THINKING BUSINESS
a blog by Chris Barrow

The End Game. Episode 2: What's the answer?

Previously, in the Chris Barrow blog …

  1. 40-year old principal delivering £3000 a day of dentistry

  2. Associate delivers £1500 a day

  3. Hygienist delivers £750 a day of S&P and whitening

  4. Gross revenues £1m

  5. Net profit before tax £300k

  6. Principal wants to be out of the rat race at 55

  7. and requires a secure, inflation resistant income of £150,000 before tax

  8. which requires assets of £3m assuming a 5% long-term return

  9. current assets (exclude home(s)

  10. Practice Goodwill £500k

  11. Asset-based investments (pensions etc) £250k

  12. Practice premises £500k (all loans due to be repaid before 55)

  13. Shortfall £1.75m – target 15 years

  14. target has to be reached by the creation of SUPER-PROFIT

  15. no extra locations please

and so lets continue…… After our lunch I attended a meeting with the principal and his business manager, to decide how the shortfall of £1.75m could be accumulated. After all that teasing at the end of the last ezine, I prefer to take a very simplistic approach to the problem. In this case, he has a very easy route, because although the practice is currently generating £300k of pre-tax profits, his current desired lifestyle requires £150k before tax and remember that the £150k he lives on includes the repayments on the existing loans) – so there is £150,000 before tax available as SUPER-PROFIT. Lets allow for a stinging marginal tax rate of 40% and no tax planning. Which means a SUPER-PROFIT net of tax of £90k per annum. Do that for 15 years (ignoring any asset growth) and you will have a fund of £1.35m – just £400,000 short. Gross up the shortfall at 40% = £666k. Divide by 15 years and I need an extra £45k a year of net profit before personal tax. Assume a 30% profit margin in the business and I need an extra £150,000 of sales. You will notice here that there is NO ALLOWANCE for an investment return on assets purchased – I’m ignoring it – its too risky. And no discussion about what to do with the SUPER-PROFIT – if you refer back to Episode 1, you will recall my view that the best bet will be to invest in UK property. What he actually does depends on his risk profile and the ideas he gets from his financial advisors. I know he likes the property idea, so my client has the choice of either accumulating cash mountains and then purchasing – or maybe accumulating deposits of 30% and then looking around to see if there are any banks left that are lending on investment property. I’m not overly fussed which route he chooses – because I’m making very conservative assumptions on flat-line asset values. The real issue is how he is going to increase his exiting profits by 15%, from £300k to £345k – so as to generate the extra SUPER-PROFIT. Options:

  1. Increase prices by 15%

  2. Increase productivity by 15%

  3. existing fee-earners do more OR

  4. extra fee earners

Responses:

  1. Increase in prices not palatable at the moment – we are already at the top of the list for the area

  2. Increase in productivity not realistic as we are already working at very high levels

  3. Extra fee-earner(s) is the most obvious solution

Is there space in the building? NO. Oops – we have a problem. At which point the client does that thing that clients sometimes do…. “ah well Chris – there is actually something I haven’t mentioned yet.” Here we go. “I’ve been thinking for some time that I’d like bigger premises and there is a property just down the road that has been on the market for 12 months. Twice the size of the existing practice – car parking – fantastic location. The price has reduced by over 20% since first offer and I reckon I could make a very competitive bid – if I can get the funding in place. Purchase price possibly £900,000 – I can put down the first £300,000 if I jig existing assets around. I could keep the existing practice premises as an investment asset (let to local businesses) and create up to 4 more surgeries – turn the place into a centre of excellence. I just didn’t know until today whether it would fit into the scheme of things – because there wasn’t a scheme of things'” This, of course, is what us coaches call a “lightbulb moment” – that instant where the client suddenly:

  1. gets it

  2. owns it and

  3. wants it

My work is done. Client has adopted maniacal stare and is busy looking into top right hand corner of the room as he visualises his new 7-surgery practice. Here are some “ifs”. If he can:

  1. negotiate the purchase

  2. raise the finance

  3. afford the relocation

  4. let the existing premises

  5. attract the new fee-earners

  6. attract sufficient new patients

  7. achieve at least £345 net profit before tax

Then there is a clear pathway to his END GAME. I began this meeting at 09:00 with a client who stated “I’m successful but I have no direction.” I end the meeting at 17:00 with a client who is on fire, on purpose and on a mission. Now the real work begins. Can you see why I love my job so much? “If you love what you do, you’ll never work another day in your life.” Isadore Sharp – Founder and CEO, Four Seasons Hotels * This article was first published in the Confidence Club ezine on 4 May 2010

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