Top Three Issues in Creating a Partnership

Creating successful partnership

Originally published on TheDentistsNetwork.Net

By Thomas L. Snyder, DMD, MBA, Senior Director | Henry Schein Professional Practice Transitions

The number of solo practitioners continues to decrease with current stats showing about 50% of practicing dentists in this category. In fact, recent studies have shown that only one in five dentists under the age of 35 wishes to be a solo practitioner. So, it is no small surprise that many doctors are now considering forming partnerships whether it is for a single practice or for multiple practice locations.

Creating a partnership is a highly personal process since no two individuals are alike and it is also safe to say that no two partnerships are alike. Unlike selling a dental practice, which is a relatively straightforward process, partnerships have many aspects that need to be carefully considered before making a decision to form one.

In our experience, there are three critical issues that must be carefully considered at the outset before getting into all the “nuts and bolts” of a partnership agreement:

#1) Tax Treatment of the Equity of Transfer

This is the biggest hurdle, in our experience. Based upon the business entity which the senior doctor has adopted (usually a PC or LLC), there are various ways that equity can be transferred on a tax basis. It’s safe to assume that most business owners prefer to minimize their tax liability when making any equity transfer. So, for example, if the doctor is a PC, the most efficient manner to consider is a stock sale whereby the owner receives 100 % capital gains treatment.

However, for a new partner, this may be the most inefficient way to receive equity in a PC. This is because purchasing stock means paying for that stock in after-tax dollars!  It is analogous to making a mortgage payment, thus, the new partner has to earn considerably more income in order to afford this type of buy-in. Therefore, most advisors for incoming partners will reject this strategy and offer alternatives. It is critically important for all parties to retain accountants, preferably firms with dental experience. One mistake made at the outset could cost one or both of the parties, additional dollars in the long run.

Since we are not accountants, we cannot offer accounting advice, only to state that careful analysis must be made on all available alternatives for a buy-in.  Some of these strategies may  include:

  • Creating multiple business entities with an accompanying management company
  • The use of an asset sale consisting of the purchase of a portion of the practice’s tangible assets
  • The doctor’s personal goodwill and also if the transaction is financed by the senior doctor
  • The use of management fees and smaller allocations for PC stock may be considered.

#2) Income Sharing

Historically, many dental partnerships were structured as general partnerships.  In this model, partners shared compensation equally, regardless of clinical performance.  In today’s world, that model does not work.  There are numerous ways to share partner income. The most important consideration is for partners to share all or a portion of their income based on their relative clinical production.  For example, consider paying each partner a commission based on a percentage of clinical collected production minus lab/implant supply expenses. 

The balance of available partner compensation, after the production-related payment, can be shared and is based on each partner’s ownership percentage or the relative clinical production percentage of each partner.  Another partner income approach considers the allocation of certain operating expenses to each partner on their personal clinical production ratios and with certain expenses being allocated directly to each partner. The bottom line in compensating partners is that any income sharing formula must be fair.

#3) Departure of Founding and/or Senior Partner(s)

In most two-doctor partnerships, this can become a big issue! A key issue is whether or not the junior partner will be required to buy out the senior partner. If so, there should be a formula written in the partnership agreement which calculates the percentage of goodwill value that a retiring partner is entitled to. If this is a 50-50 partnership and the retiring partner is not generating the same percentage of clinical production, then that departing partner should not be entitled to 50% of the available goodwill in the partnership. Rather, the relative clinical production ratio for that retiring partner is a fair way to calculate their goodwill percentage. For example, if the clinical production ratio was 45% for the retiring partner, then 45% of the available goodwill is what the senior partner should be paid.

In summary, careful consideration and resolution of these key issues will be the foundation for creating a fair and longstanding partnership!