**Dental Practice Partnerships – Profit Split**
I wrote about this several years ago. Recently I’ve had a few people asking me how to financially structure a dental practice partnership so I thought I’d revisit this topic.
Let me start by using a hypothetical scenario where neither partner works clinically or otherwise in the practice. The practice was started a few years ago by the two owners and has built up well with three associates working there. Let’s say it’s billing 1.5 Million/year and there are three dentists (not the owners). Each bills 500K/year. They get 40% so each gets 200K (for simplicity, there are no lab bills in our hypothetical practice). Expenses are paid with the leftover 60% and then after expenses 300K profit is left over which is split between the two owners 50/50 so they get 150K each.
Seems pretty simple and straightforward. That’s because it is and this is how it should work. Now let’s take another hypothetical scenario.
In this one both the owners work there with the figures exactly the same as the above except the two owners do the billings. Now each owner bills 750K and earns 40% commission which is 300K each. They also get 150K each of the profit that’s left over.
Again, pretty simple. Now onto the third hypothetical scenario.
Two owners start a practice and they both work in it. First year it bills 500K total. They each bill 250K. Second year, it bills 700K and each bills 350K. In the third year, one partner goes on parental leave and decides to take the entire year off. They get a part time associate dentist who bills 500K and the other owner bills 1 Million for a total of 1.5 Million in billings. The partner on parental leave didn’t work and billed zero.
What’s the financial split? This should be very easy still but this scenario and other very similar variations tend to confuse dentists. Some of the statements I hear: “I’m doing all the billings and the other partner is doing nothing, why should they get any profits?” Or let’s say they decide to sell the practice “I’m doing all the billings and it’s because of me, this practice is worth this much so I should get a greater share of the sale proceeds”. Or let’s say one partner not only does the bulk of the billings but they also do management tasks, I will hear statements like “the other partner does nothing and I am running everything – they just make money for doing nothing”.
Firstly, let’s look at the third hypothetical and go back to the very first hypothetical. How would it be different if two dentists worked at the practice billing 500K and 1 Million with neither owner working? The profits would be 300K still and it would be split evenly right? Why then, is it clouded with one owner doing 1 Million and the other not working?
It comes down to understanding the difference between dentist and business owner. If, as a dentist working in your own practice, you are paid at a fair market rate, then that’s all the reimbursement you are entitled to for clinical work. That’s it. If you billed 1 Million and your partner billed zero, you got 40% (400K). They got zero from the billings. That’s your compensation for working. You are entitled to nothing more and nothing less for the clinical work you did. The surgery has profits of 300K and this goes to the OWNERS of the business. It’s split 50/50. It doesn’t matter if one of the owners did more dentistry (clinical billings) than the other, as owners they are on an even footing. They both took equal risk, they both own half the business each and each was reimbursed the fair market rate for their clinical work.
The same applies to the growth in the value of the business. Each owns 50%. It doesn’t matter how much each works or how much each contributes to the billings. It’s 50/50 for the value of the business.
Let’s also consider this from another perspective, if the practice billed only 600K and only one of the owners worked in it. At this level of billings, the practice likely would make a business loss. The working owner would take home their 40% (240K) with the non-working owner taking home 0. However, say there was a 10% loss in the business BOTH owners would need to put their share of this amount back into the business (30K each). It works both ways.
The other aspects that cause issues amongst business partners are practice management tasks.
Often, one partner will feel things are not fair because while the other partner may bill more than them, they are doing all the tasks to run the practice and feel there needs to be some compensation for that. This may be true and extra remuneration may be warranted, but generally speaking, this can and does also lead to problems if not handled correctly.
I think there are three broad solutions:
- Get a practice manager that handles everything. This point is self explanatory. Will lead to very few, if any issues between partners.
- Decide on an hourly remuneration rate that is based on the hours of practice management that one partner does and is paid at a practice management rate, NOT a dentist rate.
This is not as ideal as the first solution but shouldn’t lead to any issues if discussed at the start and reviewed at certain time intervals (perhaps yearly). Practically speaking, you decide on a rate for management tasks e.g $35/hour and the business pays the person doing the tasks for however many hours per week they spend on the tasks. Ideally, this should be a short-term solution till you find a PM that can do this for you. I’ve seen issues arise if one partner starts to do too much and feels like the other partner is getting a free ride. My recommendation if this happens is to ask the other partner to do some of the tasks and spread it evenly (see part three below) or negotiate an increase in your remuneration such that you no longer feel you are being taken advantage of or hire a PM. - You split the management tasks evenly and no one takes payment. Again this is not as ideal as just having a practice manager. I’ve seen issues arise if one partner goes on maternity for example or has extended time off. Or even when one aspect of management starts to take a long time and discrepancies arise.
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