This week we share the musings of guest blogger Ross Martin, Accountancy Director at Hive Business, as he wonders whether owning one £2m turnover practice is better than two £1m ones. Thanks Ross.
Just like no one needs to explain why they want a second child, a second home or a second car, a second dental practice says, “Hey, I can do this and I like it, so I’m going again, because I can.” Sound familiar?
Second homes and second cars make no financial sense; they are emotional purchases. Which is OK if you can afford it. You won’t really use a second home but the overheads — mortgage, council tax, electricity, water, maintenance, cleaning — still need to be paid. The costs might lurch up, because you didn’t notice the windows needed doing before winter. Your eye was off the ball. Suddenly that romantic image of returning from long family walks in the woods to an open fire doesn’t seem quite so important. It would have been better to have more time and relax a little more each day instead of struggling with bills. Maybe hire a cottage for the week instead; life is short, after all.
If you were looking for a sure fire way of ensuring that an investment didn’t pay off, but instead depreciated rapidly, a second car is a very good idea. Reasonable people come round to this way of thinking because they have an emotional investment in seeing themselves a certain way, which is a way of thinking that has no place in a business decision.
Multiple children, unlike second homes and cars, do in fact offer economies of scale, yet some parents worry about the effect quantity has on quality. They notice that child two’s arrival means a sudden 50% reduction in attention and wealth income for child one. The time that family members get to themselves and with each other will be eroded, and the character of life will change, being cheapened, with fewer opportunities for luxuries such as travel.
All of these problems are associated with owning a second practice too. Two sets of overheads, two businesses to worry about with their own living, breathing problems, probably seven days a week. Carefree time for you and your loved ones cut in half. Time for yourself trampled on.
But what if you did it well and made a success of things? That depends on where you’re starting from. Let’s say you own a £600k turnover practice. You want to buy a second practice because it feels like then you could create an environment where you can undertake your specialism all the time. Then your hourly rate would be better, and everything would be good.
So you are going to be the owner of two businesses and yet you intend to work as a clinician and think as a clinician — you are ducking the big questions of business. So why not just be a well paid associate? Please don’t use ‘clinical freedom’ as a counter argument, it is madness to believe that all practices will work against you. Honestly, how much of this is about being able to use the same lab you’ve been using for 10 years and buying a new toy when you want to? But if you do like business then why not break the £1m threshold first and enjoy some economies of scale. Once you’ve done that you might realise that owning one £2m turnover practice is better than two £1m ones.
You might be reading this long after acquiring a second practice. Just remember, the reason you are in business as a director is to make a profit (unless you really, truly intend to be charitable and subsidise the practice with your own graft). If it now seems wiser to sell one and focus on the other one, there is no shame in that. How you feel you are perceived and the whole ego thing is way less important than it seems. What matters is the numbers and your quality of life. If you want us to assess which site is stronger and work up a game plan for you to create the most efficient way of making a profit, we can do that.
Tragically we often see people with one successful practice and a second practice that’s a time suck where they’re just working for their associate fee. It’s sucking their management time out of the good practice and, worse still, it’s an emotional burden. If you stop subsiding your business and pay yourself as an associate then the margin at a £1m practice could be 10%+. But if you go to £2m it can approach 20%. With two sites you’ll double your costs and be lucky to get 10%.
I see dentists all the time buy a second site because it’s what their mates are doing. I occasionally see someone with three sites and, without a strategic objective for the group, it can be a rat race where the only solution is to peddle harder. Someone with three sites has three lots of bank debt and three lots of worry. People may think of them as successful but if they were honest they’d say that they’re not in an enviable position, even remotely. They have discovered something that prospective parents of second and third children might want to make a note of: the fallacy of economies of scale. They never work when you spread yourself too thin.