In the last blog we talked about the purchase of a “large” practice with multiple doctors and the related issues with those transactions. In this blog we’ll address the “buyin” transaction where the seller isn’t ready to sell 100%, rather they want a buyer who will partner with them by acquiring up to 50% of the practice. The end result will be a partnership between two or more docs.
As a refresher, what do I mean by “large practice”? To me, the “large practice” is one which usually requires at least two dentists to handle all the dentistry. That doesn’t mean two full time docs, at least one full-time (4-5 days per week) and one part-time doc (2-3 days per week).
Many times the price is actually less important than other aspects of a buyin that leads to a partnership. What are these other issues and how could they be more important than price?
Probably most important is DO YOU REALLY KNOW YOUR FUTURE PARTNER?! Now, if you’ve worked in the practice for a couple years you may already know who you’ll be partnering with, that’s good…just make sure you really know them. However, if you’ve never worked in the practice and the seller is the sole owner who is offering a 50% interest with partnership, you really need to consider whether it makes sense to buy NOW or associate for a couple years then buyin. This is a business marriage. I seriously doubt you would plan a wedding in 90-120 days with someone you’ve never dated….this is EXACTLY what you’re doing when entering into a practice buyin where you’ve never stepped foot in the practice.
Another aspect of the buyin that is usually more important than price is the structure of the transaction. If the seller/owner is working with experienced dental practice transition professionals then the structure will likely be one that is customary in the industry and will usually provide a fair transaction to both parties. Unfortunately, sometimes the professionals aren’t so experienced, and they attempt to offer a deal that winds up being horrible for the buyer while being the best possible scenario for the seller….this would be a pure stock sale transaction.
There are other “structures” that offer a compromise of sorts to the parties whether it’s a part stock/part personal goodwill, part stock/part compensation shift, an interest sale or an asset purchase structure. There are pros and cons to each of these structures and many times they’re driven by the entity type of the seller.
Unfortunately, if the seller is a C-corp and they haven’t planned accordingly it may limit the type of structure or worse, the seller’s advisors try to force a pure stock sale approach.
The last issue that’s usually more important than price is the ongoing operating agreement between the partners. The operating agreement (or employment agreement if a corp) will detail how the partners get compensated, how profits are shared, how decisions are made, what triggers a future buyin or buyout, how the practice will be valued for a future transition and how the practice will be managed. If this operating agreement is well drafted, even though a buyer may overpay ten thousand dollars on the initial price they may wind up losing ten times that number each year as the practice continues.
You want to make sure the partners are fairly compensated for their clinical dentistry, maybe there’s a management compensation piece for the partner that’s doing most of the management and lastly, any remaining profits need to be shared fairly so one partner isn’t getting a larger share of the profits than they should. The profit sharing formula should provide for flexibility when providers production changes from year-to-year.
You want to make sure the partners have an equal say (for the most part) on most major decisions and there are definitions of major vs minor decisions. You want the triggering events for a buyout to be well defined and you want to make sure there’s a mechanism in place that allows for a fair valuation of the practice if a buyout is triggered in the future.
These last two pieces, the buyin structure and the operating agreement are usually MUCH more important to a buyer than the initial buyin price as these two components can cost the buyer WAY more money in future earnings and/or tax savings than the original purchase price so make sure YOU have experienced advisors working with you to make sure the deal is fair for both parties.
Next up we’ll dive into practice mergers, a GREAT way to grow your practice with probably the BEST ROI of practice growth strategies.
About Tim Lott
Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at firstname.lastname@example.org or any of the other dental partners/principals at (800) 772-1065 or email@example.com.