A successful alternative to partnerships

Jan. 1, 2005
My last article discussed the pitfalls of partnerships and buy-ins, which include loss of control, loss of marketability, and loss of value.

Earl M. Douglas, DDS, MBA

My last article discussed the pitfalls of partnerships and buy-ins, which include loss of control, loss of marketability, and loss of value. These are consequences of converting a real tangible practice into intangible undivided interests. This article describes an alternative to buy-ins, providing the benefits of buy-ins without the risks and losses which buy-ins incur.

Prior to considering any form of associateship, a practice must have excess production for an associate to perform. I call this excess production the "phantom practice." It may involve having more patients than an owner is capable of treating or referring services that the owner does not perform. My rule of thumb for an associateship to succeed requires a practice to be fully booked three or more weeks in advance, or have a sufficient amount of referred treatment for an associate to perform. The owner also needs to refer some of his or her patients to the associate, rather than expecting the associate to build a new patient base.

This is how the alternative works. A dentist joins an ongoing practice under the terms of an associateship agreement for five years. The associate is paid a percentage of his collections, and agrees to a covenant-not-to- compete if he or she breaks the agreement or is terminated with cause. If the owner fires the associate without cause, the covenant is cancelled.

After five years, the employment contract ends and an office-sharing agreement begins. As a result of the development of the associate's separate practice, a solo-group practice has been formed. Both practices share the common office and enjoy the economies of scale.

With the exception of the death of one of the parties, the covenant-not-to-compete ends. (If a surviving party does not purchase a decedent's practice, a covenant-not-to-compete goes into effect.) Whatever practice the associate has developed during the first five-year period now belongs to that individual. The owner and the associate divide the total practice net income on a prorated basis of their individual production. If both parties produce the same amount of income, they are each paid the same amount.

This simple plan has profound benefits for both parties. First, the associate does not have to pay a large price for an interest in someone else's practice, thus eliminating any risk, debt, or liability. There is no discount in the value of the associate's practice, since the associate now owns his or her individual practice, not just an interest in someone else's practice.

Another benefit is that both the owner and associate can each individually manage their own personal practices. By contrast, a partnership requires both parties to reach an agreement on every issue, even when a given decision does not work for one party or the other. Our new structure allows both dentists to utilize different management directions without the agreement of the other party and without impacting the other person. If the relationship does not work out for the associate, the agreement can be terminated with no debt, liability, or litigation.

The owner retains significant benefits. There is greater financial gain for the owner from five years of associate profits as opposed to selling half of the practice. This approach involves selling the owner's whole "phantom practice" rather than half of his "real" practice. After five years, the owner will accumulate more money while continuing to own and control 100 percent of his own practice. By contrast, a buy-in plan results in the owner accumulating less money, suffering a loss of control, and retaining ownership of only a 50 percent undivided interest in the practice, which is then discounted.

The principle is simple. Rather than two dentists trying to divide, own, and manage a single practice, two dentists own, manage, and ultimately sell their own individual practices.

The first practice I structured in this fashion is still operating, but I was more concerned about the structures that ended. All relationships will end - it is not about if, but rather how and when. With the solo-group arrangement, the terminations have been simple and amiable. The structure provides safety for both parties: the owner continues to maintain control and ownership - and therefore the marketability and value of his or her practice. The associate gains ownership and control of his or her individual practice without risk, debt, or liability, while also preserving ownership, control, and marketability.

Any dentist considering a buy-in or partnership - whether as an owner or an associate - would be well-advised to understand the risks involved, as well as explore safer, easier, and more profitable options.

Earl M. Douglas, DDS, MBA, is the founding president of American Dental Sales. He is president of Professional Practice Consultants Ltd. Dr. Douglas personally services the southeast area of the United States, and has affiliates nationwide. He can be reached at (770) 664-1982 or write to him at 11285 Elkins Road, A-2, Roswell, GA 30076. Visit his Web site at www.ppcsouth.com.