If you’re a regular reader, you’ll know that we’ve written before about profitability, income and expenses. As a recap, this is the fundamental equation that for your practice to generate a profit, your income needs to outweigh your expenses. On the face of it, it’s a straightforward relationship – so how (and why) do business owners so often go wrong?
The problem is that although the relationship seems simple, there’s a lot more getting in the way. For practice owners, it’s not as easy as totting up figures for expenses and income, and hoping that the latter is higher. In dentistry, it’s often hard to ascertain what’s happening because there are too many degrees of separation between your business operations and your commerciality.
To begin with, many practices don’t actually know what their overhead costs are, making it hard to get an accurate read on expenditure. Alongside this, there’s a huge weight of day-to-day “dentistry” taking place; when you’re engaged in delivering dental care, it’s hard to get to grips with whether an individual patient is yielding a profit. If we scale this up across the entire operation, we need to factor in multiple days per week, multiple surgeries per practice, and a plethora of other activities, such as new patient enquiries and digital marketing. They’re all important elements of being commercial, but they all add to that sense of disconnect from the collection of your money. And of course, the added difficulty is that there’s no course you can enrol on to “learn” commerciality – instead, it’s a hard-won series of battle scars and life lessons accumulated over time.
This sense of separation between your daily activities and your overall profits is normal. It’s estimated that the human brain processes two terabytes of information every day, which admittedly sounds impressive, but is only the tip of the iceberg when it comes to the incessant demands on our minds. To keep ourselves functional, we must filter things out and make assumptions where there are degrees of separation. But of course, the further that we place ourselves from commerciality, the more there is that can go wrong. This is why, if you can’t do things alone, it’s important to surround yourself with experts: trusted people who can act as your safety net.
Trust and risk are key factors in supporting your commerciality. Often, a solution will seem commercially obvious, but it always pays to probe deeper. A good example is the way you might approach a practice sale. Everyone wants the best outcome when they’re selling, which means exiting with the best possible price and terms. One solution is to handle the sale yourself, thus maintaining control, saving yourself a broker’s fee, and keeping more of the money. Seems logical, right? But actually, it’s wrong. By going it alone, you won’t get the best outcome. The next “no-brainer” alternative is to use a broker who won’t charge you – but the snag is that doing this immediately introduces two degrees of separation between yourself and the commercial outcome. First, there’s the handover to a broker, and second there’s the broker’s connection with the buyer (who, let’s not forget, is the person paying their bills).
This example highlights the importance of assessing the risks before separating yourself from an outcome. Bear in mind that however much you might want to believe you’re aligned, the people offering help may have drivers of their own. This can result in what’s known as a ‘perverse incentive’, which is when an incentive leads to rogue or unintended consequences (it’s also known as the ‘cobra effect’, which harks back to when the British government dealt with high cobra numbers in Delhi by offering a bounty for each one killed; it worked well, until canny people began breeding cobras).
We’ve sadly seen this all too often. In one previous sale, a practice owner went against our advice and chose a “free” broker. The broker promptly found them a buyer, but shortly after, their project management fell apart. The only time the seller heard from their broker was when they reduced the price for the buyer. Unfortunately, this seller hadn’t considered that the broker’s incentive was to get the job done as quickly as possible without alienating the buyer.
So, in any interaction or transaction, consider the motives of the other person, so that you can predict the outcome. Ultimately, your judgement on what to do is a matter of weighing the risk you’re comfortable with. In this, it’s helpful to heed the age-old advice to gamblers: never bet more than you can afford to lose. Taking a leap of faith on some cheaper printer paper is unlikely to have any lasting outcomes. Trusting a free broker with your practice sale – that once-in-a-lifetime high-stakes event? Perhaps not. A bad outcome here could cost you thousands, so it’s better to take steps to lessen that risk. Use a RICS-registered broker (we recommend Christie & Co) and talk to a range of people before making an informed choice.
Practice sales are just one example of where degrees of separation can cause commercial issues, but this really applies to everything. We’re certainly not saying that you shouldn’t trust anyone; instead (to continue our gambling analogy), it pays to stack the deck in your favour. Working with Hive, for instance, represents a safer bet for our clients because we have decades of experience across a multi-disciplinary team.
Thinking commercially is fantastic – to take us back to our opening point, decreasing expenses and increasing income is the key to profitability. But sometimes, a reduced cost can be a false economy. By taking a risk with an unknown contact, you’re substantially increasing your chances of getting a worse outcome. And that’s something very few of us can afford to do.
If you would like to discuss our services, and how we can help you further, get in touch.
