Transitions roundtable

Dec. 2, 2010
Some of the most contentious partnership breakups I have been involved with are over compensation disagreements.

We ask two experts the same questionto give you two different answers on a complex issue

Q: What is the best way to share partnership income?

By H.M. (Hy) Smith

Some of the most contentious partnership breakups I have been involved with are over compensation disagreements. Often the problems revolve around the actual compensation formula that is, or should be, a part of the partnership agreement. Other issues include the type of dentistry each of the partner's practices, the way patients are scheduled, and the amount of time each partner spends in the practice.

The legal structure of the partnership relationship (corporation, LLC, LLP, or partnership) should not necessarily matter when it comes to the compensation model agreed to by the partners. Regardless of the legal structure, the partners should have an Employment Agreement with the legal entity that defines the compensation issues clearly and concisely.

Obviously, the amount available to compensate the partners is what is left of the total collections after the required expenses are paid. This amount, "Earnings Before Owners Compensation" or EBOC, can then be divided between the partners based on the agreement that has been reached.

Dividing Earnings Equally: Because it is very rare that each partner works the same amount and/or generates the same amount of income, at some point one partner feels taken advantage of.

Paying as a Function of Collections: This is the most successful compensation model because it provides an "eat what you kill" relationship. Problems, however, arise when one partner is collecting significantly more than the other partner because of unequal scheduling practices, unequal use of the facility and/or staff, or inequitable skill sets that allow for one partner to practice a different level of dentistry.

Base Plus: This model can be very successful in that a certain amount of the income is shared on an equal ownership basis (10% to 20%) and the balance is paid as a function of personal production. This creates a true partnership sharing relationship in the practice and prevents over aggressiveness by either partner because a certain amount of each partner's production is shared with the other partner.

H.M. (Hy) Smith has been in the dental practice brokerage/management consulting business for more than 30 years. He can be reached by e-mail at [email protected].

Q: What is the best way to share partnership income?

By Tom Snyder, DMD, MBA

The root cause of most failures in partnerships is related to income sharing issues. Historically, partnerships are relationships based upon partner income being shared equally. This approach, in many instances, does not succeed in the long-term. Not all partners contribute equally to their practice as their patient base, clinical efficiency, or clinical production profiles vary. Therefore, basing a portion of partner's income on their personal clinical production is a fair approach to solving that problem. Being an owner should also reap some rewards as well, so determining partner income on a combination of personal clinical production and ownership interest is the best way to address this issue. Here are two methods that we use:

Payment on a Proportion of Personal Clinical Production and Ownership Interest: In this method we first calculate Available Partner Compensation (APC), which is defined as all income available after deducting all practice operating expenses. APC is divided between two "buckets" – one based on clinical production and the other on a partner's ownership percentage.

For example, if there was $500,000 of available partnership income available to share, and if the partners elected to share income 50% based on partner production and 50% based on ownership, then the two compensation "buckets" would be $250,000 each.

The first step is to calculate the ratio of personal clinical production for each partner. If one partner, for example, produces 55% of total partner production, the other partner produces 45%. These percentages are then multiplied by the proportion of APC that is allocated to clinical production (usually 50% or 60%). The second step is to multiply the portion of Available Partner Compensation allocated to ownership by each partner's ownership interest.

Pay Partners a Percentage of Personal Clinical Production: Another method compensates each partner by subtracting their respective lab expenses from each partner's collections and multiplying that remaining number by a commission rate (e.g., 35% to 37%). Next, subtract the total partner's production related compensation from APC. The balance is then split based on the respective ownership percentages of each partner.

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 [email protected].

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