While getting the historical payroll figures accurate remains important from a due diligence perspective, understanding the exact payroll you’ll be stepping into as the new owner on Day 1 must be the priority.
Why? Because historical payroll data is just that, history. A lot can happen in any business, let alone in a dental practice, over a year’s time. If a seller has added positions, provided raises or bonuses, or let people go, the buyer needs to make sure they have all humans properly accounted for as of closing.
One of the most important financial “adjustments” in a valuation comes from comparing the actual staffing model being delivered the day of closing to the figures in the historical financials. There is rarely a favorable variance.
In fact, the primary question is usually, “How far off are the historical numbers from the actual, go-forward staffing model being assumed?” Sometimes the variances are minimal. More often though, the variances are material, potentially affecting the valuation and putting the overall deal at risk. Investigating the staffing model is more important than ever. One need only look at the ongoing impact of shifts in RDH compensation on dental practices. We are seeing an increasing number of long-standing practices with RDHs with <1 year tenure – an insight into the serial job-hopping that seems to have become the new normal.
It is equally important to look at staff tenure in due diligence to identify HR and turnover trends. Are the owners turning over certain positions more frequently than others? Why? How have recruiting lead times been by position type? Do you have good reason to believe you could manage it better? Are replacement hires consistently going up in price, holding steady, or trending down? Are there any positions you would prefer to fill with alternate personnel you know from elsewhere?
Outside of adding net provider time, there is little reason to expect revenue lift from increased payroll – a common logical fallacy. Are there “growth investments” in staffing? You betcha, but those are typically isolated and discussed as part of the valuation discussion itself. Widespread wage creep is not something one can expect to drive any kind of revenue lift. It only results in margin compression and valuation contraction, all else being equal.
Personally, I go straight to the staffing model to better understand how a given practice is generating the financial numbers I am looking at. Do the financials make sense on a By Provider and/or By Operatory basis? If not, why not? Are there any real-world changes that could be made to right-size the staffing? Are there opportunities to drive revenue in the existing physical plant and staffing model?
If you do not intend to hire certain staff as part of the transition, speak up early and often. Make sure that such changes are clearly discussed in any offer so as to avoid confusion and heartburn down the road.
Good luck and be well!
Sean