A Group Practice Owners’ Guide to Profitability - You Need a Different Business Model
Our client decided to go to an event for therapists for inspiration, connection, and learning. They spent an incredible amount of money and time attending this event and made some amazing connections. But, they came back convinced that their business model wasn’t working and wasn’t sustainable. They spent a month feeling like she needed to start a new business or develop a new stream of income before they finally talked to us and we dove into the truth.
Spoiler alert: The truth is - they had created a group practice that works really well and is actually profitable.
So, let’s break down what happened, how they got so off course, and what you can do to determine the truth about YOUR group practice, its profitability, its sustainability, and things you can do to get it on track if it is off track.
Why did you decide to go into group practice in the first place?
Many therapists expand into group practice for one or more of the following reasons:
They are full
They aren’t making enough money
They want to find a way to expand the kind of services that are hard to find in their area (they are full and have nobody great to refer to)
They want to make a great impact beyond what they can do in 1:1 sessions
They want to create more sustainable income so they make money even if they see fewer clients
They want to make more and work less
They want to make the same and work less
Does any of this sound or feel familiar?
What people do NOT sign up for (on purpose) when expanding into a group practice is working more and making less. And yet, that is often what happens. But, is that how it has to be?
Group Practice Isn’t Inherently Profitable or Not Profitable
Just like any business model, group practice (or solo for that matter) is not inherently profitable or not profitable. In fact, BetterHelp had revenues of over 1 Billion dollars in 2022- and that was for online services only. Betterhelp, and many other online tech employers are essentially group practices. In fact, the owner of BetterHelp is Teledoc, a publicly traded company and the mental health arm of their business has been one of the most profitable.
So, let’s come back to our client and the message they sent this week- we’ll call them Sam.
Question- I recently attended a conference and they were talking about profit margins in group practice. According to this the profit margin for group practices are very low. It is making me realize that if I want to make more profit I need to be building another product. What are your thoughts about this before I pitch my product and launch ideas.
They then proceeded to share a picture of the chart from the conference that showed a comparison of profit margins for counseling, online courses, community contracts, products, and training programs. It wasn’t clear from the chart though whether they were talking about profit after expenses and business taxes, or just expenses.
The chart sought to make an obvious point that good ol’ fashion therapy services AKA group practices have the worst profit margin by a mile! The present then went on to discuss how creating other streams of income Of course, our client was freaking out! They went to see an amazing expert and paid for great training!
Uh, Oh! Are You Doing Group Practice All Wrong?
Now, if Sam is like many other therapists they likely shut down at this point. They may or may not have heard everything the speaker had to say… maybe the speaker shared everything I am going to share with you- we don’t know… but let’s break down what we saw in the image:
The profit margins were compared as if every single stream of income was bringing in the same amount of income.
The profit margins were shared as if we were looking at the attendees’ profit margins, not the speakers.
The slide showed a profit margin for counseling of 20% and a profit margin for online courses of 80%
There was absolutely no mention of how much TIME each of these took to market and sell.
And again, we don’t know if the 80% profit margin of courses brought in $10k, $1k, or $100k in total profit.
What is the profit margin in private practice?
Your profit margin tells you about the health of your business and is a percentage-based number that lets you know out of all the money you generate, how much is actually profit for the business vs what is covering just expenses.
To find your profit margin, you take your total revenue (all the money you brought into the practice) and subtract your business expenses and business taxes, which results in your total profit. Then you take your total profit and divide it by your total revenue to get your profit margin.
So for example, if you brought in $120,000 in gross income in your private practice, had $30k in expenses, $12k in business taxes that would look like
$120,000 (total Income) -$30,000 (expenses) -$12,0000 (business taxes) = $78,000 Total Profit
$78,000 (total profit) divided by $120,000 = .65 AKA 65% profit margin
Now, depending on your income and expenses profit margin can vary wildly. You can have a million-dollar practice owner who is making less money and working more than a solo practice owner and vice versa. If you are seeing a full caseload of clients as the group practice owner, your profit margin will often be much higher than someone who is focused on running the practice. Why? Because you probably aren’t paying yourself the way you’d pay an employee and it isn’t treated as an expense. It is technically profit.
Let’s look at some other group practice profit margin examples:
Below are a few examples of group practice profit margins. Remember, this is the gross profit to the owner (or owners) and they will still need to pay personal taxes including self-employment taxes on this profit. Read through and see how you’d feel with that level of profit and that profit margin.
$1,200,000 (total income) - $1,100,000 (Payroll) - $150,000 (Expenses) = -$50,000 LOSS 0% profit margin
$900,000 (total income) - $700,000 (Payroll) - $130,000 (Expenses) = $70,000 Profit 7.8% Profit margin
$300,000 (Total Income - $150,000 (Payroll) - $36,000 (Expenses) = $114,000 38% Profit Margin
$300,000 (Total Income - $200,000 (Payroll) - $36,000 (Expenses) = $64,000 21.33% Profit Margin
How are you feeling? Now, I want you to pause. Go back through the numbers again with the following scenarios:
Group Practice Profit Margin Scenario #1:
You are working 70 hours a week and haven’t had a true 7 days off of work in 3 years. You are constantly putting out fires and you feel frazzled. It feels like if you stop or change anything everything will fall apart.
$1,200,000 (total income) - $1,100,000 (Payroll) - $150,000 (Expenses) = -$50,000 LOSS 0% profit margin
$900,000 (total income) - $700,000 (Payroll) - $130,000 (Expenses) = $70,000 Profit 7.8% Profit margin
$300,000 (Total Income - $150,000 (Payroll) - $36,000 (Expenses) = $114,000 38% Profit Margin
$300,000 (Total Income - $200,000 (Payroll) - $36,000 (Expenses) = $64,000 21.33% Profit Margin
Group Practice Profit Margin Scenario #2:
You work 20 hours a week. You have a great team to support you. You love your employees and the clients that get support from them. You take time off regularly and have a great vacation. Your expenses include getting great training and coaching to support you in progressing.
$1,200,000 (total income) - $1,100,000 (Payroll) - $150,000 (Expenses) = -$50,000 LOSS 0% profit margin
$900,000 (total income) - $700,000 (Payroll) - $130,000 (Expenses) = $70,000 Profit 7.8% Profit margin
$300,000 (Total Income - $150,000 (Payroll) - $36,000 (Expenses) = $114,000 38% Profit Margin
$300,000 (Total Income - $200,000 (Payroll) - $36,000 (Expenses) = $64,000 21.33% Profit Margin
Group Practice Profit Margin Scenario #3:
You work 40 hours a week. You take time off regularly and have a great vacation. Your expenses include getting great training and coaching to support you in progressing. But, you are constantly putting out fires. You feel really drained clinically and creatively and it feels like you can’t sustain this pace much longer.
$1,200,000 (total income) - $1,100,000 (Payroll) - $150,000 (Expenses) = -$50,000 LOSS 0% profit margin
$900,000 (total income) - $700,000 (Payroll) - $130,000 (Expenses) = $70,000 Profit 7.8% Profit margin
$300,000 (Total Income - $150,000 (Payroll) - $36,000 (Expenses) = $114,000 38% Profit Margin
$300,000 (Total Income - $200,000 (Payroll) - $36,000 (Expenses) = $64,000 21.33% Profit Margin
The truth is, as business coaches for group practices we’ve seen just about every combination of the above scenarios and profit margins. Yes, your profit margin is important, but it is not everything. Your gross income is also NOT the magic number in private practice. Instead, the important things to track in your practice are your profit margin, your work-life balance, and your impact.
Profit Margins in Group Practices
The truth is many therapists who expand into group practices do so because they are already struggling with profitability. They assume that with more volume of income, the profit MUST increase. However, without doing the math and diving into the expanding expenses and the increased time running a group practice, many will find the exact opposite.
We’ve had multiple clients who came to us making truly less than 20% profit running a group practice with a full caseload of clients they were seeing. They were working 50+ hours a week and making LESS money having employees - sound familiar?
However, does that mean group practice has a 20% profit margin across the board? Absolutely not! In fact, when Sam talked to their bookkeeper they found their profitability after expenses and business taxes was actually at 55%! Not the abysmal numbers that they heard in the presentation.
So, how do we end up with SUCH different numbers when talking about profit margins in group practice?
Why Profit Margins in Group Practices Vary Wildly
We don’t learn business math in graduate school. We know this may seem like a silly thing to say, but most of us were only required to learn statistics in graduate school. Fun fact, some of us (Kelly) chose the degree to AVOID additional math classes. Miranda on the other hand was a nerd and was a teacher’s assistant in grad school for statistics. But neither of us was ever taught the business math we’d need in private practice.
Regardless of which side of the line you started on, as business owners we have to make peace with business math and it is MUCH more complex than it seems on the surface, especially when you expand into payroll, and managing multiple people.
In our Business School for Therapists, we’ve developed a piece of software that allows current (and prospective) group practice owners to answer questions, and create models of different group practice scenarios. They can put in different numbers and quickly see how that impacts the monthly income, the sweat equity, their work-life balance, AND their profit margin. It has taken us years to develop and there a LOT of numbers to consider.
And let me just say, it makes all the difference. We see over and over our clients looking at other group practice models and trying to replicate them (the pay, the client fees, the insurance contracts, etc.) and finding that when they run the numbers- the math doesn’t math, and the profits just aren’t there.
So, wait, how is that even possible? Are they mathing wrong? Why would a group practice owner run a practice that isn’t profitable?
Group Therapy Practice Owner Salary
As an employer, you are legally required to pay your employees first. You have employment agreements with them that must be legally fulfilled. If those agreements were not made with equity in mind, you will often find that you could be making little or no profit. We go into this more in our article about starting a group therapy practice, but here is a quick overview:
Let’s say you decide to do a 70/30 split. 70% goes to your employee, and 30% goes to you. That sounds fair, right, they are doing the session- and you get 30% profit-that works, right? Well... Let’s talk about what you need to pay for out of that 30%:
Rent
Training
Computers
Internet
Phones
All the marketing costs (and the time it takes)
EHRs
Credit card fees on the entire amount (3.15% in many cases)
Payroll taxes
Receptionist or answering the phones
So, let’s say you charge $125 for a session, and you give your employee 70% or $87.50. If they are a w-2 employee- which it is almost impossible to do 1099 as a group therapy practice without breaking employment law, you also need to pay payroll taxes on that $87.50 at 6.2%. Another $5.40. You also are paying out
$87.50 (70% to your employee)
$5.40 (6.2% Social Security)
$1.81 (1.45% Medicare)
$4.24 (3.15% + .30 to credit card fees)
Before we even get to any expenses we are already down to $26.05. That 30% split now already has you getting only 20.8% of the original fee before you’ve paid a dime towards any expenses or time!
Many group practice owners have moved to online group therapy practices- less overhead, right? Well, yes, and no. Unfortunately, many group therapy owners aren’t providing the materials for the job or providing appropriate reimbursements for internet, use of own materials, etc. which exposes them to massive liability if or when their employees decide to talk to the labor board. So, even with an internet based group practice providing payment for desk, internet, computer, etc. And what about providing benefits like vacation, sick, pay, and health benefits?
To create a sustainable group practice, one of the best things you can do is to create something sustainable that truly takes good care of your employees. Suddenly that 20%- even with a completely virtual practice can end up approaching or passing that 0% mark.
Risks of Not Understanding Your Responsibilities as a Group Therapy Practice Owner
Yes, we are seeing more employees who are becoming aware of their rights, and employment laws. These employees are starting to advocate for themselves which we think is beautiful. But, gosh it can be quite painful for group practice owners to realize they need to pay back months (or years) of back reimbursements, payroll taxes, sick pay, and/or wages because they didn’t fully comprehend their responsibilities as a group practice owner.
Just this last week, I saw this post in a Facebook group for Therapists. A former employee of a group practice realized their rights as an employee to accrue sick pay, reached out to the owner, and didn’t feel like they got a helpful response. They reached out to the labor board and within a few weeks, they had this to say: “The labor board charged them four thousand in penalties and another two grand payout. The employer now wants to settle it almost immediately and pay the violations. Fight for your rights as associates.”
We’d like to think that this was an oversight. This was just an overworked, or unaware group practice owner who made a poor choice and is learning the lesson in a really difficult way. But, ultimately it is PAINFUL to not understand the expenses involved and properly plan as a group practice owner.
In other words, if you don’t calculate properly the expenses when starting your group therapy practice, you aren’t just talking about issues with profit margins in the here and now, but also you could end up owing a significant amount of money in fines and back pay. Ouch.
Why (and How) do Group Practices Run Without Profit?
Ok, can you tell we love talking about this issue? There is so much here and it is really hard to put it all into one blog, which is why we have an entire Business School for Therapists dedicated to it… but, let’s get back to group practices running models that aren’t profitable, how does this happen? We are going to run down some options that we’ve seen countless times.
The Group Practice Owner Has a Full-Time Job Funding the Group Practice
We see this in both solo and group practices. Someone has a full-time job at a non-profit, in education, or even in a different industry and they are trying to move into full-time practice. They start the practice, it doesn’t pay the bills and they get “full” quickly AKA they can’t see more clients while maintaining their other job. However, they don’t have the income at the practice to let go of the full-time job. And sometimes, they don’t have the confidence to fully commit to the practice.
So, they think- well- I am 25% of the way there… let me just hire a friend or two and eventually we’ll all be able to leave our full-time gigs. But, unfortunately, no math means little to no profit. Many times due to the sunk cost fallacy, therapists will even start investing from their full-time job in trying to “make it work.” They hire website designers, pay for Facebook ads, pay a marketing agency, or even hire a well-meaning business coach for marketing. However, if the issue isn’t really a number of clients issue but a financial model issue nothing will work.
There is a part inside that they know this could work, they see it working for others, but they are so overworked and stressed they can’t really figure it out. Unfortunately, there are a LOT of private practice coaches that focus on one aspect of the group and don’t look at the numbers. In fact, we used to be those business coaches when we started back in 2010. But, we quickly figured out this was not helpful and now we only provide holistic business coaching for therapists.
The Group Practice Owner Has a Trust Fund Funding the Group Practice
Yes, this actually happens. Some group practice owners don’t need their private practices to be profitable in order to sustain them. This might mean they have a longer time frame that they cannot be profitable, or they may never need to be profitable. They are using their privilege and resources to keep the group practice going.
The Group Practice Owner’s Debt is Funding the Group Practice
We’ve talked to group practice owners who have literally ended up taking second mortgages on their homes, and/or foreclosing on their homes while trying to launch and maintain a group practice. For many of us, we come to the field of psychology from some pretty interesting backgrounds. We may come in with issues with boundaries, feeling overly responsible, and so many dynamics that can put us into a shame spiral as group practice owners. These family-of-origin issues and attachment issues have led to group practice owners sacrificing their own well-being for the sake of the practice.
The Group Practice Owner Has a Spouse Funding the Group Practice
This is a BIG one. And sometimes this is actually an agreed-upon tax strategy for the couple trying to show as much loss each year as possible to offset the spouse who is a high earner. However, more often the group practice is looked at as a hobby, a side income, and not like a real business. (By the way, this is not exclusive to group practice, this happens in solo private practice too).
Sometimes, but not always, this can actually lead to some significant conflicts in the relationship. Sometimes, the lack of profit is used as a reason for a significant power differential in the relationship financially or in terms of division of household labor.
This strategy usually breaks down in a few scenarios. One, the owner and/or their spouse start to feel really bad about the amount of time away from the family for the lack of profitability. Or, more commonly the spouse dies or asks for a divorce and suddenly the group practice owner can no longer sustain this old business model.
The Group Practice Owner is Robbing Peter to Pay Paul
This one actually brings us back to the original training our client attended talking about the profitability of multiple streams of income. In some cases, instead of adjusting the financial model, people just add additional income streams into the business. People on blogs, vlogs, and podcasts LOVE to share about success stories with multiple income streams but seldom talk about the failures, the lack of profitability, or the overwork and burnout that can come with them.
We’ve also, unfortunately, seen examples of people having multiple income streams none of which were sustainable. Over time, they were simply racking up debt in multiple areas, and without an ever-expanding income stream to cover the increasing debt behind them, the entire thing collapses, leaving the person bankrupt and at risk for legal action.
The Group Practice is Funded by Venture Capitalists
Let’s circle back to the many tech-funded startups that have been taking hold of the mental health market over the past several years. We talked about BetterHelp at the start of the article. If you haven’t been inundated by BetterHelp ads on Google and social media are you even on a computer? In May of 2022 alone, for Mental Health Awareness Month it was reported that BetterHelp spent $19.8 million dollars alone on online ads. Oof… how does one even have THAT much money to spend on ads?
Well, Betterhelp is owned by Teledoc was founded in 2002 and has had 6 rounds of funding for over 92 millions dollars in funding. In fact, according to Dealroom.co over the last four years they’ve LOST 13.9 billion dollars (2022), 429 million (2021), 485 million (2020), and 98.9 million (2019). I won’t go into a diatribe on our VERY bizarre financial system, but somehow this company is still valued at $2.74 billion dollars as of this writing.
So, is a Group Therapy Practice Profitable?
Ultimately, that depends on you. Yes, it can be incredibly profitable, but you have to learn how to create a solid foundation on which to grow that profitable and sustainable business. Post your questions in the comments below or reach out to our group practice business coaches if you aren’t sure where to start.
Looking for support in remodeling or launching your group therapy practice? Click here to learn about Business School for Group Therapy Practices today. Or, you can check out some group practice success stories for inspiration today.
