The Growth of the Intern

July 1, 1999
Starting an associateship with an `internship` promotes a stronger grace period to determine true compatibility.

Starting an associateship with an `internship` promotes a stronger grace period to determine true compatibility.

A. Keith Phillips, DDS

After several years of working with residents, I have noticed some common themes about why many associateships fail before partnership is reached. Too often, Dr. Junior graduates from dental school or a residency program with the confidence that all he needs for a successful career in dentistry is a place to work and patients to treat. Dr. Senior, having worked diligently for 25 years, figures that it might be nice to have an associate around to help check hygiene, cover the office to allow him/her more time off, and produce enough to generate a bit more profit for the practice.

So Dr. Senior tells his local representative from the dental supply house that it is time to take in an associate. Contact is made with Dr. Junior, and a deal is struck. Dr. Junior will start with a salary similar to what a hygienist makes. After six months, Dr. Junior will shift over to some percentage of production - usually 25 to 35 percent. The fee will vary depending on who pays lab fees and assistants.

Everyone is happy for the first few months. Dr. Senior "instructs" Dr. Junior on some of the finer points of patient management that were not taught in dental school. Dr. Junior learns willingly. His confidence, competence, and speed increase. Compensation, number of patients, need for increased space, and access to chair time also increase.

At about the three-year point, Dr. Senior realizes that slowing down means giving up control and spending less time each week at the office. Only now does Dr. Senior discover that, at age 52, he is not really ready to slow down that much.

As the buy-in point approaches, Dr. Senior decides that the practice is worth much more. Tremendous growth has occurred during the last three years. So the sales price jumps from $200,000 to $450,000!

Dr. Junior thinks the growth is due to his presence and hard work.

The original price, in his opinion, is fair. They decide to part ways. Unfortunately, Dr. Senior`s attorney had drawn up the original agreement. Dr. Junior then discovers the true meaning of a 20-mile/two-year noncompete/nonsolicitation clause. Dr. Junior cannot practice in the city of his choice.

Evaluate, evaluate, evaluate

By following a few guidelines when setting up an associateship, many of these problems can be avoided. First, Dr. Senior needs to evaluate the reasons for bringing in an associate. Typically, Dr. Senior thinks that bringing in an associate will allow him to slow down and enjoy treating fewer patients. But many find that adding another dentist to the office increases the patient flow and busyness factor in the office. Additional stress is placed on staff members who try to please two bosses - who often have varying philosophies.

Doctors thinking about an associate might consider planning the first year as strictly an internship - a chance for the associate to watch and learn. During this year, frank discussions about practice philosophy should take place.

No noncompete clauses should exist. It has been argued that, traditionally, it takes about five years for patients in an existing practice to fully accept a new dentist. So, it is unlikely that a recent graduate could dramatically affect a successful practice by taking a significant number of patients after only one year. If, at any point during the first year, either party decides that philosophies are too different, personalities don`t match, or that this just is not the kind of practice either party wants, it`s time for the doctors to part as friends with no hard feelings!

If things are going well, both parties must agree on a formula for calculating the practice`s value. It is not as important to agree on the specific buy-in figure as it is to agree on the method of arriving at the value. A competent management consultant should be able to help with this calculation. When this step has been completed, both parties know the range for a fair practice value and exactly how the actual buy-in price will be calculated.

If the relationship progresses along nicely, the second year should trigger procedures that gradually build a successful transition. Many practices continue the associate at a salaried position, but they calculate compensation as if it were based on a percentage of production. Such compensation allows the associate to build equity in the practice and live an acceptable lifestyle.

Let`s say, Dr. Junior decides that, after careful budgeting and planning, he needs $60,000 a year for the next three years. Dr. Senior, if he uses good judgment, will track Dr. Junior`s production for the information needed in making the decision on whether to keep Dr. Junior for the second year.

At the start of the second year, Dr. Junior still receives $60,000 a year in salary. However, his production will be monitored on a monthly basis, and his salary will be figured at 35 percent of production.

If Dr. Junior`s production is $20,000, and he is being paid 35 percent of production, his compensation would be $7,000. Since he actually is being paid $60,000 a year, or $5,000 a month, he now has a positive equity of $2,000 in the practice. If Dr. Junior produces $13,000, his compensation at the 35 percent level would be $4,550. Since he is paid on a salaried basis, his equity in the practice would drop by $450.

Beginning with the second year, a reasonable noncompete/nonsolicitation clause is appropriate. By the end of the third year, the noncompete clause should be even more restrictive. In the event a complete buy-out is occurring, it is appropriate that Dr. Senior sign a very restrictive noncompete/nonsolicitation clause.

Let`s say the buy-in value of this practice is $250,000. The buy-in point can be an agreed upon time. It`s usually after two to three years, or the point when the equity value in the practice reaches 20 percent of the buy-in value - in this case, $50,000.

What if, at the buy-in point, Dr. Junior changes his mind? Dr. Senior keeps $25,000 of the equity value and returns $25,000 to Dr. Junior. If Dr. Senior has a change of heart, however, Dr. Junior leaves with the entire equity value to ease his transition into a new situation.

If, at the buy-in point, both sides have developed a good long-term relationship, they go back to the original equation for valuing the practice, recalculate the value using the same formula and average the two values to find the buy-in value. This method helps ensure that both parties work to keep the practice growing during the internship and associateship phases.

Find a good accountant, an attorney experienced in dental-practice transitions, and a qualified practice-management consultant. They should be able to assist in managing this program in the most tax-advantageous way, as well as consider the specific situations of both parties.

Successful transitions often begin with the senior dentist finding an individual for whom he or she can act as a mentor. When true mentoring occurs, relationships are built and individuals learn to thrive on each others` strengths, using diversity to their mutual advantage.

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