By Gary Schaub
The typical practice transition involves a new dentist buying a solo practice with a short-term transition. Less frequently, this purchase follows an associateship period.
I believe that maturity is the biggest reason some new dentists may shy away from an ownership commitment. The typical dental student is in a cocoon during dental school. Real-world experience is usually nil, based on academia's perception of private practice. It is difficult to choose a career path when the roadmap is fuzzy and only your clinical leg is functioning. The right path may not be apparent until the associate can set long-term goals, bridge the financial chasm created by school debt, gain business skills, and concentrate on finding and evaluating opportunities.
Many dentists in group practice hesitate to immediately offer an equity position to a new candidate. They tell me that the working relationship in a group practice is like a marriage. Choosing the wrong partner can be catastrophic for the future of the group. Thus, many dentists prefer hiring an associate, getting to know that person well, and then offering an equity opportunity. For most associateship-to-equity opportunities, I recommend the following timeline:
Honeymoon period – The purpose of this period is for everyone to get acquainted and determine if the relationship can be permanent. Each of the dentists should look at practice philosophies and compatibility.
At the beginning of this phase, an associate employment agreement should be signed, production goals established, and a compensation formula agreed upon. In addition, get a practice appraisal and discuss the financial parameters of a future buy-in. It is a good idea to draft a
Exit strategies also need to be defined. Both sides should be able to exit gracefully and with minimal financial impact. A restrictive covenant is necessary, but it does not need to be onerous.
Commitment phase – At this stage (typically after a few months), both the associate and the practice owner make a commitment to each other. A Letter of Intent, detailing the buy-in terms, is signed, along with a practice-management agreement and any revisions to the employment agreement. The associate is accepted as a future partner. If a dentist is retiring, a long-term plan to transfer patient records and referral sources is developed.
I usually recommend incorporating into the Letter of Intent what will happen in case the senior dentist dies or becomes disabled during this phase. Typically, the associate agrees to commit to the buy-in phase as soon as this happens. This way, both the senior dentist's estate and the associate's future interests are protected.
The time frame for this phase is typically six to 18 months. During this phase, the legal sale agreement and other documents are prepared and signed. Everything, including the financial terms for the buy-in, is completed as early as possible. This way, everything already is in place when the actual date arrives.
Buy-in phase – If everything has been done correctly, this phase will be effortless and seamless. The two essential elements that make this timeline successful are committing to action after the honeymoon period and putting everything in writing upfront. It forces both sides to honestly evaluate how the relationship will function in the future.
There are creative ways to structure a practice buy-in. What works best depends upon your particular practice situation. In any case, planning ahead, effective communication, and written commitments will ensure the success of your practice transition.
Gary Schaub is from Portland, Oreg. He is founder and president of HELP Appraisals & Sales, Inc., a dental appraisal and brokerage firm. Schaub can be reached at (503) 223-4357. He is a member of American Dental Sales, Inc., the largest group of dental brokers, appraisers, and consultants in the United States. See the ADS classified ads for names and phone numbers of ADS members in your area.