Dental Practice Management: How to Protect Yourself From Bad Partnerships or Practice Purchases
Recently, our Henry Schein PPT dental practice management and transition consultants were contacted by a dentist looking for an expert witness to assist in a legal dispute with a former partner. Several years ago, they had reached out for assistance in forming a partnership, but when confronted with having to pay for the services, chose to do it themselves.
They admitted that they went to the Internet, old employment contracts and dentist friends, and patched together an agreement with their partner. They sold the partner a portion of the dental practice. They practiced for almost four years before they began to experience personal and professional disagreements. The problems escalated until the partner left the practice. He then filed a lawsuit demanding the return of his investment/purchase and additional money for damages.
The end to this unfortunate story is that eventually both parties filed for bankruptcy, the practice closed, and the litigation escalated into a very costly battle. The original owner estimates that over $200,000 has been spent to date, and they are just now preparing for their final arguments in court.
Preparing for a Worst-Case Scenario
Unfortunately, this real-life example is not a unique or extreme case. Over the years, Henry Schein transition specialists have served as expert witnesses in similar litigations concerning partnership dissolutions and other transition-related issues.
In truth, there is nothing that can prevent partnerships from failing. However, anticipating the possibility of failure and building remedies and provisions into the partnership agreement that allow for dissolution without the distress and cost of extended litigation is very doable.
Similarly, when buying a dental practice where the seller will be leaving, there are things to look for, representations and warranties that are important to consider, as well as steps to take during the process to minimize the possibility of future trouble.
These smart, cautionary steps and preparations are critical components of successful dental practice management.
Are Your Economic Expectations Realistic?
In any type of dental practice transition, it is important that the parties understand what they are getting into and comprehend the economics of the transaction and relationship.
The above partnership relationship failed because there was a misunderstanding of the economics of the new relationship. Neither party understood the impact of having two dentists in the practice, and each had greater expectations than were realistic. When their expectations were not realized, the differences grew and eventually led to the breakup of the practice and accusations against the other to the point of filing lawsuits.
In a multi-doctor dental practice, even if the economics are detailed, understood, and accepted by all parties, additional discussions are necessary to review all the other elements of dental practice management with more than one owner.
This is where an expert dental transition consultant familiar with partnership relationships like Henry Schein PPT can be of great assistance. Some issues that should be discussed are:
- Management of the practice
- Fee schedules
- Staffing requirements and compensation
- Clinical philosophy
- Work schedules
- New patient assignments
- Many more issues
Unrealistic Expectations of Dental Practice Buyers and Sellers
If there are unrealistic expectations on the part of either the buyer or seller in a dental practice sale, a fair transaction may not be possible. If the numbers don’t really work or are presented incorrectly, it is unrealistic to believe that a practice’s financial picture will immediately improve just by replacing the dentist/producer. When a bank says “no” and the seller agrees to finance the transaction, similar outcomes, including bankruptcy and closing the business, have been experienced.
Clarify Buyer’s and Seller’s Responsibilities
In a dental practice sale, what are the responsibilities of each party before and after the sale? What are the expectations of each party? Without an experienced consultant, the important questions of dental practice management and how the practice operates before and after the sale may never be discussed, which can lead to costly litigation in the event of contract breach(es).
Once the basic issues and terms are agreeable to both parties, your dental practice transition specialist may offer “standard” draft documents that can be provided as a template, or an attorney who has significant experience in drafting legal dental agreements should be engaged.
In the case of a partnership, the attorney should memorialize your partnership agreement to include any of or all the above, as well as dissolution provisions in the event the partnership fails.
Partnership Dissolution Provisions
The dissolution provisions in most partnership agreements are usually the most lacking. The provisions should include how the practice will continue in the event of:
- Partner’s death or disability
- Voluntary retirement
- Loss of license to practice
- Incompatibility of the parties and a decision to dissolve the partnership.
These provisions should include the financial terms of the dissolution, insurance coverage for death and/or disability, and how one or the other party is to be compensated for their interest in the practice if departing.
Without discussion and putting these provisions in writing in the partnership agreement, there will be misunderstandings, misinterpretations, and often costly litigation to sort out a fair and reasonable solution. That fair and reasonable resolution may not be fair or reasonable in the eyes of one or the other parties, but that is what the courts are for, and that is what will ultimately cost thousands (perhaps hundreds of thousands) of dollars and untold grief to resolve.
Whether it’s a straight sale or a more complex multi-doctor transition, it’s important to engage qualified experts who understand dentistry and the nuances of transitions. This is the best way to avoid the probability of finding oneself in a very costly and distressful lawsuit that ultimately will cost many times the cost of hiring qualified experts to assist in the first place.
Contact a Professional at Henry Schein Professional Practice Transitions
Have a question about selling or buying a dental practice? Contact us online and have a Henry Schein Professional Practice Transitions expert help take the stress and confusion out of dental practice transitions.
Henry Schein Professional Practice Transitions, Inc. is a national leader in dental practice transitions. A subsidiary of Henry Schein, Inc. they provide expert guidance for dental practice management, selling and buying dental practices, assessing partnership and associateship opportunities, and performing dental practice appraisals and valuations.