When reviewing dental practice financials, most buyers focus on the headline numbers—collections, operatories, and active patients. But the true financial health of a practice is buried deeper, in a document many overlook or misunderstand: the Profit & Loss (P&L) statement.
Whether you’re a first-time buyer or looking to expand, learning how to read a dental P&L is essential. It reveals not just how much the practice makes—but how efficiently it runs, what it costs to operate, and how much income it can realistically provide you as the new owner.
This guide breaks it down—and shows you what healthy numbers should look like.
📊 What Is a P&L Statement?
A Profit & Loss statement (also called an income statement) summarizes all of the business’s income and expenses over a specific period—usually monthly or annually. In a dental context, it’s your window into the practice’s operational engine.
The P&L typically includes:
- Revenue (Collections)
- Cost of Goods Sold (COGS) – e.g. dental supplies and lab fees
- Operating Expenses – staff wages, rent, insurance, marketing, etc.
- Net Income – what’s left after everything is paid
But beyond net income, smart buyers look at Seller’s Discretionary Earnings (SDE)—a more accurate measure of true profitability, especially for small owner-operated practices.
📐 Use This Benchmark Table to Spot Strength (or Trouble)
Use the following industry-standard targets to evaluate whether the practice’s expenses are in line:
| Category | Target % of Collections |
|---|---|
| Staff Wages (non-doctor) | 25% or less |
| Facility (Rent, Utilities) | 5–7% |
| Dental Supplies | 5–6% |
| Lab Fees | 4–6% |
| Marketing | 1–3% |
| General Admin / Office | 3–6% |
| Total Overhead | 55–60% |
| SDE / Net Income | 40–45% |
💡 Seller’s Discretionary Earnings (SDE) = Net Income + Owner Salary + Personal/One-Time Expenses
✅ What Healthy P&Ls Have in Common
Let’s say the practice you’re evaluating collects $1,000,000 annually. A strong, lender-ready P&L might look like:
- Staff Wages: $250,000 (25%)
- Rent: $60,000 (6%)
- Supplies: $55,000 (5.5%)
- Lab Fees: $45,000 (4.5%)
- Marketing: $20,000 (2%)
- Admin: $30,000 (3%)
- Total Overhead: $460,000 (46%)
- SDE / Net Income: $400,000 (40%)
This is a highly efficient, profitable practice—likely attractive to both buyers and lenders.
🚩 Red Flags to Watch For
While some variance is normal, major deviations from benchmark targets can signal inefficiencies or inflated expenses. Watch for:
1. High Staff Wages
Over 30% of collections often means overstaffing, low production, or poor scheduling.
2. High Rent
If rent exceeds 8% of collections, it could eat into profitability—especially if the space is underutilized.
3. Unusually Low Lab/Supply Costs
If these are too low (e.g. <3% each), the practice may not be offering comprehensive services—or the seller may be underdiagnosing.
4. Missing or Bloated “Other” Expenses
Generic categories like “Miscellaneous” can hide personal expenses. Ask the seller or broker to break these out.
🧾 Why SDE Matters More Than Net Income
Most dentists run personal expenses through the practice—car leases, CE travel, even family members on payroll. That’s normal. But to understand the true profitability, these expenses must be “added back” into the net income.
For example:
- Net Income: $225,000
- Add-backs: $100,000 (car, CE, spouse salary, legal fees)
- SDE = $325,000, or 32.5% of collections
Lenders (and smart buyers) use this number to evaluate whether the practice can:
- Support loan payments
- Cover operating costs
- Provide a fair salary to the new owner
📉 If the SDE is under 30%, the deal may not cash flow—and lenders might hesitate to finance it.
🧠 Final Thoughts: Don’t Just Read the P&L—Interpret It
The P&L isn’t just a document—it’s the story of how a practice is run. It shows what the seller prioritizes, how they manage costs, and how well the business performs.
Use benchmark ratios to find out where the practice thrives and where it might need help. Don’t be afraid to ask the seller for explanations—or bring in a dental CPA to review it with you.
Because when you understand the numbers, you’re not just buying a practice. You’re making an investment you can actually trust.
📘 Need More Help?
For a full breakdown of how to evaluate, buy, and grow a profitable dental practice, check out Dentist to CEO—your step-by-step guide to ownership success.
👉 Available soon on Amazon.