My partner wants me to buy his 50% interest in our PC. He feels that he is entitled to 50% of the partnership value, but he has only been practicing 130 days per year for the past three years!
We ask two experts the same question to give you two different answers on a complex issue
“My partner wants me to buy his 50% interest in our PC. He feels that he is entitled to 50% of the partnership value, but he has only been practicing 130 days per year for the past three years! I have been the primary provider and feel this is an unfair request. What should I do?”
Tom Snyder, DMB, MBA
You are not the first doctor to be in this situation. An equitable way to address this situation is to pay your partner a fair price but not at the 50% value that he feels he is entitled to.
A dental practice’s value consists of two asset classes – tangible assets and intangible assets. Tangible assets include equipment, dental supplies, leasehold improvements (sometimes), dental instruments and technology. Intangible assets consist of goodwill, restrictive covenant, phone numbers, etc. In our experience, on average, approximately 24% of a practice’s value consists of tangible assets and 76% is allotted to intangible assets. So in our approach to valuing a departing partner’s interest, we adjust the intangible asset portion of the partnership value. In your situation, your partner’s intangible asset portion of his partnership value should be discounted since he has not been contributing at the same level of performance that he was in earlier years. So, when it’s time for your partner to retire, a new equipment appraisal should be prepared to determine the current fair market value of your tangible assets. Your partner should rightfully receive his full portion of the tangible assets fair market value. Additionally, your partner’s accounts receivable can be paid out over a three month period after retirement. Also, 50% of any cash at the time of sale should be given to him. Finally, if there are any outstanding liabilities, 50% of that total should be deducted from the sale price. However, you can offset your partner’s cash due, plus accounts receivable, with those outstanding liabilities.
For example, let’s assume that the intangible asset value of your partnership is $800,000. If we calculate the average of the last three years of your partner’s personal clinical production ratio – let’s assume it is 40% and yours is 60% – instead of his receiving 50% of the intangible asset value, or $400,000, he would only be entitled to 40% of that value, or $320,000. Therefore, the $80,000 discount to his value would be appropriate given his decreasing contributions over the years.
This is a fair approach to handling a sometimes difficult ending to a long-standing partnership.
Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or Tom.Snyder@henryschein.com.
This situation happens frequently in dental partnerships. Why? Because setting up a partnership is relatively easy, and everyone is only thinking about the future success of the partnership. However, how to handle the potential future dissolution of the partnership is even more important. But this situation is rarely covered in initial partnership agreements.
The first step to resolve this problem is to get a comprehensive and accurate professional appraisal of your practice. This will enable you to use facts to determine the buy-out value. When I do an appraisal, I value the tangible assets (clinical equipment, furniture, office equipment, instruments, and supplies) on a room-by-room basis. I also estimate the collected value for the accounts receivable. Finally, after determining the overall value of the practice, the intangible assets (goodwill) can be calculated by subtracting the physical assets and accounts receivable values from the overall value. For example, I recently valued a three-dentist partnership at $2,900,000. The equipment was valued at $250,000 and the receivables at $200,000. Thus, the goodwill was $2,900,000 - 250,000 - 200,000, or $2,450,000. This value needs to be adjusted for other assets, such as cash in the bank, and liabilities, such as equipment loans.
For most partnerships, the tangible assets are valued equally for all partners. Thus, with two partners the tangible assets would be valued at 50% for each partner. In my three-person example above, the tangible assets would be valued at $250,000 x one-third, or about $83,000 per partner.
The accounts receivable are typically shared based upon the ratio of the partners’ collections to total practice collections. In a two-person partnership, let’s assume that one partner produces 60% of the collections and the other partner 40%. The receivables would be valued at 60% for the higher producing partner and 40% for the lower producing partner.
Finally, the goodwill needs to be allocated to each partner. For the two-person partnership example, the goodwill value for the higher producer would be 60% of the total goodwill. The remaining partner’s value would be 40% of the total goodwill.
If your partner disagrees with this concept, then it may be time to get attorneys involved.
One legal approach is to present this valuation offer to your partner. If your partner refuses the offer, then he or she can sell their share of the practice to another buyer. If you do not approve of this buyer, then the practice needs to be separated and this new buyer must sign a non-solicitation agreement with you.
Obviously, this is neither an easy nor an inexpensive option. In the future, remember that planning for partnership dissolution is just as important as partnership formation.
Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Ore. He is a member of American Dental Sales and can be reached at (503) 223-4357.
Past DE Issues