Young OD Wants To Know When To Bring In Another Doctor

Dear Jerry,

I now have a good problem and want your opinion on how to proceed. Here is my situation.

After being an employed OD for ten years, I opened my own practice cold two years ago.

Working solo four days per week, I generated collected gross revenues of $526,000 in 2008.

My practice is now growing in leaps and bounds with a consistent backlog of 3 to 4 weeks over the last four months.

I am on track to gross $700,000 in 2009. I am still paying off some start-up expenses, so my net is only 25%.

Question: How long should I be this busy before I consider hiring an associate OD to work with me in the practice?

My goals for bringing in an associate are to grow the business profitably and work smarter, not harder. What do you think?

Thanks, 

Sacha Nichols, OD

Dear Dr. Nichols,

Wow! That is a good problem. My readers and I want to know your secret. (Editor’s note: The name is made up. The case is real.)

When Does It Make Sense To Bring In An Associate?

Let’s talk strategy first. I thought you framed your objectives well.

In my opinion, factors like how ‘busy’ you are, or how full your appointment book is, are never reasons to hire an associate.

Except in cases where you are looking to slow down or sell out, the real test of when to bring in another OD is to determine if your practice is ready to support another doctor without causing you to take a cut in pay.

Break-Even Analysis

Let’s examine your practice finances to determine your break-even point. It’s going to vary for every practice based on gross production and net percent of profit.

You plan to gross $700,000 in 2009 with a net of 25% or $175,000 ($700,000 x .25).

Those are nice numbers for a solo practice. But, you really need to work on getting your net percentage up to the national average of 30%.

Raising your net from 25% to 30% would increase your take home pay from $175,000 to $210,000. We’ll save that topic for another blog.

Can You Pay An Associate And Increase Your Own Net?

For now, let’s say that your net is 25% and you bring in an associate starting at $80,000 per year in salary plus benefits. The direct cost to you will be in the $100,000 range.

And, let’s assume that your practice grows the same $200,000 in 2010 as it did in 2009.

$700,000 + $200,000 = $900,000 gross for 2010.

With a net profit percent of 25%, your total practice net will be $225,000 (.25 x $900,000).

Reality Check

To calculate your ‘owner’s net’, we subtract the $100,000 in compensation for your new associate.

$225,000 - $100,000 = $125,000 owner’s net.

My question now is, “Are you going to be happy if you bring in an associate and your net income declines from $175,000 in 2009 to $125,000 in 2010?”

Under this scenario, the answer is easy. NO!

Same Scenario With A $1,000,000 Gross

Next, let’s assume you are in a high-growth area and your new associate is a real go-getter.

Your practice grows from $700,000 collected gross revenues in 2009 to $1,000,000 in 2010. It may look easy on paper, but that is a huge production jump in real life.

If your net percent of profit stays the same at 25%, your total practice net will be .25 x $1,000,000 = $250,000.

To calculate your ‘owner’s net’, we again subtract the $100,000 in compensation for your new associate.

$250,000 - $100,000 = $150,000 owner’s net.

That still represents a cut in salary that you probably will not be happy with.

Same Scenario With A 30% Practice Net

Let’s look at one more scenario and run the same numbers based on netting 30% in 2010 with a gross of $900,000.

If your net percent of profit is 30%, your practice net will be $270,000 (.30 x $900,000).

$270,000 - $100,000 = $170,000 owner’s net.

Much better! Your income would be roughly the same in 2010 as in 2009.

Is Dr. Nichols Ready For An Associate?

I showed those three different scenario’s to illustrate a methodology you can use when trying to determine the break-even point for an associate in your own practice.

To be fair, we don’t have all the details needed to make an informed recommendation to Dr. Nichols.

And, she may be able to hire an associate for less than the $100,000 fully loaded figure I used.

But, based on this brief analysis, I don’t think Dr. Nichols is quite ready to take in an associate and achieve her goal of profitable growth.

I would like to see her get both her revenues and her net percent up to something in the $800,000 gross/$240,000 net range before bringing in that employed OD.

That is particularly true in a new practice where she is likely paying down some start-up debt.

It’s fine to be busy. Long term, it’s much more important to be profitable.

Is Taking In An Associate Only About Profits?

No. You have to decide on the right timing for your practice.

In fact, some ODs feel that private practice owners should be willing to bring in junior associates on a break-even basis as a way to support private practice optometry.

I have spent the last 36 years supporting private practice optometry. But, I don’t subscribe to the theory of hiring associates on an altruistic basis.

It is my observation as a practice management advisor that any partnership or employment relationship that is not based on a profitable business arrangement will struggle to stand the test of time.

Agree with this blog? Disagree? Have a comment or question of your own? Click here to send me an e-mail.

Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.

This doctor is definitely not

Barry McNamara OD - 06/23/2009 - 14:49 pm

This doctor is definitely not ready for an associate for all the reasons stated plus some more. I have found that most optometrists need a great deal of help delegating procedures to technicians. If she wants to work smarter not harder she should review those systems. May solo OD's with effective delegation are in the 1.25 to 1.5 million dollar range. Refractions and many other tests can be very effectively performed by tecs and then analyzed by the doctor. That's how you really start working smarter.
BJM