Discussing Dental Practice Ownership with a New Associate

Bringing an associate dentist into ownership can prove to be a challenging task for a practice owner. Practice owners are at a natural disadvantage because they are focused on patient care and practice management and receive very little training on the nuances of dental practice transitions.

Associate dentists may come into the buy-in process with preconceived notions influenced by social media, dental school groups, their own ideas, or family experiences, which may not always be reasonable.

A few examples:

• "I want the buy-in in writing before I start work as an associate". The equivalent of getting married on the first date.

• "I want the practice valuation done before I start so I don't buy the value that I create".

• "I want detailed financials". Anyone share their personal net worth on the first date?

Owners in today's environment need a better way to describe the stages of buying into a dental practice. Here are the key stages to the associate buy-in process.

Step 1. Practice Onboarding (First Year)

"A partnership is a lot like a marriage. It is hard to put timelines in place during the dating process."

- Jack Simmons

 

The practice onboarding phases familiarizes new associates with patients, staff, systems, and treatment philosophies. Big milestones during this process:

• Are the patients accepting the associate?
• Is the staff happy?
• Is the associate's dentistry high quality?
• Is their speed and productivity acceptable?

The goal of the first year is to ensure the associate can provide high quality dental care in your practice.  Meeting this standard is critical to moving towards the buy-in and ownership decision.

If the initial stage of getting to know each other is difficult, why rush into a long-term commitment like marriage? The same principle applies to the associate buy-in process in dentistry - taking the time to build a strong foundation is crucial for a successful and mutually beneficial partnership.

Step 2. Ownership Training (Years 2 - ?)

Dental schools provide limited business training, so owners have to fill in the gaps. You cannot expect the associate to "flip a switch" and become an owner, so you must plan a training phase.  As younger associates have been accustomed to structured training programs throughout their lives, they expect a similar approach when it comes to ownership.

Here are some easy ways to provide training in ownership:

• Pay the bills and record in QuickBooks.

• Manage the doctor and staff schedule.

• Prepare the management or goals reports.

• Lead the marketing efforts.

• Attend partnership meetings.

It's important to communicate your expectations and provide feedback on the associate's performance in the training process. From the associate's perspective, they've grown up with constant feedback via grades, exams, etc. and they will expect the owner to do the same.

Step 3. The Buy-In Process (3 - 6 months)

Valuation and Negotiation

Practice value should be based on the cash flow available to the owners after all expenses have been paid.

We recommended hiring a third-party appraiser to evaluate the practice's value, similar to the process of a home appraisal during a real estate purchase.

A qualified practice appraiser will remove doctor perks such as:

• Doctor pay

• Doctor's family pay

• Perks (i.e., continuing education)

• Doctor benefits (retirement plans, etc.)

Before involving attorneys and drafting documents, it is crucial for both dentists to come to a mutual agreement on the value of the practice. This step is essential to ensuring a successful and fair buy-in process while avoiding unnecessary legal fees.

Agreements

Once the value is determined, it's time to draft some legal documents. Agreements can vary depending on the type of transaction, but here are a few common agreement types:

Letter of Intent

Once you reach a price, a letter of intent can outline the terms of the purchase. Similar to an initial home contract that outlines the price but allows for further inspections, these agreements can typically be terminated with little recourse.

Asset Purchase Agreement

Details the assets being purchased with the allocation of the purchase price. The assets of a practice are the equipment, accounts receivable, supplies, and goodwill. I talk about these in more detail in Five Tax Breaks This Dentist Received After Buying the Practice.

Operating Agreement

Operating agreements outline how the profits are split, how decisions are made, and how the partnership handles specific situations of death, disability, and retirement. Profit split calculations need to make sense for both owners.

Buy-Sell Agreement

A buy-sell agreement is a legal contract that outlines how the purchase or sale of a business will be handled in the event of certain circumstances, such as death or disability of an owner. This agreement is essential for protecting the interests of both parties involved and ensuring a smooth transition of ownership.

Articles of Organization

Partnerships require articles of organization to set up the legal entity with the state.

Financing a Dental Practice Buy-In

While the agreements are being drafted, associates need to secure financing for the buy-in, with options including third-party or owner financing.

For third party financing, the buying and selling doctors will need to provide bankers with a long list of financial data. Here is an example:

• Practice Profile

• Prior three years Practice / Corporate Tax Returns

• Latest Profit & Loss Statement

• Practice Loan Application

• Monthly Budget Worksheet

• CV / Resume or your brief work and education history

• Previous three years personal (1040) Tax Returns
  

Owner financing is really up to the financing owner and their financial needs.

Conclusion

Hiring an associate into ownership is challenging but can have meaningful lifestyle, professional, and financial benefits. This framework can help you discuss the various phases of practice buy-in.

We feel privileged to guide our clients through these transitions and help them achieve their goals.

If you would like to discuss how we can help in your transition, please book an introduction call by clicking the link below.