Transitions Roundtable - We ask 2 experts the same question on a complex issue
A dentist who hopes to buy into a practice after serving as an associate needs an appropriate timeline so he or she knows what to expect when the transition time arrives.
As an associate, what is a normal timeline for buying into a practice? I’ve heard about dentists working for years who never get an offer to purchase, and then they have to start over somewhere else.
Tom Snyder, DMD, MBA
Frankly, this should never happen. Any associate who is considering an ownership position when joining a practice needs to have that question answered before agreeing to employment. Not having a frank discussion with the owner at the outset about transition plans can result in wasting valuable years of one’s career by having false hope about owning the practice one day.
For those owners who engage in proper transition planning, we have found the associate they recruit usually enters into some form of equity transfer within a one- to two-year period. There may be an exception to this timeframe if someone feels they need to provide substantial clinical mentoring to their associate.
When you join a practice, and have a clear timeline for a buy-in or buy-out, make sure a practice valuation has been prepared within the first 12 months of employment. We have seen situations where associates practice for several years, and then when it’s time to assume an equity position, the owner presents the associate with a current practice valuation, which results in the associate paying for practice growth that he or she was responsible for! As an owner dentist, it is not a bad strategy to “lock in” a practice value at the outset. The associate will have no excuses not to work as hard as possible since he or she will not be paying for that future growth. Furthermore, the net income of the business owner should also increase during the associate’s employment phase.
Finally, at the time of the equity transfer, it is appropriate to adjust the baseline value for inflation as well as to include any additional equipment or technology purchases. In the end, it’s all about having a well-thought-out plan and communicating your desires as an associate to the owner at the outset of your relationship.
LARRY M. CHATTERLEY
Two years is a normal timeline for working as an associate prior to buying into a practice. That time frame may be shorter if the practice has the financial capacity to support the buy-in sooner, or if certain, predetermined growth benchmarks are met before the end of the two-year period. That time frame may be longer if the parties mutually agree to more time, or if a fair “earned equity” associateship transition structure is pursued.
In either case, the parties should clearly define and commit to the time frame in writing at the start of the associateship, or after a reasonable “courtship period” to determine long-term compatibility (e.g., about six months). The price and terms of the buy-in should also be agreed to in writing at that time. Failure to do so could result in a scenario like those you’ve heard about, where time stretches on for years without either an offer to purchase or a commitment to sell. Making that commitment early serves to protect both the buyer and seller.
A common two-year deferred period between associateship and buy-in is generally needed to allow practice growth sufficient enough to cover the buyer’s debt service associated with the buy-in without creating a cash-flow pinch for the seller, or a dramatic shift in scheduling and production overnight. It is advisable to fix the price of the buy-in prior to the start of, or at least early in, the associateship so as to avoid the associate paying for his or her own efforts to grow the practice in the form of a higher practice valuation at the time of the buy-in. The seller will be compensated for his or her contributions toward the practice growth in the form of an “override” (profits earned from your work as an associate) in the interim, making the arrangement fair for both sides.
Larry M. Chatterley, who has been consulting dental and medical professionals for more than 29 years, founded CTC Associates in 1988. Mr. Chatterley specializes in transitioning dental practices and serving the business and transition needs of dentists throughout the West.
Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or TomSnyder@henryschein.com.