# How to Read a Dental Practice's P&L Before You Buy It

> How I normalize a seller's P&L before I trust it: real owner add-backs, a healthy overhead split, and the three lines that hide problems most often.

- Author: Ryan Smith, DDS
- Published: 2026-03-17
- Category: Practice Acquisitions & Transitions
- Canonical: https://ryansmithdds.com/how-to-read-a-dental-practice-profit-and-loss

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> **Key takeaways**
> - A P&L is a story before it's a fact. Normalize it against the tax return before you trust a single number on it.
> - Adding back the owner's full salary without subtracting the cost of a replacement associate is how a napkin valuation comes out too high. That's the step most buyers skip.
> - Total overhead in the mid-50s to low 60s is a reasonable general-practice target; a specialty or heavy-lab practice will sit differently, and any single line running hot is only a problem if it isn't buying you something.
> - Owner compensation, related-party rent, and personal expenses run through the business are the three lines most likely to be hiding the real number.

Every seller's P&L is written to be read by a buyer, whether the seller admits that or not. That doesn't make it fiction. It makes it a document you have to know how to read before you believe a single line of it.

I've been on both sides of this. As a buyer, I've had P&Ls handed to me that made a mediocre practice look outstanding. As someone who has sold practices, I know exactly which lines get cleaned up before a listing goes out. The good news is that once you know what to look for, a P&L stops being a marketing document and starts being a genuinely useful tool. This is what I actually do with one, once I have [the documents on the checklist](/dental-practice-due-diligence-checklist) in hand.

## The seller's story vs. the tax return

The first thing I do with any P&L is put it next to the tax returns for the same years. Not because I assume every seller is dishonest (most aren't), but because the P&L and the tax return are written for two different audiences, and the gap between them tells you something real.

The tax return is what the seller told the IRS. The P&L is what the seller wants you to believe. Small, explainable gaps are normal. A big one, or a P&L that only exists for the one flattering year, is the finding itself. It doesn't necessarily kill the deal, but it means you slow down and get a CPA to reconcile the two before you go any further.

## Normalizing the numbers: what an add-back actually means

Once the P&L and the tax return roughly agree, the real work starts: normalizing the numbers so you can see what the practice actually earns for a buyer, as opposed to what it earned for this specific seller running it this specific way.

"Add-backs" is the term for this, and it's also where most napkin valuations quietly go wrong. Here's the common mistake: a seller's broker adds back 100% of the owner's compensation (salary, bonus, distributions, all of it) treats that whole number as pure profit, and hands you a wildly inflated adjusted EBITDA.

A well-prepared seller has usually already done some of this cleanup themselves. I've written before about [the EBITDA mistake sellers make](/mistakes-selling-dental-practice) when they don't, and a seller who read that article has fewer surprises hiding in their numbers. But even a clean P&L still needs this next step done correctly, and it's the one almost everyone gets wrong.

But you are not going to run this practice for free. Someone has to sit in that operatory and do the dentistry the owner used to do, and that person expects to be paid a market rate. The real adjustment isn't "add back the owner's pay." It's "add back the owner's pay, then subtract what it would cost to hire an associate to replace their production." What's left after that is the number a buyer is actually purchasing. This is exactly how the [practice valuation tool](/tools/practice-valuation) on this site builds its adjusted EBITDA, and it's the step most napkin math skips, which is why those numbers always come out too rosy.

*Illustrative example, not a real practice's numbers. The subtraction for a replacement associate is the line most napkin math skips.*

## The three lines that hide problems

In my experience, three specific lines on a P&L do more to hide the real number than everything else combined.

| Line | What sellers sometimes do | What to ask for |
|---|---|---|
| Owner compensation | Add back 100% of it with no correction for a replacement associate | The full add-back calculation, then run it against a market associate rate yourself |
| Related-party rent | Pay themselves below- or above-market rent through an LLC they also own | The actual lease and a sense of market rent for the space, not just the number on the P&L |
| Personal & one-time expenses | Run a car lease, family phone bills, or a one-off renovation through the practice | An itemized list of every add-back, not just a lump "adjustments" line |

None of these make a seller a bad actor. Plenty of dentists run their practice's finances exactly the way their CPA told them to for tax purposes, and cleaning it up for a sale is normal and expected. But every one of these lines needs a real answer, not a broker's assurance that "it all nets out." Ask for the detail behind every add-back, line by line, before you accept the adjusted number.

## Production vs. collections

Production is what the practice billed for the dentistry performed. Collections is what actually landed in the bank. The gap between them is write-offs: insurance adjustments, discounts, and the balances that simply never get collected.

A small, stable gap is normal and not a red flag by itself. A gap that's growing year over year tells you one of two things: the payer mix is getting worse, or the front desk's collection habits are slipping. Either one changes what the practice is actually worth, because you are buying the collections number, not the production number, no matter what the seller's story emphasizes.

## What a healthy overhead split looks like

Once you trust the top-line numbers, look at where the money actually goes. As a general-practice target (not a measurement from my own offices, just a reasonable band to check a practice against) overhead excluding all doctor pay breaks down something like this:

| Category | Healthy range |
|---|---|
| Staff wages and payroll taxes (excluding doctors) | 25-28% |
| Dental supplies | 5-6% |
| Lab | 8-10% |
| Rent and occupancy | 5-7% |
| Marketing | 3-5% |
| Admin, software, everything else | 5-8% |
| **Total overhead** | **roughly 51-64%** |

What's left after these lines still has to pay the dentists, which is exactly why it isn't labeled profit yet. A specialty practice or a heavy-lab-case practice will run differently, and one line running hot isn't automatically a problem. It's only a problem if it isn't buying you something, like a location so good it functions as its own marketing. But a practice with total overhead well north of that range, with no obvious explanation, is either overstaffed, mismanaged, or quietly subsidizing something you haven't found yet. If you want the fuller operational picture this overhead split feeds into (collection rate, schedule utilization, payroll ratio) [the profit leak audit](/dental-practice-audit) walks through the whole thing.

## Reading the trend, not just the year

Everything above works best across three years side by side, not a single snapshot. Is overhead creeping up? Is the gap between production and collections widening? Did an owner add-back appear suddenly the year before the practice went on the market? A trend answers questions a single number can't, and it's the same reason [the diligence checklist](/dental-practice-due-diligence-checklist) asks for three years of everything before it asks for anything else.

## Your P&L read-through, in order

When a P&L lands in my inbox, this is the sequence I actually run:

1. **Reconcile it against the tax return.** Confirm the story and the filing roughly agree before you do anything else.
2. **Rebuild the add-backs from scratch.** Start from reported net income, add back documented personal and one-time expenses, add back the owner's full compensation, then subtract the cost of a market-rate associate to replace the owner's production.
3. **Check production against collections.** A widening gap is a finding, not a footnote.
4. **Run the overhead split.** Compare it to a reasonable general-practice band and ask what's driving any line that's out of range.
5. **Do it for three years, not one.** A single year tells you where the practice is. Three years tells you where it's headed.

A P&L is not a lie just because it's flattering, and it's not useless just because it needs adjusting. It's a starting point. Once you've normalized it the way above, you have a real adjusted EBITDA to run through [how those two numbers actually turn into a valuation range](/dental-practice-valuation-methods), which is the next step before you write a number down. For the rest of the sequence, the [acquisitions and transitions hub](/topics/acquisitions-and-transitions) has the checklist, the valuation math, and what comes after.