Partnerships and fractional sales

June 1, 2003
The use of fractional practice sales/partnerships as a transition strategy for dentists who want to continue to practice in a partnership is growing in popularity.

John F. McDonnell & Karen Norris

The use of fractional practice sales/partnerships as a transition strategy for dentists who want to continue to practice in a partnership is growing in popularity. The definition of this type of transition strategy is "The sale of a portion of a dental practice to another dentist who will ultimately buy the remainder of the practice at an agreed-upon point, based on an agreed-upon method for determining buy-out price, and who will jointly own and operate the practice in the interim."

This approach could be for you if:

1 You have an associate who you want to be your successor.
2 You want to assure an exit strategy for yourself.
3 You want to share the responsibilities of ownership.
4 You want to have an exit strategy, but you're not ready to retire for at least five years.

Our experience suggests there are several keys to a successful partnership. They include:

— Professional/clinical compatibility
— Business compatibility
— Shared vision for the practice
— Mutual respect
— Capability of the practice to financially support both owners

Many dentists do not consider this option for practice transition unless they have an associate or have identified a candidate within the practice. These opportunities can be advertised/marketed effectively, particularly to experienced dentists seeking ownership opportunities. In these situations, the prospective partner will typically work in the practice for a "get-acquainted" period so both parties reach a level of comfort with each other.

The components of a fractional sale are:

1 The valuation of the practice
2 The amount of ownership/ equity to be initially sold
3 The preparation of cash flow/financial models to demonstrate the ability of the practice to support both parties, the projected growth in the practice, and the return on investment for the prospective buyer/partner
4 The buy-in price (based on the valuation and the financial models)
5 The funding of the purchase

In many cases, a portion of the purchase price will be via a promissory note held by the seller. In these cases, the rate and terms of the note will need to be negotiated. Many buyers also request a structure which enables the use of pretax payments.

6 The formula or methodology for determining the price for the remainder of the practice to be determined at a point in the future. The prospective buyer does not want to be in a situation in which his or her contribution to practice growth creates a higher buy-out price. This can be addressed by the formula or methodology.
7 The basis for compensation of the owners during the partnership. This is typically based on production/collections from the doctors' individual performance of dentistry. In this way, compensation will be correlated to production and/or overall hours worked.
8 The basis for distribution of net profits. This is typically based on ownership; however, variations can be utilized.

The services of a professional-transitional organization are necessary due to the complexity of these transactions. In many ways, a fractional sale is more complex to facilitate than an outright sale. Some of the services this type of organization can provide include:

• Marketing
• Screening of candidates
• Valuation of the practice
• Development of financial models
• Funding and/or development of purchase framework
• Development of the buy-out formula
• Overall facilitation of the process
• Liaison with outside advisors and attorneys in the preparation of legal documents

Some experts predict that 40 percent of practices will transition with a fractional partnership. If this method becomes your choice, be sure to plan ahead for a healthy transition!

Karen Norris is a certified public accountant (CPA) and a certified business valuation analyst (CVA). She and John F. McDonnell are two of the owners of The McNorGroup Inc., a consulting and accounting firm working exclusively with dentists. McDonnell is the founder of the firm and Norris is the chief financial officer. They are members of American Dental Sales and can be reached by phone at (888) 273-1014 or by email at [email protected].

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