Posted by Guest Author on Nov 15, 2023 10:25:00 AM
Having a stake in a dental practice can be a key component of your career advancement. You could buy outright an existing practice or build your own business from the ground up. However, a third option — becoming a partner — may be an easier transition for both you and the practice.
So, what does it mean to buy in as a partner? When you buy into an existing dental practice, you agree to co-own the business with the other owners. This move can help bolster your income. Additionally, you’ll be involved in operational decisions, and you could help improve the experience for your patients without the stress of sole ownership.
If buying into a dental practice is suitable for your career, you’ll need to know the process. Below, we’ll tackle the five questions to answer before diving into buy-in.
What Is the Structure of the Buy-In Offer?
As you start looking at your options to buy-in, it’s crucial to perform a document review. An experienced legal team can assist with understanding all components of the deal. Some firms and financial consultants only focus on assisting those in the medical field.
Your chosen firm or attorney will analyze the current bylaws of the dental practice and the shareholders’ agreements. This is typically when you’ll find out if every partner agreed to similar terms or if there are significant differences.
In coordination with your team of advisors, review the following:
Financial details: To help decide if the practice is financially stable and would be an ideal buy-in option for you, look specifically at income tax returns and financial statements.
Leverage assessment: Before you begin deal negotiations, know your bargaining power. Consider your current standing as well as the consequences if you personally know one or more of the partners and the deal falls through.
Forecast for financial return: You should have an idea of the expected earnings of the buy-in so you can help predict your future income.
Offered Interest: Will you have a minority interest or an equal share? A minority interest can weaken your decision-making power.
Personalities of your partners: Can you work well with the personalities of the existing partner(s)? Different business philosophies can indicate challenging circumstances between partners in the future.
Legal Control: If the senior partner chooses not to maintain control of the legal aspect of the dental practice, would you earn legal control and when?
Asset Value: Understand the dental practice's tangible and intangible assets.
What Is the Value of the Dental Practice?
Price influencers of the buy-in may include:
- Hard assets
- Book value
- Cash value
- Real estate
- Accounts receivable
- Cash flow
With the help of a CPA or financial advisor, it’s suggested that you perform due diligence on the dental practice’s income tax returns. You’ll also want to review accountant-prepared financial statements such as the practice’s profit and loss statements, balance sheets, depreciation statements, accounts receivable summary, and a summary of employed dental professional productivity for at least the past year.
You should ask how the valuation was determined. There are several possible ways: using comparable sales, discounted cash flow, looking at the internal rate of return, and the payback period. Your advisor will use this same information to come up with a reasonably accurate value of the business, then use their estimate to analyze your buy-in price.
If the balance sheet indicates that there is existing debt, it’s wise to ask if you will be held liable and responsible for that debt amount. Since the practice is responsible for the debt it incurs, you’ll likely inherit the debt. Understanding the dental practice’s financial situation, including any debt, can help reduce your buy-in price.
How Is Income Distributed?
The choice to become a partner cannot be made without knowing how the buy-in can benefit you from a financial standpoint. One aspect of determining the financial benefit is knowing how the dental practice distributes its income. The three common pay structures you may encounter include:
Equal allocation: The equal allocation model is often considered a comprehensive compensation type. With this model, every partner has an equal ownership stake in the dental practice and, consequently, receives equal shares of the practice’s income or revenue. Equal allocation also makes each owner equally responsible for the business's expenses.
This model is ideal for partners with equal responsibility and workloads, but it can cause problems if some partners feel they contribute more than others.
Productivity model: With this model, income will be distributed depending on a partner’s productivity. Productivity may be determined through RVUs, billing collections, patient billings, or a combination of these three methods.
The productivity model may help incentivize the contributions of younger dentists to promote the growth of the practice. Issues can arise if partners see the dental practice as “every person for themselves,” creating a competitive environment rather than one driven by teamwork.
Hybrid model: This is a combination of the equal allocation and productivity models. In this model, part of the earnings are distributed equally between partners, while the remaining earnings are allocated based on productivity.
With the hybrid model, partners can receive a set income while still being encouraged to increase productivity and work ethic for a successful business.
There is no single right method for income distribution among partners. Your best option will be what fits with your situation, but you’ll want to have a well-defined model in writing. A complicated model structure or an unwritten agreement can be the source of future conflicts if partners feel there is unfairness based on their interpretation of the agreement.
What Happens if You Leave the Dental Practice?
When you become a partner, you’ll want to think long-term. This includes understanding what will happen if you leave the dental practice. You should determine under what conditions your interest may be repurchased and when — and to what extent — your participation would be required in future purchases.
Have an understanding of the equity repurchase structure. This may include if the departing partner’s stock will be purchased at a set price, at a predetermined value based on the buy-out details of the agreed-upon method, or if a partner can buy-out at all. You should also consider deferred compensation, a payout that recognizes the leaving party’s goodwill and interest in the accounts receivable.
Consider the protections for the ongoing partners and how you may be affected if you choose to leave. These aspects include:
Percentage of Gross Income: How much deferred compensation (the maximum allowed) would be paid in one quarter.
Competitive Practice: If the departing partner opens a competing practice, the payout may be reduced or eliminated. If the buy-out structure in the agreement includes a non-compete clause, the leaving partner may not legally be able to open a new practice in a specific geographical area or within a set time frame.
Reduction for Short Notice: Deferred compensation is reduced should the partner not give enough notice before departing — it’s recommended that notice is made six months or more before you exit a partnership.
“Bad Boy” clause: This clause is used to eliminate a partner’s compensation should that partner be rightfully terminated or suspended based on an immoral criminal offense or professional misconduct.
Post-termination Liabilities: Depending on the details of the agreement, a partner may be held responsible for liabilities that occurred or began prior to their leaving the partnership.
How Do I Cover the Cost of Buying Into a Dental Practice?
Before you become a partner in a dental practice, you should determine how to pay the buy-in price. Since nearly all dental practices are incorporated, buying into a practice typically indicates that you’ll be buying that corporation’s stock.
It’s suggested that you use your paycheck to cover the expenses that come with buying into a dental practice. This is a standard method that allows for a set amount to come from your paycheck over an agreed period of time. This may be advantageous since you’ll be paying in cheaper, pre-tax dollars.
Keep in mind that this may be a gradual transition. You could experience a delay before you are issued your purchased stock. You may experience one of these two vesting types:
Time vesting: After you invest for a specified timeframe, you may be issued the stock. For example, you receive some stock after the first year and all of your stock after four years.
Productivity vesting: With this vesting, the partner receives stock when they achieve a certain milestone or finish a specified task.
As you get ready to buy into a practice, you may choose to provide a lump sum upfront to energize the purchase. If you can’t procure a lump sum, you may wish to consider partner buy-in loans as an immediate investment option.
Have Advisors on Your Side Before You Buy-In
Jumping into practice ownership or partnership is an exciting yet potentially stressful venture. As you prepare for this important transition, it’s crucial to consult professionals with experience working with dentists and medical professionals.
If you need help creating your financial plan to meet your goal of becoming a dental practice partner, contact us today.
About Panacea Financial
Written by Michael Jerkins, MD, M.Ed, President and Co-Founder of Panacea Financial on Nov 15, 2023 10:25:00 AM
Panacea Financial, a division of Primis. Member FDIC is a financial services company for physicians, dentists, and veterinarians.
About Treloar & Heisel
Treloar & Heisel, an EPIC Company, is a premier financial services provider to dental and medical professionals across the country. We assist thousands of clients from residency to practice and through retirement with a comprehensive suite of financial services, custom-tailored advice, and a strong national network focused on delivering the highest level of service.
Investment Advice offered through WCG Wealth Advisors, LLC a Registered Investment Advisor doing business as Treloar & Heisel Wealth Management. Treloar & Heisel Wealth Management is a separate entity from The Wealth Consulting Group and WCG Wealth Advisors, LLC.
WCG Wealth Advisors, LLC, Treloar & Heisel, LLC., and Treloar & Heisel Wealth Management do not offer tax advice.
WCG Wealth Advisors, LLC, Treloar & Heisel, LLC., and Treloar & Heisel Wealth Management do not offer legal advice.