Practice buy-in phases

July 1, 1999
As a result of the rapid growth in practices in recent years, practice buy-ins are becoming much more feasible than the traditional sole practitioner selling outright.

Kevin Shea, JD

As a result of the rapid growth in practices in recent years, practice buy-ins are becoming much more feasible than the traditional sole practitioner selling outright.

With these changing demographics, a practice buy-in may be more desirable for a selling doctor. A buy-in has the tremendous advantage of maximizing both the practice value and profitability. Nevertheless, some limitations on practice buy-ins remain. Although practice buy-ins have great appeal, they may not be right for all doctors.

Careful consideration must be given to assure that all phases of the buy-in are addressed at the beginning of the relationship. Too often, issues are addressed after the initial associateship or when one party wishes to sell or buy. That may cause a breakdown of the entire relationship, resulting in greater damage than if the relationship had never been formed. The goal should be to establish the parameters and rules for the beginning, middle, and end of the buy-in. These phases are as follows:

> Associateship ("The Beginning")

The initial phase of the relationship is the associateship period of time. This phase is when the selling doctor introduces a new associate into the practice. During this phase, consider:

x Duration of the associateship

x Compensation of the associate

x Associate benefits

x Duties and responsibilities

x Termination considerations

x Restrictive covenant

x Option/right-of-first-refusal

> Buy-in

The buy-in phase typically is the area that gets the most attention, since it establishes what the "practice is worth." Although important, it is no more essential than the other phases of the buy-in. Nevertheless, in this phase, attention needs to be given to:

x Pricing

x Percentage of ownership

x Stock vs. asset sale

x Down payment

x Duration of financing

x Interest rates

x Tax considerations

> "Partnership" ("The Middle")

(For purposes of this article, we will use the term partnership, although the business entity may be a corporation, LLC, or LLP). This phase of the relationship usually will be the longest in duration, since this is the period in which the parties practice together as joint owners. This relationship could last 20 years or more. In this phase, consideration should be given to:

x Control issues

x Division of administrative duties

x Decision-making

x Limitations on spending

x Partnership "perks"

x Division of income and expenses

> Departure of a doctor ("The End")

The final phase of a buy-in relationship will be the departure of a doctor. This phase will terminate the relationship that was started with the associateship. The departure of a doctor can happen either involuntarily (death or disability) or voluntarily (retirement, third-party sale, or dissolution). This phase involves consideration of:

x Events that trigger a buy-out

x The structure of a buy-out

x Down payment and financing

x Interest rates

x Deferred compensation agreements

x Tax considerations

x Dissolution stipulations

x Retirement "requirements" (e.g., notice, covenant not to compete)

x Disability definition

x Short- and long-term disability contingencies

Practice buy-ins can be exceptionally successful undertakings for both the buyer and the seller. They can maximize practice value and profitability, yet if entered into haphazardly - without considerations of the entire relationship - they can be both frustrating and catastrophic for all parties. However, if the parties give due consideration to all the phases of the buy-in, they can provide themselves with a great deal of assurance that things will be done right. This will allow them to focus their attention on the clinical and operational aspects of the practice.

Kevin Shea, J.D., is an attorney and president of PEB Practice Sales, P.A., Minneapolis, Minn., which assists dentists in purchasing, selling, appraising, and conducting practice transitions. He can be reached at (877) 275-2727. Shea 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.