We ask two experts the same question to give you two different answers on a complex issue
QUESTION
"I need to practice two more years and am facing a lease renewal that I do not want to sign. A good friend of mine has a practice one mile from my location. What can be done to create a good opportunity for us both to benefit from this type of transition?"
Pete Ackerman
There are a few missing pieces to this puzzle, but, based upon experience, I will make some assumptions. More often than not, this question arises from a dentist approaching retirement who has cut back to what is now a part-time practice. Usually the colleague down the road is in the same boat.
It may be advisable to consider a practice merger with a plan of ultimately selling the two combined practices assuming the sum of the two is greater than the individual values. However, if either party has a change of heart, the other could be stuck. This, in addition to numerous other complicating issues attached with co-ownership, often will eliminate this structure.
Some dentists will want to take an "easier" path. They shut down their location and move into their colleague's facility renting space until they wish to retire selling to the dentist from whom they are renting space. The doctors would typically enter into an agreement to purchase before the move. These agreements typically contain provisions allowing enough "wiggle room" for the purchaser to back out, rendering the value of their practice worthless.
An ideal scenario is if the dentist down the road is interested in increasing their income, net worth and plans to practice many years after the seller's retirement. The dentist down the road should purchase the practice for fair market value, move the practice into his or her facility, and retain the seller as an associate. Typically the purchasing dentist will increase cash flow and his or her net worth with little risk. It is important to recognize most post-closing employment contracts can be terminated at any time, resulting in the seller having to seek employment elsewhere outside the restrictive covenant.
They can be many solutions to this situation, but the key is to explore the risks and benefits to each path … including staying put and renewing the lease.
Peter Ackerman is a principal of The Dental Marketplace and past president of American Dental Sales
Tom Snyder, DMD, MBA
One transition option may be for you to consider developing a facility sharing arrangement with your friend. Facility sharing arrangements typically feature you retaining your business entity, as well as your staff, at the new location. There are many components to creating a successful facility sharing arrangement. First, what will be your monthly rental charge and how will it be calculated? This is dependent on how the facility will be used, for example, the number of days you practice and the number of treatment rooms you plan to use. Additionally, if you have a different dental management software program than your friend, you will need to make arrangements for running separate systems. This may entail additional hardware and that is a cost you should absorb.
Assuming that you will be bringing your staff, you will continue to pay them as is customary. However, if you plan to use any of your friend's staff, then he should charge you for any staff time plus any allocated fringe benefits.
It is impractical to have two separate supply inventories, so you will also need a formula to pay for your share of dental supplies (a percentage of clinical production is often used).
The most important component of your facility sharing arrangement will be to negotiate a future purchase option for your patient list. For example, agreeing to a ratio of the last two to three years of gross practice revenue is a common approach to value your patient list.
Also, if you intend to practice on a very limited basis after the sale, then you should also negotiate an associate arrangement up front.
Facility sharing arrangements are good ways for both doctors to win and, most importantly, for you to create an effective practice transition solution.
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].
