Practice Mergers for Wealth Accumulation: Are They a Safe Investment?

In all dental practices, there are two broad categories of expenses – fixed (as rent, insurance, utilities, CPA fees, etc.) and production (as supplies, lab, & to a degree, staff).  Therefore, whether a practice produces $500K or $900K, the fixed expenses remain relatively stable in terms of actual dollars, whereas the production related expenses remain relatively stable in terms of percentage.

In any practice, regardless of gross income, for every additional dollar of revenues acquired through a merger, there is no additional cost for fixed expenses, only for our production related expenses.  Thus, for every additional dollar of revenues acquired through a merger, the production related expenses are typically represented as:

Provider Compensation                            30 – 40%

Lab Expenses                                                 8 – 10%

Supplies (Clinical & Office)                        8 – 11%

Additional Staff                                            10 – 15%

Debt Service                                                   10 – 12%


Thus, in a Practice Merger, if you never personally touch a handpiece or mirror and explorer to any of the acquired patients (as demonstrated by the Provider Compensation above – basically paying an “Associate” or the Selling Dentist to do all clinical treatment), you will earn 12 – 34% for every additional dollar added through a merger!  For example, if you merge a $500K practice into yours, and never treat any of the patients personally (allowing the “Associate” or Seller to perform 100% of the acquired dentistry), you net an extra $60 – $170K!

If you eliminate the Associate (or Selling Dentist) completely and treat all of the patients entirely yourself, you earn even more (up to roughly $300,000.00 through elimination of the Provider Compensation category above)!  Thus a realistic scenario and financial return would be somewhere in between – the Seller or Associate doing some of the additional clinical dentistry and the Purchaser performing the remaining dentistry.

As another example, a $500K grossing practice might sell for around $350K. Therefore, if you earned a realistic additional $200K income from the practice merger and paid $350K for the acquired practice, your rate of return would exceed 50%!!  Thus, investing in what you know best (dentistry), using other people’s money (100% bank financing), and using other people’s hands to produce the dentistry (Associate or Seller) may allow you 50% or more returns. There are not many investments in today’s economic climate that can produce such generous and relatively safe economic returns. Dental Practice Mergers – what a great means of wealth accumulation for dentists of any age!

–Ron Prokes, DDS