The Operational Gap: Why Most Dentists Are Underpaying Themselves for 30 Years Or More

My brother James published his newsletter last week: “The EBITDA Illusion: Why DSOs Buy You at 5x and Trade at 14x.” He’s breaking down how private equity plays the arbitrage game—buying practices at 5x EBITDA, bundling them into a portfolio that trades at 14x, and pocketing the difference. The dentist walks away with $500K. The DSO flips the same asset for $1.4M.

I texted him: “They’re getting crushed on the back end. But most of them are getting crushed on the front end too.”

“The $100K gap?” he replied.

“Yeah. They’re leaving it on the table every year for 30 years. Then they sell for half of what they should because they’ve been optimizing for taxes instead of EBITDA.”

“Double hit,” he wrote back.

Exactly.

In our benchmarking work, we see the average dentist making about $218,000 per year. That sounds pretty good—until you realize they should be making closer to $300,000.

The gap—that missing $80,000 to $100,000 per year in an average practice—isn’t because dentists aren’t working hard enough. It’s not because they’re not skilled clinicians. It’s because their practices aren’t operationally efficient enough to support both proper doctor compensation and strong practice profitability.

Here’s the thing: most dentists don’t even know this gap exists. They’re making $218K, the practice is profitable, the bills are paid. That feels like success—and relative to most small businesses, it is.

But it’s success at a level far below what’s actually possible. They don’t know that $300K+ and 25% EBITDA is achievable with the same team, the same hours, and better systems. They think this is as good as it gets.

The 35/25 Rule

At Precision Dental Analytics, we’ve built our entire methodology around a specific target for operationally excellent practices. I call it the 35/25 Rule.

Here’s how it works:

• You should be paying yourself 35% of your personal production as compensation.
• And the practice should be generating 25% EBITDA (earnings before interest, taxes, depreciation, and amortization). That’s the practice profit—the equity you’re building.

Let’s say your practice collects $1.2 million annually. Under the 35/25 Rule, you should be taking home well over $300,000 in compensation, and the practice should be generating around $300,000 in EBITDA.

That’s over $600,000 going to you and your business equity. The remaining funds cover everything else: team labor, supplies, lab fees, rent, marketing, operations.

It’s the gold standard. It’s a sign of a well-run, efficient, and highly profitable practice.

It’s also uncommon. Not because it’s impossible—but because most practices don’t have the systems, clarity, and discipline required to achieve it.

The Brutal Reality

We recently analyzed the financials of 29 independent practices. Here’s what we found:

• Average doctor compensation: 16% of collections
• Average practice EBITDA: 10.2% of collections
• Average total labor (including doctor): 51.7% of collections

Compare that to the 35/25 ideal:

The average doctor is taking home less than half of what they should be earning. The average practice is generating less than half the EBITDA it should be producing. And labor costs are eating up nearly 7 percentage points more than they should.

This isn’t just our data. This is the industry norm. The average dentist making $218K isn’t underpaid because they chose a low-paying profession. They’re underpaid because their practice operations can’t support what they should be earning.

Why? What’s the gap between the average practice and a top-performing one?

If you look at these numbers through a purely financial lens, the answer seems obvious: labor. At 51.7%, it’s well above the 45% target. The natural response is to look for ways to reduce that expense. Cut hours, reduce overhead, tighten the budget.

And that’s not wrong. Labor is too high. But there are two ways to fix a ratio: cut the numerator or grow the denominator.

Most practices focus on the numerator. I focus on the denominator.

You Can’t Cut Your Way to 35/25

Here’s the truth about dental practice expenses: most of them are fixed.

Your rent doesn’t go up if you have a busy month. Your base staffing—the minimum number of people you need to open the doors and operate safely—is a fixed cost. Your utilities, insurance, and software subscriptions don’t change with production.

The only truly variable costs are dental supplies and lab fees. Everything else is locked in.

Here’s the challenge: you can’t cut below the minimum staff required to run your practice. If you do, you can’t operate five days a week. Your hours shrink. Your production capacity drops. And that 51.7% labor ratio? It gets worse, not better.

Cutting the numerator only works if you’re genuinely overstaffed. And most practices aren’t. They’re understaffed and inefficient—which looks like overstaffing on the P&L.

The only way to fix the ratio is to grow the denominator.

Imagine a practice producing $800,000 with $400,000 in total labor costs (50%). The doctor personally produces $640K of that (the hygienist produces the other $160K). At 35% of personal production, the doctor should be taking home $224K. Team labor is $176K. On paper, labor looks bloated. But you need every person on your team just to keep the doors open.

Now imagine you implement operational systems that allow you to produce $1,200,000. The doctor now produces $960K personally. At 35%, that’s $336K in doctor compensation. You add modest team support to handle the increased volume—maybe moving a part-timer to full-time, or adding another part-time assistant. Team labor increases to $204K. Total labor is now $540K.

Your labor ratio drops from 50% to 45%. You didn’t fire anyone. You added support where needed. You’re paying yourself $112,000 more per year. And the ratio still improved by 5 percentage points.

Your CPA will love the new ratio. And you’ll love the fact that you’re taking home an extra $112K while building a stronger team to support the growth.

That’s the secret. You don’t cut your way to the 35/25 Rule. You operate your way there.

How It Shows Up in the Data

When you don’t focus on operational efficiency, the problem shows up in different ways depending on how you structure your compensation. We see two common patterns in the data.

Pattern 1: The Equity Builder

This practice looks great on the P&L. In our study, one practice had an impressive 26.8% EBITDA. Any financial advisor would love it. But the owner-doctor was only showing 10.4% in officer compensation—far below the target.

This is often an older doctor preparing for a sale. They’re taking minimal salary and pulling the rest as distributions to show strong EBITDA for valuation purposes. On paper, it looks like they’re building equity. But the reality is, their operations can’t support both proper doctor compensation and strong EBITDA. They’re just structuring it to look better for a buyer.

Pattern 2: The Sinking Ship

This is far more common. In this scenario, labor costs are out of control, and profitability is nonexistent. One practice we analyzed had a staggering 61% labor cost. Their EBITDA? 2%.

This doctor is paying themselves via salary (29.6% officer comp in this case), but the practice is hemorrhaging money. There’s no profit, no equity being built, and the owner is likely stressed, overworked, and barely staying afloat. Every dollar that comes in goes right back out to cover bloated overhead.

Here’s the key insight: these aren’t two different operational problems. They’re the same problem showing up in different ways depending on how the doctor structures their compensation. Whether you’re taking it as salary or distributions, if your operations can’t support 35/25, you’re leaving money on the table.

How to Achieve 35/25: The Four Pillars

Both patterns stem from the same root cause: operational inefficiency.

The schedule has too much downtime. Patients don’t fully understand or accept the treatment they need. Broken appointments erode production. The team is working hard, but not productively.

In both cases, the answer isn’t to cut expenses. It’s to build the operational foundation that allows you to achieve both goals simultaneously.

That foundation rests on four pillars:

1. Clarity of Vision

Not some fluffy mission statement that sounds good on a wall plaque. An actual, actionable plan. “We will hit 35% doctor compensation and 25% EBITDA by implementing these specific systems, in this order, over the next 12 months.”

You need to know where you’re going and how you’re going to get there.

2. Systems in Place

This isn’t about “selling more.” It’s about being a better trusted advisor to your patients.

Efficient scheduling that minimizes downtime and maximizes your time with patients. Case presentation systems that help patients understand and accept the treatment they actually need. Patient retention strategies that ensure people don’t fall through the cracks. Broken appointment recovery protocols that keep your schedule full.

All documented. All repeatable. All focused on delivering excellent care, not pushing treatment.

Systems turn good intentions into consistent results.

3. KPIs to Ensure Systems Work

You can’t manage what you don’t measure. The patient journey reveals everything: new patient volume and conversion, broken appointment rate, case acceptance rate, procedure mix, hygiene reschedule rate, active vs. inactive patient ratios, insurance AR.

These are the metrics that tell you whether your systems are working—or whether you need to adjust. They reveal behavior, not just outcomes.

4. Courage to Maintain It All—and Shift Gears When Necessary

The discipline to stick with the systems even when it’s hard. To hold yourself and the team accountable. To not revert to old habits when things get busy.

But also the wisdom to use your KPIs to know when to pivot. The data reveals behavior. If case acceptance is stuck at 45% for three months, that’s not a number problem—it’s a behavior problem. Maybe the case presentation system isn’t working. Maybe the team isn’t following the protocol. The numbers tell you where to look.

This pillar requires the courage to admit “this strategy isn’t delivering results, we need to adjust” and the discipline to change direction even when you’ve invested time and energy into the current approach.

When these four pillars are in place, you don’t have to choose between paying yourself and building equity. You can do both.

Stop Choosing. Start Operating.

In our benchmarking work, we see the average dentist making $218,000. That’s solid income—but it’s well below what’s achievable when operations are dialed in.

The 35/25 Rule isn’t about how much you personally make. It’s about whether the practice is operating at its full potential. When a practice hits 35/25, everyone benefits: the doctor earns what they should, the team works in a well-run environment with less chaos and more purpose, and patients receive better care because the systems support clinical excellence instead of fighting against it.

The 35/25 Rule isn’t achieved by slashing expenses. It’s achieved by building the operational foundation—the four pillars—that allow you to maximize production and efficiency with your existing fixed-cost structure.

Stop trying to fix the numerator. The answer is, and always has been, in the denominator.

See how top-performing practices hit 35% doctor compensation. Run your numbers through the EBITDA Leakage Diagnostic. Read Phantom EBITDA for the framework.

Leading with you,

Joe DeLuca