For a dental practice that has never merged with another, often the operating expense to profit ratio can be 60% : 40% respectively. A practice that has done at least one merger before may see approximately opposite numbers, with operating expenses and profits at a 40% : 60% ratio respectively, including debt services.
Take the following example to be a typical scenario for merging two dental practices.
The adjusted rent would be 6% to 8 %; insurance adjustment 2% and salaries would be 15% to 20%. If the net income of the host (purchasing) dentist was 35% to 38 % before merge, the new net from increased production would be 58% to 68%. Even if you factor in debt service of 9% to 11% the profit margin is still 49% to 57% vs. pre-merge 35% to 38%.
It is glaringly apparent that if the purchased practice’s gross yearly income was $400,000 and the host‘s practice was $500,000, 57% of $900,000 is much more than 38% of $500,000. That boils down to an increase in net of $313,000 and 80% of that increase is passive income.
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