Using a partnership for a flexible transition
A dental partnership can occur for many reasons. Whatever the reason, a partnership should be handled properly and for the right reasons. It can increase business, or can help a dentist transition into retirement.
Most dentists know someone who has been in a partnership that ultimately failed. This has led many to overlook or dismiss what can be a very lucrative and fulfilling business model. Despite this, partnerships have risen in popularity for a variety of reasons—increasing costs associated with technology and government regulation, decreasing reimbursements as a result of the growing presence and acceptance of PPO plans, and fiercer competition as more dentists graduate each year.
Other factors include general dentists expanding their procedure mixes and more multispecialty corporate practices entering the fray. These circumstances undoubtedly place more pressure on doctors to consider a partnership. However, the flexibility in transitioning afforded by a partnership makes it a great way to control a doctor’s exit from dentistry.
The most common way to transition in and out of the ownership of a dental practice is still through a full sale (or purchase). In such a case, a doctor will typically sell the entire practice to one purchaser in one transaction and then quickly transition out of the practice. This abrupt transition can present a problem for many sellers. If you ask most sellers what they prefer, between quitting dentistry cold turkey or taking a slower, staged exit from the profession, the majority choose the latter. For doctors who are working four to five days per week, selling and walking away undeniably creates a large vacuum in their daily lives that is often difficult to fill. Gradually reducing one’s time in the office and easing out of practice is typically preferable and much easier for dentists to manage.
However, most dentists own one-doctor practices in terms of income and patient volume. When they sell to another dentist, the new owner cannot afford and does not need an associate. After all the costs of acquiring the practice and the overhead associated with running the business, there simply isn’t enough money or production to share with another doctor. As a result, if doctors want to continue dentistry after they sell, it will likely be in a different practice outside the range of the noncompete agreement they signed during the sale, instead of practicing in the practice they nurtured (sometimes from scratch) with familiar patients and staff they’ve known for decades.
As a result, doctors often find themselves faced with two options, neither one favorable:
- Sell too early - This romanticizes the idea of more free time while capitalizing on a higher value and ensuring the sustained full-time employment of the staff.
- Sell too late - This reduces the schedule to a desired level while allowing income (and resulting value) to atrophy and much of the staff to find full-time employment elsewhere along the way.
A perfect solution to this conundrum is the well-planned sale of a fractional interest in your practice. By selling an interest, you can gradually reduce your schedule while shifting the abandoned production over to your partner. This will prevent practice income from declining as a result of your decreased time. In addition, by purchasing an initial interest in your practice, the new partner would simultaneously legally commit to purchase your remaining interest at a later date. As an example, if Dr. New joins your practice and purchases a 50% ownership interest, she would also contractually agree to purchase the remaining 50% interest when the time comes.
In other words, the seller can lock in his or her transition plan with the initial transaction and keep working as long as he or she chooses, reducing time to a schedule that is mutually agreeable with his or her partner. Sometimes this process happens quickly, over only a year or two. Other times doctors enjoy the freedom of a reduced work schedule and continue working longer than they ever anticipated while cultivating a new pace of life and interests beyond the practice.
If you’re having difficulty deciding on the right time to sell your practice, a partnership could be your best bet.
Jonathan Martin, CPA, provides transition planning through Roger K. Hill & Company Inc. John K. McGill, JD, MBA, CPA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc. Both are members of the McGill & Hill Group LLC, the one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.