We are regularly approached by doctors interested in forming partnerships. Partnerships are not “cookie cutter” arrangements completed in a few days and have many factors that must be considered.
For example, what will be the partnership business entity? Will the buy-in be funded with cash or will the ‘Senior Partner’ be the bank? Will the partners be individual doctors or separate business entities? No two partnerships are alike, so it is vital to assemble a team consisting of a knowledgeable practice transition consultant, CPA, and attorney (with dental experience). If you want to increase the odds of a long professional relationship, you need to make the financial investment in experienced professionals!
There are two types of “partnership” agreements. The most often utilized type is a full partnership where two (or more) doctors are equal owners. This gives each partner equal access to the tangible assets (e.g., equipment, technology), intangible assets (e.g., patient records), but also responsibility for other liabilities (e.g., overhead) and debts. Decisions must be made as a partnership – where everyone has equal say. However, partner income may not be shared equally. Most partnerships divide the available partner income into ”buckets”: one based upon individual partner clinical production and a second based upon ownership interest. Management decisions are usually made by consensus of the partners unless one partner is designated the Managing Partner with certain decision making authority.
For the buy-in, a true partnership has fairly rigid parameters for the buyer. This type of purchase is a function of collections. When an associate becomes a partner, they become an immediate equal shareholder in both the assets and the liabilities. If they are not producing enough dentistry to cover their equal share of the overhead, it simply doesn’t work. The general metric is that an associate must collect within 5%-7% of the other partners – so 50/50 buy-ins require an associate producing 45%-50% of the doctor collections.
While this form of partnership is the “easiest” to construct, it is also the one that can be the hardest to deconstruct. Everything from patients, to staff, to finances must be taken apart and split up unless a departing owner is being bought out internally. This is typically time consuming and costly. Further, any buy-in or buyout is, for the most part, a less tax advantageous share purchase. An alternative is a “solo-group” (or “group-solo”) arrangement. This is a quasi-partnership, which is realistically a space-sharing arrangement plus partnership. While more complicated in structure, this model allows for more flexibility in how doctors can practice as well as conduct their business affairs.
In this structure, each doctor owns their own practice. Each has a separate patient base, telephone number, marketing programs and, sometimes, staff (noting there can be some efficiency realized by sharing at least some staff members). Common expenses, such as rent or maintenance, are paid by an umbrella entity also owned by the doctors and funded by the doctors’ individual practices. This funding can be accomplished by comparative production or collection levels or ownership or even on an expense-by-expense basis. This arrangement is highly customizable. Finally, lab and other supply costs are the responsibility of each practice. In all, each practice maintains its own profit and loss statement and files its own tax return (in addition to the partnership).
A key benefit of this alternative is doctor autonomy. For example, one doctor may wish to join multiple PPOs whereas the other doctor prefers to remain a fee-for-service provider. Not a problem in this arrangement! The last general benefit is that a solo-group model can typically be the most profitable practice model, beating solo practices by several percentage points as evidenced by economies of scale when sharing common overhead expenses.
Solo Group arrangements usually are easier to terminate than true partnerships, if the business structure was designed properly. Doctors in these arrangements can move or sell their practice, separate from the other doctor(s). Provisions are typically written for the first right to purchase opportunity clauses as well as creating cross purchase agreements in the event of death or disability.
In any case, multi-doctor situations are complicated to put together. If you’re thinking of going down this route, as we stated at the outset, assemble a sold advisory team. We have consulted on many of these transactions at the outset as well as have “rescued” many partnerships and improperly formed solo groups / space sharing agreements. We are certainly available to assist if you are considering this transition option.
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 selling and buying dental practices, dental practice fees and management, assessing partnership and associate-ship opportunities, and performing dental practice appraisals and valuations.