72: Three Elements to a Successful Dental Partnership

Welcome everybody to another episode of the show. Today I'm continuing on my series on dental partnerships. A lot of you may be in a dental partnership, a lot of you may be considering joining a dental partnership and partnerships form for different reasons. And what I want to focus on today are what are the three key elements I have found in working with dentists over the past 15 years that lead to a successful, healthy, harmonious dental partnership. This is highly relevant because I think as cost structures go up in dental practices, reimbursement levels are not going up at the same rate. One way to fight against the fear financial fatigue of the industry pressures on income in a dental practice is to sort of join powers with another producer. And that is essentially what a dental partnership is. You're getting multiple producers under one cost structure. And there are absolutely economic benefits to doing that. And a well run, well organized, happy partnership business marriage between two or three dentists is a great way to maximize take home profits and build personal wealth. And if you sort of expanded up the line, more profit and more partners. More partners, more profits. Theoretically the profits as a percent of revenue goes up, meaning that however much is left, how much money per producer relative to the collections. So what your profits, remember, profit is your income, is your, is your revenue, which is your collections. Less all of your overhead, labor, lab supplies, facility marketing and admin. Your profit is what's left. I usually call that your operating income, income after operations.

And the more producers you have under a common cost structure, meaning the more collections with one line of expenses, the more profit you should have per producer. Hopefully you're understanding that concept. So theoretically you have a thousand producers under one common cost structure. Those thousand producers are going to make a lot more than a single producer under a single cost structure. Now the truth is, is cost structures will go up as the number of producers or the, or the amount of production goes up. In dental though, if we think about this economically, and I'm going a little bit to an kind of a finance class, an accounting slash economics class here on dental practices.

You have primarily two main variable costs in your dental practice, meaning that these costs are variable, they go up or down with production, and that is your labs and your supplies, the two main variables. Now there's a number of other small things like your merchant processing costs, your merchant terminal costs, or maybe carecredit costs or some other small items that go up or down. But by and large your labor cost is for the most part straightforward, unless there's a certain bonus element of that that's attached to Revenue. But most of your costs are fixed. Your labor cost is largely fixed. Your rent is fixed, most of your utilities are fixed. Your phone is fixed. Maybe your accounting costs are fixed. So much of your cost structure is fixed. However, if you expand out any growth and you go from a million dollar practice to a $20 million practice, well, trust me, even your fixed costs are going to go up. Your rent is going to go up because you need more space. You're going to have to hire more employees, probably going to have to pay more in utilities, more in accounting costs, more just all around. If you go up and down, your P and L is going to be more cost all around. So at the end of the day, all of the cost structure in a dental practice is variable. However, the true variable cost, the one that, that literally are one to one relationship with your production, that's going to be your labs and supplies. Everything else goes through a fixed period where it's largely the same. And then it will step up as you expand into a larger sort of sphere of production. And so I call those your step fixed costs. They're your fixed costs. But like stairs, periodically they will step up as you hire a new employee, as you build out another operatory and so forth. So it may not be that if you get two producers with one cost structure that your income is going to increase by twice as much. It's not going to work like that. It will won't be a one to one ratio. But if you can successfully bring in a separate producer, a separate dentist form as a partnership and you're each producing a healthy amount, then the amount that you take home with your cost structure should be improved. Meaning that your cost structure may go up, let's say by in a year. Let's say your cost structure goes up by 30%, but your revenue went up by 70%. That is going to be a good equation for you. So stepping back, there are huge benefits financially to a well run, well orchestrated, harmonious dental partnership. But as I've mentioned in my previous episodes, there are those pros, but then there are all of the cons, which I'm not going to repeat. You can listen to that podcast episode because there are definitely landmines in a dental partnership. So many that most dental partnerships, I won't say most, but the rate that partnerships dissolve occurs at the same rate that they form. Meaning that in the industry there has not been an increase in dental partnerships, private dental partnerships. Obviously there's been an increase in group practices and DSOs. But your 2, 3 doctor partnership as a percentage of the whole really hasn't changed much. Even though I think if done right, there is a, there is a good motivation to have a dental partnership. They're just, they're just more complicated. So today, what I want to talk about are the three key elements of a successful dental partnership. And they are, number one, chemistry, good chemistry across the partners, number two, a shared clinical philosophy, and number three, an equitable allocation of profits. Those are the three items I want to focus on. Chemistry, shared clinical philosophy, and an equitable allocation of profits. Now, the two that doctors usually get right are the chemistry and the shared clinical philosophy. At least those ones are a little bit easier to sort of forecast at the onset of a partnership formation. It's the allocation of profits. How do you split the money? That's usually the cause for partnership dissolutions many times, which are very ugly and difficult to, to get out of. And this is really important. It is probably easier to unwind out of a literal marriage with a spouse than it is out of a dental partnership. Because with the dental partnership, you have a lot more complexity in the business asset itself. The equity of the business asset, the assets inside of the dental practice. It's literally the heart of your cash flow. So if you divorce, so to say, metaphorically, as a business partnership, who do you continue working in? The same office? Who leaves? Where do the staff go? There are so many things to consider in a partnership dissolution. This is why you want to go into it eyes wide open and well educated, not just on the hopes of a happy experience with a friend or somebody you get along with or somebody you new in dental school. All of which can be valid reasons to consider a dental partnership. But they cannot be the only reasons to form a dental partnership.

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Let's talk about this first one, chemistry. This one is fairly straightforward. You don't want to work with somebody that you don't get along with because you're going to spend a tremendous amount of time with this person. Even if you don't always work on the same days, you are inevitably going to have a lot of interaction with this person and so gotta make sure you just get along. You enjoy walking the halls together. You can sit down in your office during lunch and talk in a, in a friendly way. And if you have good chemistry, I will say that can make for a much more enjoyable career. Because being a dentist can be lonely at times. I think this is part of the reason why dentists are so attached to their study clubs or their dental societies or their, their state groups is because it can be a bit lonely as a single doctor dentist in your office. No one fully understands you in your office. Your staff ultimately is there because they are looking to be of course, paid and, and even if they're very committed, at the end of the day, you're the owner. You're the one who loves and cares for this thing like it's a child. And being essentially a single parent can get lonely at times. So the thought of bringing in a partner can be exciting to have somebody to share in the, in all of the experiences of business ownership with. All right. To have good chemistry, though, I will say some of the key characteristics that you really need to evaluate is how well do you communicate as a partner, as two people? Because I think in any relationship, in business or outside of business, the most valuable characteristic of two people who have great chemistry is they know how to communicate through the difficult conversations. Not the easy conversations. Those ones are easy. It's easy to share in the glory of some moment, but it's difficult to navigate through a conflict or a difference of opinion, especially when that difference of opinion has to do with your skill set as a clinician and also as really when it comes to money. And money is a huge cause for dissension, which I'll get to that in the third element here, but in the first one, talking through differences of opinions, that communication skill set is so valuable. And if you're jumping into a partnership and you're about to sign a partnership agreement and you've never gone through at least some level of a challenging conversation with the other person, I think that's a very risky move because you don't know how empathetic are they, how good of a listener are they? Will they seek to understand you? Will they hear you out and then work through it? Or is it just immediately going to be an emotional response? Emotional iq. Communication IQ is one of the most important aspects to a successfully run dental partnership. With that comes trust. Do you trust each other? Do you trust each other's word and commitments to each other? Without this communication and this trust, there's just going to be misunderstanding. And oftentimes what we do when there's misunderstanding is we bury it. I mean, not everybody. Somebody's just going to be constantly throwing it out there. And that can be a problem too, and sometimes we bury it. But knowing how to sort of deliver it and communicate about it in that sort of middle way where you're thinking about it, you're pondering it carefully before putting it forward to your partner and then walking through that, I think is a difficult thing to do. And one of the problems is that so many dentists, especially two young dentists, will go into it with a whole lot of trust and because they've had a good sort of friendship through dental school or whatever, and they don't get proper representation. Now, a couple things, I think two things that will help have good chemistry. Number one is in the beginning, at the onset, is to make sure that you have a good attorney and account help you both together. Now it's difficult sometimes to say, I'm going to get my attorney, accountant, and you get your attorney and account, because you're immediately saying, I'm going to approach this with distrust. At least that's the perception in reality. The attorney and the accountant, if they go into it with a win win mentality, not all of them will. But if they can go into it with a win win mentality, they're actually trying to create an agreement that will lead to the highest likelihood of success. There are attorneys and accountants that will dual represent, meaning that they will represent you as a partnership. And I'm not opposed to that. We at practice CFO have helped many doctors come together and form a partnership. I do think it's a good idea to perhaps have your attorney, a separate attorney, review the partnership agreement. I will emphasize the value of having.

Representation that understands dental specifically dental partnership. The truth is there's not a lot of great dental partnership depth out there, even among dental CPAs out there. A lot of dental CPAs don't like to do partnerships because they are a lot more complicated when it comes to accounting and tax. They're a lot more emotional as well for partners and so a lot of them just steer clear from it. Some very good, reputable dental CPA firms will just steer clear from partnerships. And we at Practice cfo, we do do partnerships. That was a deliberate decision. So we have sort of a clinical process around helping partnerships form and then of course doing the accounting and tax and profit distribution reports after the partnership is formed. So go into it. Get good representation. I really like the idea of everyone being in the same room, whiteboarding it and trying Are you looking to buy.

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To come to what feels like a very compatible win win approach. That's my first one of my first key comments here. The second one is after that, that's at the onset. After that, as you go, I highly recommend having quarterly or semi semual, annual or even monthly what I call companionship inventory moments where you come together and you take inventory of your partnership, of your relationship. And you can have a standard agenda on that. For example, what's going well, what's not going well, what's on your mind and what are some of the areas that we can focus on the, on the core going forward and, but doing that and always sitting down with a really sort of mind to be open and understanding is one of the most, I think, productive activities you can do as a dental partnership. All right, that's going to wrap up the chemistry discussion. Let's go on to number two, shared clinical philosophy. You are team members together. And just like you wouldn't want to join a tennis doubles or a pickleball doubles or any other group, if you're really into a competitive experience, you, you're going to want somebody that you believe in, that you believe in their clinical skill set. Because if not, it could hold the practice back, it could lead to liability exposure as well. And so having alignment or belief in each other's clinical skill set and also philosophy, not just how good are you, but when do you believe it's right to do a dental implant or a crown versus a filling or an inlay or an onlay. And there's different philosophies or levels of, I'll say, assertiveness in case presentation and case acceptance that, that different doctors will have. And make sure you have a shared approach on that. If you don't, what's going to happen is you will start to feel some lack of respect or some resentment for your partner in the practice and that will come out either and you just not wanted to talk about it and then it sort of festers. Staff will feel it. When staff are like children in a marriage, they will sense immediately when there's discontent in that relationship. They know it. Even if you go behind Closed doors and you talk about the issues. If you don't resolve those issues, it's going to be felt. And whenever there's discontent or contention inside of the practice among the team, you will not operate at your highest level. You just, you just won't. And that will affect, I believe, your reputation with your team. And this could affect your reputation with your. With your clients as well. So if there is a breakdown in clinical effectiveness and there are unnecessary redos that are resulting or lawsuits that could emerge, malpractice lawsuits, reputation is your number one asset. Keep that in mind. Reputation is your number one asset. It's actually not your team, it's not your technology, it's not even your skill set. It's the reputation that all of it has created around your practice that's your number one asset. And in accounting, we'll sometimes call that sort of goodwill that you have with your, your space, your industry, your area, your patients, all that. So make sure that as you go into this, you really have confidence in, in each other as clinical producers and also in the way that you deliver your clinical advice to your patients. All right? That is your shared clinical philosophy. Let's go into the third one. Now, this is the one that is the most common culprit for partnership dissolutions. It is the equitable allocation of profits.

In a. My next episode, my next one or two episodes, I'm going to be talking about formations or corporate formations or legal structures for dental partnerships. In any structure, though, you are going to be paid as a producer and as a business owner. And this is key. This is key. Whether it's a partnership with just you and one other doctor, or if it's a. In a large group practice or even a DSO, a lot of DSOs, you are often paid in two ways. One is as an. As an associate, as an employee, as if you were. Now, you may not literally be a W2 employee in your partnership. And in fact, if you do form as a literal partnership, that is a term partnership that the IRS has, that has its own tax return, that is a legal structure, a general partnership, you are not paid as a W2. You are paid. There's one of two ways that you're paid. It. One is called a guaranteed payment, which is sort of like a W2. You're paid something that's based on a. Almost like an employment agreement. And then you're paid profits. What's left after paying all of the expenses and after paying you, the dentist, as an associate, through what I call these guaranteed payments.

And whatever's left, that's your profit allocation. That's what you get for being a business owner. So if your dental partnership does $3 million a year and you pay, each dentist gets paid 500,000, we'll say for the year, that's a million dollars. $2 million is left. And that 500,000 each, that's based on your production. And so let's say you're paid a third of your production. Or let's say you're paid, yeah, a third of your production. That's these numbers probably aren't totally aligning with what it would be, but just follow the math and you're each paid 500,000 for your sort of production pay. Then you're left with 2 million. 3 million left, the 500,000 each, that's you're left with 2 million. And then let's say that your labor, lab supplies, facility, marketing and overhead is 1.5 million, and you're left with $500,000 as profit. How do you distribute that 500,000? Is it equally? Is it in based on your equity? Is it based in any other way? Well, let's say it's equally. Then you each take 200,000, and therefore you're each paid 500,000 in sort of guaranteed payments as a producer and 250,000 as profit distributions as a business owner totaling $750,000. That's a very sort of big basic way of looking at it. But the key point I'm trying to make there is that you're really paid based on your production and then you're paid on your profits. Now, there are different ways of doing that that create variances off of that key concept, which will be for another episode here soon. But for right now, I want to focus on equitable allocation of profits more as a concept, as an equity key ingredient to a successful dental partnership. I want to emphasize something here. Why is it that money tends to be the reason for partnership breakups? It's this reason, in my opinion. It's because we all have a very unique or we all have a very nuanced view of our contribution of income input to the value in that dental practice relative to the input of our partner. In other words, we're always going to view our input differently than the other person views our input. And we're going to see the other person's input differently than the way they see their own input. And what I mean by input is production and contribution and morale and reputation and all of that. That makes for a healthy right run dental practice. What are you putting into it as a business owner and as a producer.

And as a business, you're not just doing the clinical. There's marketing, there's business administration, there's motivating your team, there's dealing with HR issues, there's dealing with all of those aspects of a partnership, there's the reputation you create with your patients, all of that. And it's not easy to.

Come up with a structure where you feel like you're both putting in.

Putting in time, effort, skill, etc, in a way that's commensurate with what you're getting out of it. Generally speaking, there's some misalignment there. And if that misalignment of perceived input relative to perceived output is reasonable, then usually it's okay. And you think big picture and you, you move through whatever those slight differences are. If that perceived inequitability between input and output, your input versus the output, you get back out of it. If there feels like that is too large of an inequitable equation or result, there's too big of a gap, then conflict will arise. And then how do you work through that conflict? Going back to chemistry and the profit allocation, what happens is dentists will form a partnership. They may have an attorney sort of come up with the partnership agreement. And in the partnership agreement, which is a legal document, it will state how profits are to be allocated between the two. And it'll have some formula in there. Usually it's just a narrative. Sometimes there will be a table sort of visualizing what it would look like and with maybe even some sample numbers. But then what happens is you form the partnership and the attorney lease, the attorney's gone, and you hire an accountant. The accountant comes in and is supposed to help you roll out that methodology of allocating profits. And oftentimes the accountant doesn't really understand the dynamics of dental economics and dental PNLs. And they attempt to roll something out, but it's not consistent with the partnership agreement. In fact, it's extremely rare. I find when a new dental partnership comes to us, that we find the way that they've been allocating profits is consistent with the partnership agreement, which is a bit scary because that could lead to a lawsuit between the partners that could go back for a period of time that one partner finds out, they get representation, they find out that they weren't paid in a way that that was consistent with the partnership agreement. Maybe they were underpaid by 30, 50, $60,000 a year and they want to get that back over the past 10 years, whatever. And so it is extremely important at the onset, in my opinion, that the attorney and the accountant come together and they agree on how the profits are to be allocated and that the accountant has a, has a way to systematically calculate and report that profit allocation in a way that ties back to the profit and loss statement, what's called the general ledger. That, and that's reconciled back to the bank account, those three points, the bank account to the P and L and balance sheet to the partnership distribution report. Now, what happens is a lot of times doctors will just do something simple. They'll say, I'm going to pay myself 33% of my own production and then whatever cash we take out each quarter or going to take it out 50, 50 or whatever that profit distribution agreement is, which tends to work at some level. It does. It tends to work at some level. And as long as there's not something too disruptive that feels inequitable out of that, then it could work just fine. However, usually it's not tying exactly back to the partnership agreement. And oftentimes other issues come up, other issues around personal expenses that you run through the practice. What if one person is funding the 401k and the other one isn't? Who pays for the staff for 1k costs? What about a sharing of resources? What if one of you use a more expensive assistant or more costly supplies? So I've, I've spoken about this in the prior podcast and I'll talk more about this in the profit distribution models podcast I'll do here soon. On partnerships. And so you get these, these items that emerge where you try to do these adjustments, these sort of workarounds, you throw it in Excel and you say, what if we add this here and take this way here. Okay, this is how much I think it should be. And maybe the accountant or CPA can help with some of that. But it feels a little bit disjointed and it's not tying correctly back to the partnership of agreement, which again leads to potential exposure to one or even both of the partners. And let me say, when I've seen partnerships dissolve, it is an. It can be an absolute nightmare where more money goes to paying the attorneys over a period of years than would have been received in a legitimate buyout of one partner from the other. And so they, this, I can't emphasize how important it is that we get this right. An equitable allocation of profits that the CPA understands it, ties it back to the partnership agreement, delivers a reporting on it. You really want an independent person to do the calculations and to report on it so that each partner feels that they are being properly represented with it. Okay. The last thing I'll mention on that too is these business roles I was talking about. Who's doing the marketing and who's handling sort of relationships with your suppliers, who's handling the tax side of, of things, meeting with the, maybe the tax partner on the tax return. There's literally in a partnership return, a partner designated as the tax partner, who's handling hr, who's handling all of these sort of non production items and how do you allocate a compensation to that if one of you is spending five to ten hours a week on that while the other one is just going golfing on their day off? So those are the items that really need to be addressed when it comes to the equitable allocation of profits. All right, those are the three ingredients to recap. Number one, make sure you have great chemistry. Hopefully that chemistry has been already tried through some difficult conversations and proven to be successful. Number two, have a shared clinical philosophy. What with each other, believe in each other, trust each other. I have seen a partner who had to report their partner to the state board because they were highly concerned with the clinical work of the partner. And you never want to find yourself in that position. And then lastly, knowing how to allocate the money, how do you split the bank account every month or every quarter is the final and third ingredient to a successful dental partnership. All right, in the next episode we're going to talk about partnership valuations. How are they valued? Meaning what, what if it were to sell? What's the, what's the price? And if a doctor, a let's say new associate is buying into a single owned a single practice, single doctor practice and they're going to form a partnership, how do you calculate 50% of the value to that, that doctor buying in and what exactly are they getting for that 50%? They're going to have a loan, they're going to have to pay that loan out of their share of the take home from the, from the partnership profits. And so this is, this is incredibly valued one. Stay tuned for that. Thanks for joining.