Pros of Dental Partnerships

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To another episode of the Dental Boardroom podcast, it's Wes Reed, your host, coming at you. I've got a series that I'm rolling out right now in our podcast on partnerships. If you are in a partnership, if you are considering a partnership, these next six podcasts will be relevant to. Now, I may sprinkle in other unrelated podcasts during the series, but over the next month or so I'll be rolling out six podcasts. Let me explain what these podcasts are going to cover on the subject of partnerships. Number one, what are the pros and cons of a dental partnership? I'm really going to focus on a partnership with two, maybe three doctors. Kind of a classic style dental partnership. I'm not talking about large groups, I'm not talking about DSOs, I'm talking about vend very traditional dental partnerships. So number one, what are the pros and what are the cons of dental partnerships? Number two, how are partnerships valued? And if you are a practice owner considering bringing on a partner, what would be an appropriate value for that partner coming on board to pay you for their interest in the partnership? Number three will be on legal structures. How to find form your partnership. There's various types of entities that you could set yourself up as as a dental partnership. There are S corporations, there are C corporations and there are partnerships. And a lot of times we just hear the term LLC and we will explain the different ways to structure yourself as a partnership from an accounting and tax standpoint. And, and we'll talk about the pros and cons of each and ultimately arrive at the one that I always recommend for dental partnership formation. Number four is we'll talk about the elements of a successful dental partnership. What are those those ingredients that make a partnership successful? There are a lot of partnerships, unfortunately that fail. The rate of failure is as almost as strong as the rate of failure formation. In other words, I would say a majority of dental partnerships ultimately end and they end on a really unfortunate separation. And that's for various things that weren't set up properly in the beginning, particularly around how profits are handled and distributions are handled in that partnership. So we will talk about elements of successful dental partnerships. Number five will be what is an appropriate buy in timeline for for an associate to owner partnership owner model. This won't be a timeline. When two young doctors come together and they sort of buy a practice together, they join as a partner immediately. This will be an existing single doctor practice or maybe two doctors and then bringing in that second or third doctor, generally a younger associate what's the appropriate timeline for that and how to go through that process? Then lastly, we will talk about partnership agreements and profit allocation. How do you structure the partnership agreement, which outlines the responsibilities of each partner, the exposure to risk or liability of each partner, and then of course, how do you split the bank account at the end of every month or quarter when you make distributions? And so these are the series of subjects. Let's kick off today on this episode on the pros and cons of dental partnerships. Now, I'm definitely going to cover pros. We'll see about getting to the cons and may make that a separate episode here. But let's jump into the pros of a dental partnership and if you are watching our YouTube version, I have a screen with a PowerPoint going over these different advantages. All right, number one, what I call financial efficiencies. Dental practices are made up of overhead that consists of two types of overhead. The first are fixed overhead costs, and the second is what's called variable overhead costs. Now, as you might intuitively understand, fixed costs are those costs that largely stay the same from month to month. And variable costs are those costs that really fluctuate up or down and are tied to or tethered to collections. Let's go over the six categories of overhead in a dental practice. Labor, labs, supplies, facility, facility costs, marketing, and admin. So labor, labs, supplies, facility, marketing and admin. Let's go through those really quickly. Which of these are variable and which are fixed? Go ahead and think through that.

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Labor Costs Fixed or Variable Labs Fixed or variable Supplies Fixed or variable Facilities Fixed or variable Marketing Fixed or variable Admin Fixed or Variable let's talk about labor at the end of the day over a longer term time horizon. And everything is variable. You go from collecting 500,000 a year to collecting 5 million a year. And every single one of those categories is going to go up, I guarantee you. But in the short term, month to month or even year to year, some of those costs will largely be the same, other than maybe inflation with each year. The first one is labor. Labor, by and large is a fixed cost. Now, I'm not necessarily talking about an associate who's paid based on production. There may be elements of bonus programs that are a function or tether to collections, but generally speaking, you're paying a very similar amount to your team each month. Whether your collections are at 100,000 or 200,000, you're by and large paying your team the same amount. And so that's largely a fixed cost. Go to labs and supplies. Those ones are obviously variable. Facility it doesn't get more fixed than facility costs. You got your rent or you've got your loan payment if you own your building. Marketing Marketing generally is a fixed but could be tethered to collections depending on your marketing agreement with any marketing companies that you use. And then administrative costs are mostly fixed. Things like your phone bill, things like your accounting costs or legal costs or your waste management costs. Those are generally fixed. There's some elements like collection costs, maybe paying to care credit or paying a merchant processor that can be tied to collections. But by and large the this category is fixed costs. So when you boil it down, if I simplify that your labs and supplies are primarily the only true fixed, I mean variable cost in your practice and that might be running you. Depending on the type of practice you are, and depending on whether or not you have a CAD CAM in your practice, that's probably going to run you somewhere on the very low end around 6 to 8%. On the high end somewhere around 15 to 20%. Again, depending on the type of of doctor you are. And also depending if you have Invisalign baked in there called labs and call those supplies or or even could be labs, those can be higher. Therefore, so everything else is fixed. Now how does this relate to a dental partnership? In a single private practice, you have one doctor supporting essentially a cost structure that is 80% fixed. Now imagine if you can get a second doctor in there doing the same production amount as the first doctor. The percentage of your fixed costs relative to your collections goes way down. In other words, if your overhead, let's say per month is $50,000 and you're collecting your fixed overhead, your labor, your facility, your administrative costs, that's $50,000 your fixed costs and you're producing $100,000, your fixed overhead is 50% and maybe your labs and supplies are another 15%. So your overhead is 65% and your profit margin is 35% before paying you as the owner. Now, if you brought another doctor in and you got collections to 200,000. Now this is all theoretical for purposes of the math, that $50,000 which is fixed, let's assume you had enough ops to bring in another doctor. Now your fixed overhead goes from 50% down to 25%. Now, it's not going to work out perfectly like that. If you have another doctor in working full time, you might need a couple more ops. You may need an extra half or full time front office person, one more assistant, but it's not necessarily one for one. Those fixed costs are very unlikely to double because you brought in that second op doctor. The only thing that's probably going to go up dollar for dollar is your true variable costs, labs and supplies. But I'm going to get to that in a second. So as we look at your labor, your labor costs will go up, but they're not going to go up by the same measurement. So your labor percentage for a two doctor practice should be lower as a percentage of collections because you don't need twice the front office and you really don't need twice the general labor cost. Therefore, you're not paying twice the payroll taxes and twice the benefits and twice all of that. Let's go on now to labs and supplies. Technically, your labs and supplies will go up directly tied to collections. However, if you start collecting more, it's possible, depending on how much more you're ordering in labs and supplies, and that you could negotiate a slightly better discount. Now, this is one of the benefits of scale with group practices is they're able to negotiate dramatically lower costs or prices for their supplies, their labs and even their equipment. Now, if you go from 100,000 to 200,000 in collections, there's not a whole lot of leverage you can use with your vendors to lower it that much. If you were to go from 100,000 to 5 million because you grouped with a Bunch of other doctors. Yeah, you're going to have more negotiating power. But as a single doctor going to two doctors, probably not much, but maybe a little. And it's definitely worth the attempt when you work with your supplying company. So that's labs and supplies. Let's go into facility costs. Do you need twice the facility cost or twice the square footage for a two doctor practice than a one doctor practice? I'm going to say no. Now you may need twice the ops if you're going to also double your hygiene, which I love a very strong hygiene and strongly believe that if you're going to bring in a second doctor, you essentially want to be trying to double your hygiene because your hygiene is your feeder, your it brings them back to feed up or to stage larger treatments. And so I really like to see a near doubling or very strong hygiene department to justify bringing on two doctors. Now of course I'm talking about GPS here, not talking about oral surgeons or endos or other specialists that don't have hygiene. So you get my point on that. What about the front office? I do not believe that you need twice the front office for twice the production. Also I don't think you need twice the overall square footage, meaning you don't necessarily need two doctor's office. You can have a divider and in there I don't think you need two sterilization rooms, I don't think you need two lunch rooms and you really don't need two reception areas. So in terms of square footage, you may need to increase your facility costs by 25 to 50% as you do a build out or just find a larger space. But it shouldn't go up by twice when you double your production. So that is definitely a cost efficiency there. Going on to marketing, marketing. Usually you'll pay a marketing company some monthly fixed fee plus a gross up for ad spend, things like that. Well, if you have more production or two doctors, that's generally not going to go up by twice as much either. Unless you somehow have some contingency arrangement with your marketing company, which usually I don't see that. So your marketing category should not double either. Going on to administrative costs, these ones absolutely should not double. Now some will go up, but your phone bill really shouldn't go up. A lot of your computer costs shouldn't go up. Or subscriptions, they may go up some, but I don't necessarily think we're going to get a double on a lot of these costs like utilities and whatnot. They may go up by 25 to 50%, your accounting costs will generally go up. Because when you set up a partnership, usually you have more accounting, there's more tax IDs that are going to be involved, and I'll explain that in a, in a different episode. So that may go up a little bit, but overall, most of your fixed costs should only go up by about 25 to maybe 50% while you can double the production. And these financial efficiencies are one of the most powerful motives to form a dental partnership. More producers, one cost structure. And I'll tell you what, I, I like that way more than as a single doctor, opening up a second office or a third office, because now there's still one producer. Now you may have more hygienists, but there's one producer with two overhead structures. And that generally is a recipe for you working harder and taking home less. And I've seen it over and over and over. The thought that I can double my take home by simply doubling my office from one to two or tripling it and triple my take home, it's usually the opposite because the second office or third office ends up being at a loss. It's being subsidized by the original successful office. Now if you have another doctor, two doctors with two offices, okay, that becomes more, more of an opportunity, three doctors, etc. The key point here is higher production with lower fixed costs is a win for, for the owners. This is why mergers and acquisitions exists on Wall street in big businesses and businesses of all sizes. Why financial consultants while private equity? Why, why? All those players in Wall street know that when you take two companies and you mesh them together, you can, you can sift out a lot of those overhead costs unnecessarily needed to sustain that global combined revenue. Okay, so those are financial efficiencies. Let's go on to the second advantage of a partnership, and I love this one. This one is collaboration. I have partners here at Practice cfo. I have partners at Practice Orbit, which is my technology platform that facilitates buying and selling of dental practices in a much more efficient, cost effective manner. And in both of those, I have partners. And I can't tell you how valuable it is to have partners for purposes of feedback, goal setting, accountability and idea generation because we can't get out of our own heads. And having somebody else who knows the inside of our operation to be able to give us a sounding board to share their thoughts, to go sit in front of a whiteboard. I have a big, huge, massive glass whiteboard in our conference room and I cannot Tell you how many times I've used that with my partners and to figure out how to improve the quality of our service and the operational effectiveness of our business. I love the collaboration aspect of partnerships. Now when I get to cons, there's the opposite of that as well, which I will get to partnership conflicts too, which a lot of people don't go into partnerships just because they want to avoid sleeping in the other room, metaphorically speaking, with a business partner, because it is a marriage of sorts. So I love the collaborative aspects of a dental partnership. Let's go on to number three. Division of ownership responsibilities and division of ownership responsibilities. I like this. I like this one because for two reasons. One, it's really hard to be a clinician and to also carry the load of everything that it means to be a business owner. We call it a practice. We call it a practice owner. But to be a good practice owner and to make practice ownership worthwhile, you can't just say, I bought the practice so I have a job and people around me, and then treat yourself strictly as an employee. No, you have to treat yourself as an owner of an operation that has profit, that has a return on investment, all of that that relates to your skill as an operator, not a clinician. And if you're in a partnership, I do not recommend forming a partnership unless you're doing at least 1.6 to 1.8 million minimum. Preferably you're doing two to two and a half million in a dental partnership. Now I'm talking maybe in a place like California where some of your overhead costs are higher. But generally, when I see a partnership and doing less than 1.5 to 1.7 million, there's. There's often not enough cash to go around. Conflict is created. Partners feel that they're not being compensated for their input, the output's not equaling the input. And every ev, partners always have a very their own perception of their input and their value. And it's highly subjective. And when you don't have enough money to go around or what feels like a small conflict, or in another situation would be a small conflict, becomes a big conflict. When there's plenty of money to go around to the two partners, they don't sweat the small stuff. So being a good business owner, not just a clinician, is, I think, even more important when it comes to partnerships than when it comes to private practice ownership. And as a business owner, you want to tackle these areas of ownership responsibility. Think of all the things you gotta do. As a business owner, I have to do it here at Practice CFO and Practice Orbit, I have to manage the financial administration. I have my own financial reports and analysis. I do the human resources, risk management, marketing, supply ordering. Now I don't really have supplies, but I have a lot of subscriptions to various financial technologies that we use to deliver our service. I have to manage that all the computers are compliance with government laws in both accounting and investment services. And there is a tremendous amount of business administration. How do I make sure that everybody's rowing in a common direction? How do I make sure that meetings are effective? This has nothing to do with me sitting down with a doctor and going over their retirement plan, going over their tax plan for the current year, going, going over their insurance protection, reviewing their debt structure, all of that stuff that a CFO does for a business, which is what we do here at Practice CFO for our clients. A lot of my job now as an owner is to make sure that everybody else is being very effective clinicians. In fact, that's more important because we have 10 advisors and we have 50 people doing accounting and tax and 401k management and payroll. And I need to make sure that everyone is delivering a quality service and is enthusiastic about their job and that we have a mission statement and everyone feels a great sense of purpose and servicing our clients mean something to everybody. That's all the responsibilities of good business owners. It's really hard to do that when you don't have other owners who are in the yoke with you, feeling that intensity and that passion for the business. So what I like to do with partnerships, when I set up partnerships is, is I have, I have a list. I have a list. And it has, what are all these business functions? And then we simply allocate across the two or multiple partners who's responsible for what. And when it comes to taxes, you literally have to designate who's your tax partner. And that goes on the tax return. But who's managing the financial administration? Who's managing the human resources, who's managing the marketing and advertising, who's managing the supply ordering computers and equipment, who's managing all of that? Divide it all up and ideally you have something where a. And this goes back to the second importance of division of ownership is allocating those out based on skillset and based on passion. One partner may love marketing, one partner may be extremely OCD and in the details and want to review the financial statements and talk with their accountant about cash flows and then the bankers about banking and restructuring debt. You may have a partner Just who just loves those things. And you have another partner who hates the numbers but loves people, really good chemistry with people. And maybe on the HR side deals with giving feedback and reviews with the team and setting goals with the team, but figure out that chemistry that works and it's never going to feel perfect. But if you can get to a chemistry where you're both putting equal inputs in different areas, that is a recipe for a lot of success on the business ownership side of a partnership. Now sometimes a problem emerges where one partner ends up doing a lot more of the work. And while the one partner is leaving at 4:30, going home, going to the gym, going to do their extracurriculars, whatever, the other partner staying late, talking with their banker, talking with their accountant, talking with their marketing company, reviewing or researching different softwares to use in the practice, reviewing production reports, all that stuff, it starts to not feel fair. And if you've got a model where you're paid based on partially based on your production and then you're splitting the difference 50, 50, it's not going to feel equitable because that's splitting the difference of 50 50. Really what should happen is there should be a compensation to the partner who's doing a lot more of the administrative work. If they're spending, let's say eight hours a week handling the administrative work, the marketing, the human resources, there should be a compensation attached to that. And maybe it's, maybe it's 7,000amonth, maybe it's 10,000amonth, maybe it's more, maybe it's less, but something should be allocated to them as if they were an employee. So when you're running the partnership profit allocation, which I'll get to in a different podcast that let's say it's $10,000, that $10,000 is deducted as any other cost, as if those 10 hours were an employee cost and that's deducted and it's given to that partner as what's called a guaranteed compensation in arriving at the 50 50, which is then split. So there's a number of factors to consider with this area that I do think is a pro, which is this effective division of ownership and responsibility. Okay, let's go on to number four, specialization. This is a, is a tremendous advantage because now you can retain in the practice a lot more procedures that have been referred out. Now this is commonly the case when a general dentist who primarily does nut and bolt dentistry brings in another dentist who does a lot of specialty. Maybe they do ortho, maybe they do dental implants maybe they do know whatever now that can be retained in the practice. I'll talk later about the con, which is a general dentist who maybe isn't fully trained or doing a high quality delivery of those specialty work does create potential liability to both partners. But right now I want to focus on the advantage economically of being able to retain a lot of formally referred out profit. Now generally that doctor doing the specialty work is going to get paid more as a portion of their sort of associate, their metaphorical associate pay. They're not paid a W2 in the structure that I recommend, which is a, what's called a 1065 partnership, but they still essentially get paid as if they were associate. And then they get paid, of course, their share of the profits at the bottom. But even after paying them, say they're getting paid 40% or 45% for doing dental implants, there still should be a profit related to that both doctors participate in. So I love the benefit of specialization. Let's go on to number five, scheduling flexibility. This is one that often draws partners to each other. This is a huge advantage to be able to have another doctor in the office to pick, pick up when you are on vacation or you are out sick or maybe even on temporary disability. To have somebody else at the helm running that ship and being able to meet with your patients so that the house doesn't have to close down while you're temporarily out is a huge, huge benefit. And it's a great idea in the beginning of the year. Once a year I really promote partnership meetings, really, really promote them. Meet every quarter, every month, but once a year, meet, project out vacations, put it on the calendar and schedule accordingly. Scheduling flexibility, another huge advantage. Let's go on to what is the last one and that is succession planning. When you have another partner in the practice, assuming you don't retire at the same time, there is better succession planning because oftentimes the partner that remains can assume some, maybe in some cases all of the production of the seller. Generally they cannot assume all of it, but they can assume some of it. But normally what happens, and I'm just finishing up as we speak, a partnership doing it was a large partnership doing about 5 million and 1 partner is buying out the other partner who is moving out of the state. And it was a built in succession plan. Now the remaining partner has to find some associates and work through that to replace some of the production that he was not able to do on his schedule. But it did have a built in succession plan there. Now if you're both retiring at the same time. You got to go through the same routine of any private practice which is you got to go fishing to find another buyer practice. Orbit can help with that as a platform to help make the match between dental sellers and dental buyers and then navigate that sell in a very organized, efficient and cost effective manner. So I'm going to end this podcast with this. The next podcast we'll talk about the cons of dental partnership. When you are considering forming a partnership it is really important to not just jump into it. Why? Because partnerships are full of landmines and those landmines can be avoided if properly planned for. But my what I advocate here to always to partnerships is you need to be fully informed on this and what happens is I have a lot of say young partners who want to form a partnership because they have good chemistry. We get along, we like each other. We actually, we actually like each other. So let's go ahead and form this. It's going to be fun. Attorneys. Yeah, I guess maybe if we need to formalize it. But really we just know this is going to be great. Then you step into it and then suddenly you're sharing a bank account. Suddenly you're not entirely confident about the other person's clinical skill set or you have a different difference in philosophy or difference in the way you want to run the business and a million decisions have to be made and you're going to disagree on a lot of those. Just plan on it. It's how you do dispute resolution and how you split the bank account that's going to make or break the difference. But you've got to go into it understanding what are both pros and cons. I hope this was helpful. We will see you in the next episode.