In this day and age of deferred retirements, more practice owners are making the decision to have an associate join their practice. Hiring an associate may allow the senior dentist to take more time off and still maintain some income. Before such an endeavor is undertaken, it should be realized that an associate buy-in is much more complex than the outright sale of a practice. There is more stress and much more detail to deal with. It entails a lot more work and all involved need to be aware that it may take more than one try to get the right associate.
Before starting the process of taking on an associate and planning a buy-in, a practice owner should decide what he or she is trying to accomplish. Does the practice owner want to have more time off, need help with the workload, or is the objective to “grow a buyer.”
Some practice owners bring on an associate and expect the associate to essentially grow a new practice within their practice, and then expect to be able to turn around and sell the associate that portion of the practice that was developed by the associate. I have seen this strategy fail many times over the years.
A practice owner must be willing, at least initially, to give up some of his or her income in order to guarantee the associate an income base to start. Detailed planning is necessary before bringing on an associate for a buy-in into a practice.
Getting an appraisal of the practice at the start of the project is essential to avoid frustration and disappointment with the outcome. All too often I have seen an associate start in a practice with no more than a handshake and no written documentation. Then months later the associate is presented with the price for a buy-in and he or she suffers “sticker shock” and leaves the practice, with a needless waste of time and effort by all.
In order to ensure that all parties have the same expectations, the following steps should be taken. A purchase agreement, partnership agreement, and operating agreement must all be put in place well before the buy-in. Also, the parties must agree on a definite timetable and payment terms for the associate to buy into the practice.
Having the entire package prepared before searching for an associate will allow the senior dentist to present it to prospective associate candidates during the interview process. Then all parties involved will know what they are getting into and can make an informed decision about whether or not this is a good fit.
What to address in an agreement
One example of the kind of decision that must be made ahead of time to avoid dissention is that the operating agreement must outline in detail how the partners will be compensated. Will it be a set percentage of each doctor’s production? After the practice expenses are paid what will be done with any leftover profits? Will the profits be divided according to the percent of equity in the partnership, the percent of the total practice collections contributed by each partner, or will they be saved and spent on capital improvements?
A frequently overlooked matter when structuring partnerships is planning for the possible dissolution of the partnership. This must be decided ahead of time when cool heads prevail. Consideration must be given to such matters as which partner leaves and which stays in the office facility? Who gets the office phone number? How is the equipment divided? How much does one partner pay the other to keep the equipment? Which staff may the exiting partner take with him or her?
Another critical matter is the issue of retirement. Will the senior partner have the first option to retire before the junior partner? Can the senior partner forbid retirement by the junior partner before him? Is there a mandatory buy-out by the partner who stays, and on what terms will that buyout take place? Can the retiring partner sell their interest to an outside third-party? Must the remaining partner be granted first right of refusal to purchase the retiring partner’s interest? If so, what will be the price and terms? There are many other issues that must be considered prior to the start of the partnership.
As you can see, many questions and issues must be decided as part of planning for an associate buy-in. Using an experienced dental practice transition specialist is essential to increase the chances for success of the associate buy-in.
Peter Mirabito, DDS, and Jed Esposito, MBA, are partners in ADS Precise Consultants, a dental practice transition consulting and brokerage firm in Denver, Colo. Dr. Mirabito is also one of the founding members of the national organization ADS.