Profit Allocation Models for Dental Partnership

Podcast Summary:

In this episode, we delve into one of the most critical aspects of running a successful dental partnership: profit allocation. Drawing parallels between marriage dynamics and business partnerships, we explore three core models for distributing profits among dental practice owners. These models — the 50/50 Model, Associate-Owner Model, and Full Allocation Model — are unpacked to help you determine the best approach for your practice. Whether you're a seasoned dentist or exploring partnerships for the first time, this episode provides valuable insights into structuring financial success in your dental business.

Key Points:

Podcast Summary:

In this episode, we delve into one of the most critical aspects of running a successful dental partnership: profit allocation. Drawing parallels between marriage dynamics and business partnerships, we explore three core models for distributing profits among dental practice owners. These models — the 50/50 Model, Associate-Owner Model, and Full Allocation Model — are unpacked to help you determine the best approach for your practice. Whether you're a seasoned dentist or exploring partnerships for the first time, this episode provides valuable insights into structuring financial success in your dental business.

Key Points:

Importance of Profit Allocation in Dental Partnerships:

• Financial arrangements impact business success and partner relationships.

Three Models for Profit Allocation:

• 50/50 Model: Equal distribution of profits, simple but less flexible.
• Associate-Owner Model: Combines individual production rewards with shared profits.
• Full Allocation Model: "Eat What You Kill" approach; rewards are based solely on individual contributions.

Factors Influencing the Right Model:

• Production levels, time commitment, and practice type.
• Balancing fairness with incentivizing productivity.

Practice CFO's Expertise:

• Years of experience guiding dental partnerships.
• Customized solutions tailored to practice-specific dynamics.

Special Considerations:

• Family practices often favor the 50/50 Model.
• Adjustments for specialists or varying partner roles.

The Importance of Financial Reserves:

• Maintaining at least one month’s expenses in working capital.

Exploring Practice Orbit:

• Innovative platform for buying and selling dental practices.

#DentalPartnerships #ProfitAllocation #DentalCPA #PracticeManagement #BusinessStrategies #EatWhatYouKill #AssociateOwnerModel #DentalBusiness #PracticeOrbit #DentistryInsights

Transcript:

Wes Read: [00:00:00] Hey everybody, it's Wes Reed here, coming back at you with my final episode on dental partnerships. I am likely gonna post this on both of my podcast shows. The one is my main one dental boardroom or the dental boardroom, associated with my CPA and financial planning firm called Practice CFO, but also have one for dental practice sales specifically.

And since dental partnership formation does relate to. A dental practice sale or dental practice acquisition, it's just simply not a full sale or a full acquisition. It does relate to a dental practice sale. I will likely post it also on the Dental Practice Sale Podcast. Alright, this one is probably the most important when it comes to a successful partnership because generally speaking, I find that partnerships break up.

Sometimes in a horrific way where a lot of re reputations are damaged or [00:01:00] relationships are damaged. It's how you split the bank account, how you split the money. And just like in a normal, regular marriage, money is one of the top three factors that leads to a successful or an unsuccessful marriage, depending on how the two spouses approach that.

Issue in their lives. It's the same thing when it comes to a business and the same thing when it comes to a dental business. And so I wanna go over three methods conceptually on how to allocate profits in a dental practice. Now, by way of just credibility, how do I know about this subject? Well, practice CFO works with a lot of dental partnerships and, uh, where a lot of.

CPA firms and even dental, CPA firms won't take on dental partnerships because of their complexity practice. CFO has decided many years ago to embrace the fact that dental partnerships are one important format of structure and [00:02:00] dental practice ownership in the industry. And if we want to be able to make a true impact, which is our mission at practice CFO to dentists, we need to be good advisors around dental partnerships.

Dental partnerships are a way to increase your profit. Multiple producers with a shared cost structure, if done right, can economically benefit those partners. So let's talk about this. At practice CFO, we've set up a lot of formats for how to break out cash flow or how to break out profits and distribute those profits to the owners of a dental partnership.

Thi let me start off by sort of in your head, drawing a continuum, and there are three points on this continuum. On the left side of the continuum, you have this communistic approach where regardless of contributions or production or time in the office. You split the profits 50 50. If partner A takes out a dollar, partner B will take out a dollar and it will never be [00:03:00] any different than that.

If you slide over one level in the middle, you may have, let me actually slide over two levels to make my point more clear. Now you go all the way to the right side of the spectrum and you have what we call the eat what you kill model. Formally, I call it the full allocation model, but I'll get into that.

Eat. What you kill is whoever produces the most, whoever provides the most value, whoever works the hardest to get more output, that person is gonna get paid commensurate with the value that they create, period. And in this model, the far right model on this continuum, you are trying to tether the distributions of money.

To each partner as specifically as you can to the input of value by each partner. You eat what you kill. Think of that analogy. You're out hunting with your partner in the woods and you do not share [00:04:00] any of your, your catches. You simply have to find your own. If you, if you don't hunt successfully, you're not eating, or your other partner may be completely bloated.

It's almost like in the movie, the Three Amigos. I think is what it's called. And they're, they're in the desert and they're just desperately thirsty and one of 'em has a full cante of water. And the other, the other two I think don't. And they're like, dirt is literally coming outta their canister. And the other partner is just sort of so full of water.

They're drinking and pouring leftover on their head and tossing the can. Well that's kind of the eat what you kill model. There's no sharing, there's no, let's be in the yoke together. It really is. I'm gonna try to produce as much as I can and control as much as I can so I can have as much as I can to take home.

Now, there are times where a full allocation model works, and as much as I just made that sound a bit grim or overly competitive, it doesn't necessarily have [00:05:00] to be, and I'll explain when there's times to structure yourself more on the right side of that continuum. If you go in the middle. You have this sort of hybrid where there is some sharing going on, you're acknowledging that you're both in, in the business together.

You're, you're pulling this thing in tandem. And so it isn't just about what each of you do individually, it's about what you do collectively, and you're really focusing on one plus one equals three in this model. Now, the, the name of these models is on the left. The communistic approach is, I just call it the 50 50 model.

It's very simple. The one in the middle. I call the associate owner model. Associate owner model. And the reason why is in this model, you each pay yourself first as if you are an associate sort of metaphorically in your practice, and then you split the profits 50 50. Now, I'm gonna go into that a little bit more, [00:06:00] but I call it the associate owner model because you're simulating as if you were associates.

Of this business getting paid a W2 or 10 99 independent contractor, and then you get the profits, whatever's left at the end of the day based on your ownership. Equity. Are you looking to sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales in such a fragmented market with transaction costs so high, many dentists selling their practice feel discouraged.

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Alright, let's move over to the far right one. I call that the full allocation model. So the 50 50 model, the owner associate model, and the full allocation model. Now there are variations off of these, no doubt, and there will may be other dental CPA firms. [00:08:00] Who have some nuanced versions of these, no doubt, and in many cases, that nuanced version may be specifically needed and tailored because of some very unusual circumstances in that particular practice.

It is true that there is no two dental practices that are exactly the same. However, if you're both general dentists and you're both in the opposite about the same amount of time. There are a lot of common characteristics that will be found across all of those types of dental partnerships, and that's really what I am using as my assumption or premise here in explaining these three different models.

Now, if one of you only works a day a week and the other person works four days a week, or if one of you is more of a specialist and does maybe full mouth work or. Endo work or some of some of that, these models still could apply for sure. They may need some nuanced adjustments, but they can apply.

Alright, let's dive into these. And I wanna go with the first one, the 50 50 [00:09:00] model. Now the 50 50 model is fairly straightforward and if you're, if you're watching my, my version here, you don't even really, I don't even have a screen for it and let me. So if you're looking at my screen, ignore what I've got on the screen.

I'm actually gonna go back one page here to my intro page. And a 50 50 model is pretty straightforward. Basically what you're gonna do at the end of every month or every quarter, whenever you decide to do distributions, you see what's in the bank account and you keep in a minimum amount to cover your working capital at all times.

Which for me, I usually like to see about a month of total outflow that includes expenses and debt and even distributions. And so let's say your total outflow is $200,000. Let's say this is a $3 million practice. Your total outflow is $200,000. I would wanna see about $200,000 in your account at [00:10:00] all times and not dipping below that.

So payroll goes out and you're right at around $200,000 at the end of the month. That's a good scenario right there. Anything above that is the surplus that can then be distributed. And in a 50 50 model, you're gonna take that 50 50. Now, if you own the practice 70 30 or 60 40, then it would be according to those ratios.

I'm just using 50 50. Most dental partnerships that I work with are 50 50, and frankly, that's how I generally recommend it. There are circumstances where may be justified to not have a 50 50, but in my experience, most partners don't want to be. A minority owner, most of them are in it to win it. They're in it for the long run.

They're committed. They're giving a lot of sacrifice and love and care to the practice, and they want to feel like an equal. And anytime you have anything other than 50 50, you're gonna have somewhat of this like parent child or big brother or authority asymmetry going on. And that oftentimes [00:11:00] erodes what is the great aspect of partnerships, which is synergy between them.

Which is why I generally recommend a 50 50 model, and as I go through my scenarios, just know that my premise here is that it's a 50 50 model, but whenever I use the term owner ratio, just know that the owner ratio is gonna be what the actual ownership percentages are. So if it's a 70 30 model, the owner ratio is gonna be 70 30.

Okay? So that's how a 50 50 works. Whenever there's extra cash to take out, you take it 50 50. And you can do that on whatever cadence or timeline you want to do. Fairly straightforward. You almost don't even need to keep a separate report that tracks how much each of you can take out. Simply look at the bank account at the end of the month, look at your p and l, make sure you keep enough in the practice so you don't get into the red.

You're probably gonna be okay. I've seen this done primarily only in the case [00:12:00] when it's family. Beyond that, I have not seen it done and generally do not recommend it. All right, let's go onto the middle one, the associate owner model. And if you're looking at my screen, you're seeing how we here practice, CFO, do this, and in each of these next two scenarios, the owner associate model, and the custom fully allocated model.

I have multiple columns and there's a column for each producer, every doctor, every associate, every hygienist is a producer. Now have a column for doctor one or partner one, a column for partner two. If there was a third partner, I have a A column for partner three. I'm just gonna go off a two doctor scenario.

I have a column for hygiene and I have a column for associates. If there is an associate, and if they're specialists, they could be under the associate, or you could have a separate column for the specialists. And again, I'm on the second one here, associate owner model now, and then I have on the far left, I have the total, the total of all of those columns, [00:13:00] simply adding them all up.

Horizontally, and let's look at a scenario where the total collections are on my screen. $172,500. One produced for that month, 60,000 Doctor two, produced 50,000 hygiene produced 47,500, and the associate produced 15,000. Now, if you don't have the visuals here, you don't need to remember these numbers.

I'll sort of explain conceptually what's going on as we move our way down these columns. And so we have our total collections of $170,000 after taking out a little bit of money for refunds, 2,500. So you're sitting at $170,000 after the refunds, and Doctor A did 55% of the production between just those two doctors.

They did 55% and Doctor B, the second doctor did 45%. And so if you take doctor's production doctor one did 60,000, doctor two did 50,000, simply multiply them [00:14:00] by what you would be paid if you were an associate. And you both agree on that, and let's say it's 32.5% and you each get paid as your first payment.

In this model, you get two payments. One is your associate pay and one is your. Share of the profits. Your associate pay is 32.5% of your production. So Doctor One got 19,000, it's a rounding year, 19,000 to Doctor one, doctor two who did 45% of the production between those two doctors, doctor two who did $50,000 in production times 32.5%.

Gets about $16,000 and again, I'm rounding. So those a $3,000 sprint, DR one got 19 and DR two got 16,000. Now think of it as if those associate your associates and you two doctors got paid out. Your $35,000, that's just summing up your associate pay 35,000. Well, the net collections was 170, less than 35, so now you're down to [00:15:00] remainder collections of 135,000.

Before paying all of your overhead, and when I say overhead, I'm referring to labor, supplies, labs, facility, and administrative costs. And marketing could be called out separately. But for purposes of this conversation, marketing is baked into the administrative costs, so labor supplies, labs, facility, administrative costs, and anything that's not in labor supplies, labs, facility is going to therefore be in administrative costs.

Now, the way that we split out these costs is 50 50 because you own it 50 50, and you're sharing in the cost 50 50 for all of them except for two of those expense categories, supplies, and labs. And the reason why is supplies and labs are the only true short term variable costs in the practice. Meaning that if your collections go up.

Your [00:16:00] supply costs go up. If your collections go up, your labs go up and vice versa, because they're directly tied to your collections. Your labor cost doesn't necessarily attach itself directly to your collections because they're probably, most of 'em are probably being paid hourly and they're coming in the same amount of hours every week.

Your facility costs, which is your rent, that's not gonna change. And most of your administrative costs, there's a few small ones, most of them are the same. Your phone bill, how much you pay your accountant, for example, or I don't know how much you pay for your utilities. You know, most of those things are the same every month.

So all of those costs that don't really change, those get split 50 50. So in my example, your labor costs your hygiene. And associate cost, that's total cost was 24,500. So you split that out. 12,250 each. You each bear 12,250. Your assistants were $8,000. You each pay for $4,000. Your front office was 10,000, so you each pay 5,000.

Now when you [00:17:00] get to dental supplies. You're gonna pay those pro rata based on your production between the two doctors. So if Doctor A did 45% Doctor A, or in my case Doctor A did 55%, doctor A is gonna pay for 55% of the supplies and Doctor B is gonna pay for 45% of the supplies. And that's the same with dental labs.

Facilities, in my example, 8,000 get split equally and administrative 15,000 gets split equally. So I have these three main columns, total Doctor one and doctor two. And near the bottom you allocate out the profit and the profit is 170,000, which was the total net collections after some refund, one 70, less than 35 paid to the doctors as their quote unquote associate pay.

You're left with 135. When you take out all the expenses, which equal 88,000, you're left with a total of 46,563, and that [00:18:00] isn't exactly equally split that profit. It's actually split, and I'm rounding here, 22,000 to Dr. A in 24,000 Doctor B. And that's because Doctor A had to assume more of the supplies and lab cost.

So even though Doctor A produced more. A's net profit is less than Dr. B's net profit. And so you may be thinking, well, that's not fair. Dr. A produced more and only got 22,000. Dr. B produced less and got 24,000. Well, that's of the profit, and that's because Dr. A had to bear more of those variable costs of supplies and labs than Dr.

B. However, when you add up the associate pay, which was that first part and that net income. Dr. A does end up getting paid more and the total, when you add up Dr. A's associate pay of 19,000 and then their 22,000 I'm rounding, [00:19:00] it's at 41,000 total for Dr. A and Dr. B, who got paid 16,000 as their associate pay plus their 24,000 of profit got 40,000.

So the difference between those two was roughly a thousand dollars. So the $3,000 spread in associate pay 'cause Dr. A did 55% of the production and therefore got paid more at 19,000, and Dr. B who did 45%, got paid 16,000. That $3,000 spread gets narrowed when you add up the profits between the two. And so in this case, a 55 45 split in production.

Led to probably about a 48 52 allocation of total take home. So you see how this owner associate model finds this middle ground and doesn't just allocate total net income based on production. It sort [00:20:00] of blends itself, and so it will close that gap. Of the difference in production between Doctor one and Doctor two.

But there is a difference and Doctor One produced more and he did take, or she did take home a little bit more. And so there is this middle area where there's some commensurate level of, of take home there to production, but it isn't as stark as the difference in production. Now, couple comments here with this.

I actually, one primary comment with this. Partnerships, and if you listen to my prior podcast, generally structure themselves as a 10 65 partnership tax return, which is what I recommend, and you get a K one that shows your share of profits on that K one. What I recommend is that the associate pay that 32%, that's 32.5%.

In my example, that gets paid what's called a guaranteed payment. It's almost like a W2 or 10 99. It's not, but it's conceptually the same thing. It's a guaranteed payment. [00:21:00] You're guaranteed to get paid. 32.5% of your production provided that your overhead isn't so negative that you end up running negative after you pay yourself your 32.5% and all of the overhead.

If you, if you're still negative at that point, meaning that there's zero profit, then you end up not being able to do that. But generally, if you pay yourself 32.5% and then pay all your expenses, there's still gonna be a remaining profit. So that 32.5% associate pay, quote unquote, I like to call that a guaranteed payment, and it shows up in the guaranteed payment box.

On the K one and then the net profit at the bottom, that's what shows up in box one on the K one. So there's a lot going on there. And the more you can understand this, the more you're gonna be well-versed as a business owner of a partnership. And I find that to be incredibly important and valuable for business owners to understand this language.

Okay, let's move on now to the third model, and that is the [00:22:00] full allocation model. Eat what you kill. I'm gonna go to the next screen here and. It's laid out similarly in format. I have the same columns. I got total doctor one, doctor two, and I'm gonna try to be more consistent here. Between AB one two, I'm just gonna say doctor one and doctor two.

So I have the total column. Doctor, one column, doctor two column hygiene column, and the associate column. Think of it this way. Each column, not the total, but each column is its own profit and loss. As if they were four separate businesses or what I'll call four separate profit centers. 'cause that's what they are.

They're four separate lines of business in a way. Four separate profit centers within the dental partnership. And all of those sublines, those, those p and ls all add up to the first column, which is the total. And that's the company p and l. That's the, that's the total. [00:23:00] Dental, profit and loss statement sometimes called the statement of income and expenses.

Now, this is cashflow, so it's not gonna directly tie out to your actual true profit and loss. It's a little bit different. It will extract the information from your financial statements in QuickBooks into a separate, we use a spreadsheet for this, and then it creates this cash-based, segmented set of income and expenses for each producer.

Dr. One Two Hygiene and Associate. And now let's start moving our way down. So at the top, again, total collections were 172,500 with 2,500 in refunds. And so 170,000 in total collections. And again, Dr. One did in this case, I have DR. One doing 60,000 and Doctor two. Doing 50,000 and I have hygiene doing 47,500, an associate doing 15,000 now in the middle format.

The one we just [00:24:00] did, the owner associate model in that one, we didn't need to keep a full p and l for hygiene and associate. Because all we did was we split out their income, less their labor costs, and that was split 50 50. Now in this one though, hygiene and associate have a full column, which mean hygiene.

It's gonna pay for its share of supplies. It's gonna pay for its share of assistant and front office who might be helping them. The associates are gonna pay for their share of labs and supplies and front office costs. Each of these is a sub-business using or consuming resources inside of your dental practice.

And so we need a full top to bottom profit and loss or maybe more accurately stated cash flow statement. So let's go ahead and dive into this. Let's look at at column one, Dr. One. Dr. One did 60,000, had refunds of 1,500 for net of 58,500 [00:25:00] and. If you look across the three doctors, doctor one, doctor two, and the associate, we calculate a doctor ratio.

How much did you produce across the doctors doctor? One did 48%, doctor two did 40%, and associate did 12%. Then there's the collection ratio, and the collection ratio is how much did you. Relative to everyone including hygiene. So in this case, doctor one did 35%, I'm rounding 35%. Doctor two did 29% hygiene, did 27% and associate did 9%.

And then you have the ownership ratio, and in this case it's 50 50 between DR one and DR. Two. Hygiene and associate obviously do not own any of the actual interest in the partnership. That's 50 50. So you have these three different ratios and. As you go down those five expense categories of labor, supplies, labs, facility and admin, and within labor you have hygiene, non hygiene, front office and associates assistant, sorry, associates and other labor.

[00:26:00] You have those sort of four sections. As you go down, those that, that expense list, you will allocate out expense based on one of those three ratios and you use the ratio that makes the most sense economically. So when you hear it, you're like, yep, that makes sense. Uh, we would allocate that cost to that column.

So let's look at an example to, uh, put some, uh, specific words and numbers here to this concept. Hygiene. So hygiene labor. So let's start off with the labor expense. Actually, lemme back up really quick. Notice that I have not done an associate pay in this model. There's no associate pay. You're only paid.

What is at the bottom of your p and l of your column, because that's how much you get at the end of the day. It has, it, it, it's, it's not as directly tied to your collections. It is, but it's just tied in a different way because you're not gonna get paid it as an associate. You have no nothing guaranteed.

There is no guaranteed [00:27:00] payment. Like in the first one where you're paid 32.5% of your production and then you're paid whatever, 50% of whatever's left after the overhead. In this example, we just take your straight net collections after your refunds, in this case 58,500 for doctor one, and we subtract all of the expenses allocated to them, and whatever is at the bottom is what they get to keep.

So let's go over the first expense labor and in labor. The first one is hygiene. How do you think, which column do you think hygiene pay? Let's say you paid your hygienist, your hygienist, $20,000 for the month. What column do you think hygiene should be allocated to? You got column one, which is doctor one, column two, doctor two, column three, hygiene and column four, associate.

Well, that's gonna go to your hygiene column. Hygiene Production. Hygiene. The hygiene profit center should pay for its own labor, and so hygiene did 47,500 in collections while 20,000 of that [00:28:00] collections from hygiene is going to pay itself, is going to pay the hygienist. And it's zero in the other three columns.

Let's go on to the next one. Non hygiene. This is front office and assistance, and that's $18,000. In my example is the sum of pay for that month to the front office team and to the assistance and that one. Think about it, how should that be a. Should it be allocated based on ownership? 50 50. Should it be allocated based on the three doctors or should it be allocated across all four of them?

It's gonna be allocated across all four of them, because all four of them consume use of the front office and the assistants. The front office is scheduling, even hygiene. The front office is scheduling hygiene appointments. Some of you have assisted hygiene. You could pull out the assistant and not allocate assistant costs to hygiene pool.

That's fine too. You can get a little more granular on this if you want to. In my example, I have the front office and the assistant, so everyone other than hygiene, and of course [00:29:00] the associate is allocated based on collection ratio. In this case, doctor, one 35%, doctor two 29% hygiene, 27%, and the associate 9%, which equals a hundred percent total.

And so the doctor that produced the most, which was doctor one, is bearing the largest cost of the front office and assistant. And if you think about that, it makes sense because that doctor probably, not necessarily, maybe they're doing bigger treatments, so they're getting paid more per visit. This is why every, every design needs to be custom.

But if they're all doing the same treatments, for the most part, doctor one is getting more use and is gonna bear more of that cost. Doctor two in this case gets a little bit less hygiene, gets a little bit less, and then the associates who only produce 15,000 for the month of the 170 associates will consume the lo the lowest amount of that front office and assistant costs.

So that one is allocated across all four of 'em, pro rata based on [00:30:00] collections. Let's go down to the associate. So the associate is paid 10 99 or W2, doesn't matter. Who should bear the cost of the associate? Which column? Well, it's gonna be the same as hygiene. The associate column should bear its own cost.

So the associate p and l, the associate has $15,000 in revenue or collections. And so let's go ahead and take out the full associate cost. The associate got paid 4,500, which is, uh, what is that? Like 33% of their production. And so that is fully allocated out to the associate and it's zero in the other three columns.

Alright, I have other labor here. This might be payroll taxes, this might be benefits that I'm allocating out, pro rata across all four of them. Let's go to the supplies and labs. Now the supplies and labs, remember, are the only true variable costs of all of these sort of main line items of labor, supplies, lab, facility, and admin.

So the supply and lab costs, let's look at the [00:31:00] supply first, the supplies, there's a lot, you know, a lot of little supplies that get consumed throughout the day, throughout the month, and those ones are being allocated. How do you think across those four production columns. Well, an argument could be made that they're allocated across all four of them.

However, in my example here, and generally what I recommend is hygiene may not be consuming as much in supply costs as the doctors are. So in this case, I allocated. It based on the doctor ratio, the doctor one, doctor two, and the associate. And so that's a 48%, 40% and 12% allocation there. And so that's how I allocate it.

Doctor one pays the most, doctor two the next most, and then doctor, the associate pays the rest and it's zero in the hygiene column. Now you can do custom allocations in all of these rows. It needs to make sense and doctors need to all agree on this. Alright, the labs. Now here's what I've done with the [00:32:00] labs.

Doctors can be very specific about their labs. Some use their own lab provider, different from the other partners. Some like more expensive labs and some don't. Some might use a Cadcam and another one doesn't. So I break out the labs a hundred percent to the doctor. So doctor one will pay for a hundred percent of his or her labs, doctor two the same, and associates the same.

That's how I do it. A hundred, a hundred percent allocation there. Alright, the facility costs, I broke those out on ownership ratio. So if the rent was $8,000, I broke that out exclusively to Doctor one and Doctor 2 50 50 based on ownership ratio. And the thought here is, is that no matter how much. The space is being used no matter how much the hygiene comes in or doesn't, or the associate comes in or doesn't.

At the end of the day, the rent has to be paid. It's totally untethered to [00:33:00] production, and it's purely a function of ownership. And so I had that $8,000 going 4,000 to Doctor one, 4,000 to doctor two, zero to hygiene, zero to associate. And so that is based on the ownership ratio. Lastly, administrative, those are all of the small things from your collection cost to your accounting fees, to uniforms, to utilities, to business insurance, to your licensing costs, things like that.

I allocate out across all four of them based on production, because really all four of them are consuming those resources at some rate that is commensurate with their production. One could argue now that one's not perfect, and you could get more granular as you go down that administrative list and break that out more specifically.

But that's the total expenses. So now for Doctor one and doctor two, you take their total collections and [00:34:00] you subtract out the, the total of their expensed column and you come out with the operating income. So each of these four columns, Dr. One, two, hygiene and associate have a net profit. In this case, it shook out that Doctor one has, I'm gonna round 31,000.

Doctor two has about 26,000 hygiene, has about 18,000 and associates or associate has 4,000. And by the way, if you have 2, 3, 4 associates, you could put them all in that same column, just like hygiene. Regardless of how many hygienists you have, you put them all in that one column. It's only the doctors where you break out a column by individual person.

So the operating income totaled 79,500. Now, here's the thing, hygiene and associates, they are not owners, so they don't get to keep that bottom line profit. What you do is you take their profit and you zero [00:35:00] it out by shifting it over to Doctor one and doctor two who, because they are the owners, they get to keep a hundred percent of the profits.

So Dr. One is gonna keep his or her share of the profit in his or her column at 31,000. DR two will do the same at 26,000, but the hygienist and associate, which totals about 22,000, that's gonna be allocated $11,000 each to Dr. One and Doctor two. Therefore, you're subtracting out those amounts from hygiene and associates, and the bottom line in those two columns is zero, and you're adding that $11,000 to each of the two doctors.

And so doctor one who had 31,000 before allocating the quote unquote passive side of the business, hygiene and associate that gets allocated out to them, that's a total of $42,000 for the month. And DR two got a total of $37,000 [00:36:00] for the month. So what's the spread there? The spread there is, let's see, 42 minus 37.

It's about $5,000, and the production spread between them is 10,000. Remember DR one, it's 60,000. DR two did 50,000. So even though it gets narrowed, it doesn't get as narrowed as much as in the owner associate model. And in this one, in this full allocation, eat what you kill model the one on the far right of the spectrum.

Dr one in that model got 42,000 in the associate owner. He or she only got 41,000 and DR two only gets 37,500 in the full allocation model where DR two got 40,000 in the owner associate model. So the key concept there is that because we broke out expenses in a more granular way based on production, that the [00:37:00] doctor who produced more ended up getting a little bit more, and the doctor that produced less ended up getting a little bit less.

Now they're still relatively close. I mean 42,000 versus 37,000. Not a huge difference, but hey, it is $5,000 for the month. That's no small change right there. And so that matters. And so a lot of doctors may wanna do it this way, and that's totally okay. Now, where I say that this model, lemme go into a few now, key points about this model.

Number one is that. If your partnership and the doctor production, their treatment, their labs, the technology they use, maybe the price variation and the assistance they use, maybe they have more of a silo team that they use. The more that each doctor has a process, system and resources that are different from the other doctor, the more you should do this model.

This one allows you to be much more detailed [00:38:00] in how you allocate out the profit at the end of every month. That's my first comment. Second comment is that this needs to map back to the partnership agreement. This is so critical. The part, the attorneys generally will come up with something that's more of almost like a concept statement and a paragraph.

What I recommend is that your CPA helps design this and the attorney work together and that the CPA give a printout in Excel and with either some, some example numbers or just Xs, and it shows exactly how those columns are calculated. What GL items in the accounting records called the, the, the general ledger, that's all the categories you can code or assign income and expenses to and QuickBooks.

You make sure that that is clearly mapped out and that gets put as an exhibit inside of the partnership agreement that everyone is the best. Business process and it protects all partners to make sure that if there's a conflict in the future, [00:39:00] you have something to point back to to say, Nope, we did it right, or No, we didn't do it right.

Alright, lemme go onto my next, my next comment here. I highly recommend that before signing the partnership agreement with whatever the allocation model is, you take your historical numbers over the past year and you run them through what this model is. And you look at what is the bottom line or you model it.

And if you, if you believe Dr. A is gonna do X and Dr. B is gonna do Y hygiene, will do, you know a certain number, and associate will do a certain number, model it out, sit down. This is a good two, three hour meeting. Sit down with your accountant and your attorney, maybe just your accountant, who can then communicate it to the attorney and go through and model what it would look like.

So when you look at that bottom line and you say, I produced X, Dr. B produced Y, look at the bottom line. Does that make sense? And if it doesn't make sense, then you need to readjust this to something that does make sense. That's where you need to go through the critical conversation [00:40:00] of saying, here's how we're going to break out the bank account.

Because when you don't have that conversation and you just spit and shake and you think everything's gonna work out because you're, you're good friends, you have goodwill, you trust each other, all that's good. And I think you need all of that. But I have seen many partnerships who had that. Break up because they didn't do this proper exercise ahead of time.

Ounce of prevention is worth a pound of cure. Couldn't be more applicable than in partnership income allocation, design, and modeling. Alright, my next comment you may need, especially if you do the more full allocation model. You may need to have a separate credit cards for the two doctors, and you may need a third or fourth credit card, depending on how nuanced you want to get.

Because when the CPA gets the accounting, all of the, all they see is the expense. It feeds into QuickBooks or they see it on the big statement and it says Henry Shine. They don't know who it's for, what it's for, or it has a lab provider. They don't know which lab it's for. And [00:41:00] if you say Doctor A, who gets.

His or her labs here and Dr. B does over there, then you should each have a credit card and you pay for your labs respectively outta your own credit card. That way the account knows when it feeds in into QuickBooks that all of this credit card is for Doctor one and all of this, for this doctor is Doctor two, call it, and it makes it very easy.

You don't wanna have to have long extended emails and communication every month or every quarter in order to calculate the profit distributions by. By each partner, so that, that's really critical. Now, I am a huge fan of this emerging space called FinTech Financial Technology, and there are software companies that are emerging that are layered on top of a traditional bank or credit card, and they give you all of these tools to slice and dice and label expenses inside of that software.

So [00:42:00] well that when the accounting comes in, it's very, very clean. These are called expense management systems. Let me give you a couple examples. One is ramp, uh, one is Divvy. There's one I think called Mercury. There's a number of these popping up. In fact, they're popping up all over the place because they make so much sense, especially when you have people who need access to your financial detail outside of your business.

Like, like me. Wes like the accountant or a practice management consultant, or you have a bookkeeper somewhere and you can grant very secure access to them. So you're not always having to deal with logins and sending up new logins and, oh, the login broke. Hey doc, can you go into your Bank of America account and reestablish connections so I can view, nor do you have to give your account your actual login, which you absolutely don't want to do.

So these are great ones. Our preferred here as of today, right now based on our latest research is ramp. And we use personally practice CFO uses ramp. We have [00:43:00] a lot of employees. We have a lot of inflows and outflows here, and we have a very structured financial platform that we run our accounting on using RAMP credit cards.

A couple cool features about them, and I didn't mean this podcast to be on FinTech, but a couple cool features about these is that when RAMP, and I don't get paid anything by RAMP right now, by the way, by doing this, this is me sharing with you what I have discovered to be an excellent new evolution in banking that I find highly valuable.

In ramp. In Ramp, you can create as many virtual credit cards as you want. They all sync up to one credit card statement. So the accounting is still easy, but you can create a hundred different virtual credit cards and they all have their own credit card number and you can delete 'em and you can put restrictions on them and controls on each one of them.

And so if you have a front office person who may be buying some things, or sometimes in smaller dental offices only the doctor or the doctor spouse has, has access to a credit card. But as you get bigger or you [00:44:00] have maybe somebody handling your bill pay specifically, or a front office person or. Or you could set up a credit card by different vendors and put limits so that you know that if they ever try to pull a fast one on you, you can cap how much they can pull out.

I have one doctor runs a $6 million practice. He owns it fully here in San Diego. He's got a great business mind. He's also very, very detailed, exceptionally detailed for all of his vendors. He created literally separate ramp, virtual card and put restrictions on it. Then in ramp, what you can do is you can give it a category.

Then you map categories and ramp to QuickBooks, and so you actually do the mapping in ramp, and it's a lot better than doing the mapping in QuickBooks, and when it feeds it in, a lot of the accounting can be handled much more accurately and smoothly. Ramp also recently just opened up a checking account option and what they call treasury, where you get, I think it's about 2.8% interest on any cash you have.

[00:45:00] Sitting in the account as well. And uh, so that's brand new. I haven't seen it. Any use we may consider using that. I'll fill you in more as I get more information on it, but I'm excited to see that as well. In the past, the only one that I knew of was called Relay Fi. Very cool company for checking accounts with the same, with the same sort of tech features on them.

Uh, stay tuned for more on that. One key thing to know about these types of credit cards though, is that they're more like charge cards. Have Generally you have to pay off the balance at the end of the month. You cannot roll it forward and with ramp, generally they are tying your credit limit to the cash you have in the bank.

And so if you're always running low on cash ramp probably isn't gonna be a good option for you. You could go with Divvy, which allows a fixed amount, for example, every month now. So make sure you really understand what the terms are. If you do decide to open up one of these FinTech based credit cards.

The underlying credit card, it's gonna be a [00:46:00] MasterCard or a Visa, amex. None of them use Amex as far as I can see. Alright, that's a diversion there. But the reason why I bring that up is 'cause when you have a partnership that gets a little bit more detailed, especially if you've got three, four partners of, you know, a bigger thing going on, these expense management, uh, a fee technologies and, and banking systems are an excellent foundation to structure this right from the beginning.

And I recommend that you have sort of a playbook. It's a few pages. It outlines what's your mo, what's your protocol? Which car do you use for what? And everyone knows the drill and you sit down with the CPA. This is what we do. We sit down, we make sure everybody knows it, we give it to you, and it's the financial playbook.

Okay, let me keep going on A couple other things here. If some partners do nonclinical work more than other partners, you may need to allocate or reallocate. Some pay to that partner. For example, if one partner is the one staying after and by design, doing the marketing, working with the accountant, [00:47:00] working on order supplies and managing that, uh, handling, you know, leadership and training and things like that, while the other partners is doing the work and going home, then it's probably fair that you allocate some pay.

And so if you had hired somebody to do that training, to do working, you know, on those items, let's say you spend five hours a week, maybe attach $300 an hour or $250 an hour. To those functions and that doctor gets paid an extra thousand dollars a week or so for that administrative work that they do.

And then in the allocation chart, you would simply allocate some of the collections to that doctor specifically earmarked for that work doing the administrative work. This, this can be a point of contention. A lot. One doctor feels like they're carrying more of the administrative and operational burden than the other doctor, and it sort of festers.

Over time, and as soon as there's festering and resentment, that partnership is on its way down the slope to a [00:48:00] potential end. That's why I always recommend meeting every three months or six months outside of the office and you do what I call a companionship inventory. And you talk about the partnership, what's working, what's not in a very empathetic, open, caring way.

Alright, let me see. Anything else on this? Yes. At the bottom line, the amount of cash going to the doctors should tie back to the bank, and as always, you want to keep a certain amount in the practice. For cash, so you would never distribute an amount that would take you under that level. And so our models that we deliver every month on partnership distributions will calculate what each doctor gets that will calculate each doctor's share of working capital that they're responsible for.

Let's say that's $200,000 total working capital. Each doctor is responsible for a hundred thousand. Kept in there. So anything above that will be distributed. And I will just say that practice CFO has a, uh, we do, we have a really good system around this. It's [00:49:00] become a specialty within our dental specialty to handle dental partnerships.

And so if you're thinking of about setting up a good foundation or starting a partnership, or forming a new partnership with an existing owner that you're associating for, or vice versa, give us a shout. I generally say partnerships. They only make sense. If two things happen, one, assuming you already get along and all that stuff, one that the practice is doing at a minimum, 1.8, I prefer two to 2.5 million in collections.

If you're at 1.5 or less, there's, after all the overhead, it probably doesn't make sense that bottom line profit, it's probably gonna be super thin. And so I generally don't recommend that. Number two is don't form a partnership if it's not gonna last for more than five years. There's a lot of work in these, especially if you set them up as I recommended in my prior podcast as a partnership of corporations where if there's two partners, there are three entities and there's a lot of a lot of administrative and [00:50:00] legal work in these things, don't do it for just a year.

That makes no sense. Just have single owner with an associate, so if you're the older doctor thinking about selling. And you want to essentially retire in three years and stop doing dentistry. Don't form a partnership for three years. Instead sell it maybe a year or two, three years out, and then associate back.

It's gonna be a lot cleaner and a lot simpler for you both. And with that, this officially wraps up. My series on dental partnerships. This has been a ride. It's been fun, it's been a little bit technical, and so these are are ones, especially without the visual where maybe, maybe you got lost in the weeds a little bit.

Maybe rewind. Listen again. Find the pod, the the YouTube version, and watch that. And of course, as I always recommend, remember your highest and best use as a dentist is not to be a CPA. And so creating and managing this is probably not a great idea. You're all very intelligent and you could all figure it [00:51:00] out at the end of the day.

But if you could be doing dental implants, if you could be doing crowns, if you could be doing restorative work, if you could be marketing, if you could be motivating your team to produce and running a great business as a leader, you will get way more return on your time than trying to do this yourself.

And so find a good firm that does this. There's a few of 'em out there. Practice CFO, if you are doing 2 million plus, we're not good for smaller dental practices, we're we're generally dental practices that need a true CFO function, a strategic financial function that bears a lot of the burden and then educates you on the rest.

We are gonna be a great model for you. Alright, stay tuned in for more podcasts to come. I am gonna be doing more podcasts on general. Financial planning and talking about what does it mean to be prudent with your money? What does it mean to build wealth? How do we make sure that our wealth doesn't eclipse the very purpose for which we worked so hard to accumulate that wealth?

How do we make sure that our wealth enhances our life and doesn't detract our [00:52:00] from our life? How do we make sure that we use wealth in a way that gives our kids the right opportunity but doesn't actually ruin those opportunities? Tell you, I see it all the time. It happens. And we're gonna talk about these really interesting subjects that dentists are, that are, so, I would say applicable to dentists who generally have a good cash flow, who generally are in the upper income in society, and especially, you know, our clients, they have extra cash.

Generally speaking. How do we make sure that that benefits your life? Excited to be talking to you about that. As a certified financial planner, which I am, it's one of my favorite subjects. Do I enjoy tax? I enjoy tax to the extent that I can help you save it. Yes, I don't enjoy the tax code. I enjoy making your life better.

Practice. CFOs end game is to accelerate the financial life of our clients and help them use that additional financial benefit to be and live a happier life. With that signing out everybody, until [00:53:00] next time.