Top Ten Reasons Associateships Fail to Result in a Practice Purchase

Top Ten Reasons Associateships Fail to Result in a Practice Purchase

8/27/2015 11:58:00 AM   |   Comments: 0   |   Views: 499
Most dental school graduates today are burdened with substantial debt, so they begin practice as associates. While some enter General Practice Residencies (GPRs) or the Armed Services until they complete their obligations, the outcome is the same — they enter private practice. As associates, they have the opportunity to improve their clinical skills, increase speed and proficiency, and learn dental business management.In addition, most associates hope the position will lead to ownership of the practice. However, many find themselves building the value of their host doctor’s practice, only to be forced to leave the practice and relocate. Relocation is compulsory; the result of their non-compete agreement when the promised buy-in/buy-out didn’t occur.Understanding the reasons for failure and avoiding situations that lead to it is the best route to achieve the desired goals of both parties. This article examines the most common reasons many associateships fail to result in ownership or partnership, and provides a checklist designed to improve the chances of a successful outcome.

 

Reason One:

Lack of predetermined purchase price. The number-one reason that the promised buy-in/buy-out does not occur after a one- to three-year time frame is that the parties did not agree on the purchase price before the associate was hired. Therefore the two parties can be at odds with vastly different ideas of practice valuation and appropriate buy-in price.

The purchase price needs to be determined and agreed upon prior to commencement of employment. If not, the senior doctor expects the practice will be valued at its current value, but the recent graduate expects to receive credit for the increased production and profit provided during his or her employment. Subsequently, the associate feels he is being asked to pay for his own sweat equity that increased the value of the practice.

However, if the purchase price was established prior to commencement of employment, three out of four associateships lead to the intended equity position. Conversely, if the purchase price has not been predetermined, nine out of 10 associateships lead to termination without achieving the ownership intended or promised.

Reason Two:

Lack of written details. The second most common problem is that the details of the buy-in have not been agreed to in writing prior to or immediately upon employment. A common but fatal mistake is to say, “If we like each other, we’ll work out the details later.” Do not procrastinate on the details of one of the most important transactions of your career.

The more items discussed and agreed to in writing beforehand, the better the chance of a successful equity ownership occurring as planned. The written instruments consist of two specific documents:

  1. Operations Agreement, which may include an Employment Agreement if applicable. These documents detail the responsibilities of each party and spells out all expectations of the relationship, which, for example, may include the associate’s responsibility to meet certain production criteria for specified time intervals. This document also applies to associates in a large group or multi-practice model design where the associate is an employee or independent contractor.
  2. Letter of Intent, which details the proposed equity acquisition. The Letter of Intent includes the proposed date of sale, the proposed sale price, and provisions for special circumstances. For example, how to proceed in the event of irreconcilable differences and if there be an obligation to buy the remaining portion of the practice, what will happen if the practice owner also owns the building, i.e., will it be a requirement or an option for the new doctor to purchase a position in the building, how will income be shared, how will patients be distributed, and how additional partners would be handled. It will include a statement indicating that while the Letter of Intent is not binding on the parties, it does represent their agreement to the anticipated details of the proposed sale.

Reason Three:

Insufficient patient base. The third most common reason an associateship fails is an insufficient number of active patients. Typically, 2,000-2,500 active patients are required for each practitioner, and a new-patient flow minimum of 35-50 per month. If the senior doctor does not intend to cut back on his or her clinical hours, then the conversion from a one-doctor to a two-doctor practice requires 4,000 to 5,000 active patients and a monthly new-patient flow of 65 or more. Attempting to “get by” on fewer is a recipe for failure.

The method of counting patients critical. Many senior doctors count their active patients by the number of patient charts in the database. However, if the charts have not been purged within the last two years, the count will be highly inaccurate. Even if charts have been purged recently, the best way to estimate the number of active patients is to use the hygiene recall record.

Take the number of available hygiene days per week multiplied by the average number of patients seen per day multiplied by 25 weeks. The product is the number of patients that can be seen in a six-month period (assuming that most patients are on a six-month recall). That number is then multiplied by 1.5, which yields an accurate estimate of the total number of active patients.

If the patient base or new-patient flow is insufficient, after about six months the senior doctor realizes that all expenses relating to the new doctor are coming directly out of his or her bottom line. The practice begins to experience severe financial pressure, and the associateship ends.

Therefore, if the patient base is insufficient, then the new-patient flow is even more important. However, this problem may not be as critical if the senior doctor —

  1. Intends to retire and turn over total ownership of the practice within 24 months
  2. Cuts back on clinical hours shortly after hiring the associate

Many times the senior doctor views an associate as the answer for increasing practice production, but adding a clinician to a practice with insufficient new-patient flow results in two doctors competing for the same insufficient patient base. This competition results in employment termination.

Reason Four:

Clinical incompatibility. The fourth reason associateships end prior to ownership transfer is incompatibility of clinical skills or practice philosophies. For example, a practice that consists of amalgams, extractions, and dentures will not be compatible with a young dentist who desires a reconstructive and cosmetic practice.

While on the surface different skill levels and philosophies would be desirable, in reality the patient base in that type of practice does not lend itself to the type of dentistry desired by the younger practitioner. Therefore, sufficient clinical and philosophical compatibility between senior and junior practitioners is essential to a successful partnership.

Reason Five:

Unilateral changes in the transition plan. While closely related to Reason Two, the fifth reason for an unsuccessful transfer is 1) failure to identify when the buy-in or buy-out is to occur, and 2) failure to execute it within the agreed-upon time frame.

For example, the Letter of Intent may have stated that the buy-in was to occur in one to two years, however certain behaviors and signs during the employment relationship might indicate that the senior doctor is having difficulty honoring the intended buyout. Or, the associate does not feel ready or comfortable consummating the transaction within the original time frame. If either party delays execution of the agreement for any reason, the transaction may not occur because the party burdened by the delay loses patience and trust for the party responsible for the delay. In the event of extenuating circumstances, both parties must sort out the problem and be willing to make an equitable settlement or the result will be failure.

Reason Six:

Restricted access to patients. The sixth reason for an unsuccessful transition relates to insufficient access to the patient base by the associate. Restricted access can take several forms. For example, if the senior doctor never intended to turn over existing patients, but rather give the associate new patients only or patients obtained solely by the associate’s efforts, the productive capability of the associate will be greatly compromised.

Therefore, it is critically important for the associate to buy an “equal access” to the existing and new-patient base. Dental equipment can be purchased over night and office space set up in a matter of weeks, however it takes years to develop a patient base.

The patient base comprises the goodwill value of the practice. Goodwill value typically constitutes 70 to 80 percent of the value of a practice. If the senior doctor fails to recognize the need to turn over existing patients to the associate, then the associate will be frustrated in his or her efforts to produce dentistry, earn a salary, and improve skills.

While it is normal for the senior doctor to be concerned about turning over patients —with whom he or she has carefully developed trusting relationships — to an unknown and untried new graduate, patient transfer must occur if the associate relationship is to ever develop into transfer of practice ownership.

Unfortunately, senior doctors frequently instruct their staff to steer patients away from the new doctor. A similar situation occurs when the new doctor diagnoses dentistry of a highly profitable nature, such as bridgework or crowns, only to find that it is scheduled with the senior doctor. Even worse are instances where the profitable case was originally scheduled with the new doctor, only to be switched to the senior doctor’s schedule!

The best method of introducing a new doctor to the practice is through the hygiene program. At the end of every hygiene appointment, the hygienist informs each patient: “Dr. Senior has requested that Dr. New see as many patients as possible to familiarize you with our new doctor.” The recall examination is an effective and non-threatening method of introduction.

Upon entering the examination room, the new doctor repeats the same story: “Mrs. Smith, Dr. Senior has requested that I check as many of the hygiene patients as possible so that you are familiar with me and I with you. This way, in the event that I am the doctor on call and you should have an emergency, you will not hesitate to call me to obtain the needed relief. After all, we will already be familiar with each other.” This method of introduction has proven to be highly successful.

If the new doctor has diagnosed needed dentistry, the scheduling staff member gives the patient a choice of an appointment with either doctor — with no bias. The choice of doctor is left entirely to the patient, not the doctors or staff. Historically, 50% of patients will choose an appointment with the next available doctor or the appointment time most convenient for the patient, regardless of who the doctor will be.

For the other 50% of patients seen by Dr. New in the hygiene room, approximately 25% state that they really liked the new doctor and they’d like to be treated by Dr. New. The other 25% state that Dr. New was really nice but they want to see Dr. Senior for treatment. This choice is noted in their patient file, so the determination is already made as to which doctor the patient prefers during the introductory period.

After a few months of seeing as many recall patients as possible, the new doctor’s schedule will begin to fill quickly. Eventually it will reach a point when the senior doctor notices that his or her schedule is slowing down. At that point, the doctors will begin to share recall exam responsibilities.

Reason Seven:

Inability to disconnect. Reason Seven is related to Reason Six, but is a separate and distinct problem. It is the senior doctor’s unwillingness or inability to “let go” and turn treatment responsibilities over to the new doctor. Senior doctors facing this situation may have a number of explanations for feeling that way, therefore a careful and totally honest self-examination must be made to determine if they are indeed ready and willing to accept total release of their practice.

In the case of a senior doctor close to retirement, this may be an emotionally taxing decision. Until the senior doctor has identified pursuits after retirement in which he or she has a greater interest than the practice of dentistry, the senior doctor will be unable to turn over practice responsibilities to another doctor. Many doctors feel that their only interest in life is their dental practice. For such doctors, retirement is especially difficult.

Therefore it is wise for a new doctor considering an associateship to spend some time investigating the senior doctor’s outside interests and activities. Is the senior doctor a hunter, traveler, or golfer? Does the senior doctor indicate having trouble spending enough time at the office because of outside activities? Or has the doctor’s spouse expressed a desire to have more time for activities they would like to pursue? These can be viewed as good signs that indicate the senior doctor will have no problem “letting go.”

Conversely, if the senior doctor is proud of the number of hours spent “living” at the office and/or has no other interests in life, it should raise serious concerns for the new doctor. It means that the senior doctor is not ready to let go.

Reason Eight:

Incompatible business philosophies. Reason Eight for transition failure centers on different business and/or practice philosophies. Unfortunately, a significant part of this problem often deals with integrity issues. It is very important for the new doctor to ascertain the senior doctor’s attitudes and philosophies of business before entering any transition agreement.

For example, a senior doctor who is willing to share the practice numbers, profit and loss statements, and tax returns generally indicates openness and honesty. Such a doctor has nothing to hide and is proud of his or her accomplishments. But, a doctor who is unwilling to share numbers, unwilling to share personal financial information, and who appears distrustful will probably remain that way in the future. There is a major difference between having concern for privacy and having something to hide. The cues for determining the difference become apparent during the first meeting.

An important question to ask doctors who have been in practice more than 20 years is the status of their retirement plans. Do they have a well-funded pension/profit-sharing plan, or are they still going day-to-day, week-to-week and month-to-month financially? If the senior doctor is having financial stress after 20 years in practice and if the intended partnership is more than three to five years, then the partnership should probably not occur. It would be losing proposition for both parties.

But if the doctor has a well-funded pension/profit sharing plan and is proud of the practice’s financial accomplishments, it indicates a strong probability that the practice will be financially strong enough to launch the new doctor into a similar state within a reasonable time frame.

Reason Nine:

Personality conflicts. Unfortunately, this is a frequent reason for failed buy-ins or buy-outs. While all other areas may be compatible and working smoothly, if the two doctors have conflicting personalities, there will be immediate stress and friction within the practice. Personality conflicts between doctors quickly spill over into the staff, and patients can readily sense the hostility. Any attempt to hide it is futile, so a thorough assessment of both personalities is essential before considering any transition agreement.

A variety of effective personality tests and assessments have been developed over the years, but the use of a few commonsense rules can easily determine a potential for conflict. Obviously, two short-tempered individuals will not get along. And two quiet, introverted personalities probably will not mesh. An outgoing leader will usually get along well with a quiet follower. A trusting person will not get along with a distrustful person.

Stay alert for personality conflicts during the initial interview. If significant personality concerns arise and the doctors are planning a partnership expected to exceed three to five years, then these warning signs should be carefully evaluated. If a long-term relationship is intended, it may be prudent to seek professional personality assessments. If the assessment reveals the personality differences to be unmanageable, then it is best to abandon the plan and part amicably.

Reason Ten:

Delegating control to outsiders. The final reason that associateships fail to lead to buy-ins or buy-outs has nothing to do with the doctors or the practice. There have been countless situations where the doctors got along wonderfully, but they fail to have a congruent advisory team that works efficiently in the doctors’ best interests for optimum transition results. A strong, congruent advisory team will consist of top industry experts: practice strategist (consultant and broker), dental CPA, CFP, attorney, and financial institution (banker). The ideal advisory team not only understands practice design, but also contributes value-added direction and advice collectively to get it done and benefit both parties.

Nevertheless, it is extremely important that both doctors realize the boundaries that must be set relative to their attorneys’ involvement in finalizing the buy-in and buy-out arrangements. Your attorney and other advisors are not your decision makers, you are! You will have completed the negotiations relevant to the proposed contractual transition at the outset of your relationship, with all details spelled out in your Letter of Intent and Operations Agreement, which includes an Employment Agreement if applicable. Your individual attorneys are hired to ensure that the i’s are dotted and t’s are crossed in a proper legal document. They are not being hired to “renegotiate” the transaction. If they are allowed to do so, two unfortunate and unnecessary things can happen: The longer they argue with each other, the higher your legal bill, and the less chance that the transaction will consummate into a change of ownership.

Without appearing to beat up the legal profession, we must realize that attorneys are adversarial by nature and training. They have been taught to fight hard to get the best deal for their client. But if the attorneys’ personalities and styles are allowed to spill over into the doctors’ relationship, the relationship will probably end short of the intended and desired result.

Usually, indications of potential attorney problems show up at the beginning of the relationship. For example, problems that occur while producing the Employment Agreement, Operations Agreement, and Letter of Intent will be a pretty clear indication that significant problems can be anticipated later in the process, for example, at the conclusion of the employment period when an option may be executed and the preparation of Partnership Agreements begins. So beware of the potential pitfalls throughout the entire process, which includes overly adversarial attorneys.

Therefore, I recommend an attorney with a focus on the dental industry as much as I recommend a dental CPA. Having these dental business experts in your camp will help to influence and execute a timely, smooth, and mutually beneficial closing.

Sometimes it is desirable for the attorneys of either party to make a change to one or more details in the proposed transaction agreements. Ensure that any proposed changes are submitted in writing to their own client (the doctor) within a reasonable time to keep the transition moving toward closing. The attorneys are instructed not to contact or discuss the agreements or any proposed changes with the other party’s attorney, but to only direct their comments to their specific clients. However, if one attorney is more well versed in dental industry transitions and if all parties give consent, then the attorney may facilitate a group call to minimize delays and keep things moving forward. This method can significantly reduce the legal fees incurred.

The most successful transitions involve a neutral third-party mediator such as a practice strategist/broker (in my experience, this person has been me) who provides suggestions based on the realities of dental business operations. The practice strategist —

  1. Outlines specific needs to be met and immediate actions to take to ensure smooth and trouble-free forward movement from day one of employment or ownership
  2. Understands management and transitions because they have worked with many attorneys and have boilerplate templates of what the transactions, logistics, and transition outcome should be
  3. Can create a professional culture to “make it happen” with existing team members and create a logical, integrated framework to jumpstart production from day one.
  4. Provide a neutral outline of operational agreements for the team to be successful as a new culture that provides dental services with excellence.

Other Considerations

There are other potential areas for conflict, but they are considered relatively minor and most of them can be dealt with through open discussions between the parties at the beginning of the relationship.

The following questions will help reveal some of these minor issues. While they generally do not result in major breakdowns in the relationship, they are areas that should be considered and discussed.

  • Does the senior doctor actively pursue continuing education for himself/herself? Will he/she encourage your ongoing development though paid time off and partial or full reimbursement for continuing education expenses?
  • Are they willing to share management duties such as staff matters, financial information and financial duties?
  • What is their attitude about technology advances and implementation, and what is their commitment toward acquiring new technology? Moreover, is the existing dental equipment in good repair, or is it unreliable and due for replacement?
  • What is their attitude toward modern periodontal procedures? Do they have one or more hygienists, or is this the reason they are hiring you?
  • Have they had one or more prior associates? How and why did those relationships end? Has a relationship recently ended with the associate establishing a nearby practice?
  • Does the support staff appear to be in harmony or chaos, competent or incompetent, supportive in furthering the doctor’s goals, or do they appear to be disruptive?
  • How long has the staff been employed with the doctor? Has frequent staff turnover been related to pregnancies or staff relocation, or could it have been due to problems with the senior doctor? (Frequent staff turnover is an area of concern.)

Summary

While this article has been aimed primarily at a solo practice that evolves to a two-doctor practice, it can also apply to other scenarios —

  1. Long-term partnerships, which are defined as five or more years
  2. A group practice that is adding more associates
  3. One- to two-year associateships that ends with the senior doctor’s retirement
  4. Three- to five-year partnerships that end with the new doctor purchasing the senior doctor’s remaining equity.
  5. The senior doctor continues as the new doctor’s associate on a part-time basis. This arrangement inspires patient trust and confidence in the new doctor.

Other scenarios are possible, but ideally, the seller continues to be active in the practice for at least three (3) years for a successful patient transfer in today’s market.

In ALL instances, the following questions should be addressed:

  1. At the beginning of the relationship, is the senior doctor willing to establish the purchase price with clarity and be proactive in obtaining maximum “good will” transfer from one owner to another?
  2. Will the Employment Agreement and Letter of Intent be drafted and agreed to either before employment or within 30 days after the beginning of employment?
  3. Is there sufficient patient base, treatment chairs, hours of practice, and adequate new-patient flow to support both doctors as well as grow the practice for sustainable short-term and long-term objectives?
  4. Will there be any problems with clinical skill compatibility and, if so, will the senior dentist be willing to mentor the associate for clinical excellence?
  5. Are both parties firmly committed to the buy-in/buy-out timetable?
  6. Is the senior doctor committed to giving the new associate equal access to the patient base through the preventive care model?
  7. Will the senior doctor be able to “let go?”
  8. Are the doctors’ business and practice philosophies and ethics compatible?
  9. Does the potential for personality conflicts exist, especially if there will be a long-term relationship?
  10. Do the doctors understand the role of their attorneys and other advisors in consummating the buy-in/buyout?

In the real world, nothing can 100% guarantee a successful outcome. However, by identifying potential pitfalls at the beginning of the relationship and staying alert for potential problems throughout the process, one can greatly improve the chances of success. As an introduction to the proposed relationship it is strongly advised to share this article with the prospective employer or partner as a focus for future discussions.

Rhonda Mullins, CEO, RHO Global Inc and Dentrepreneur Solutions, LLC
Ready to Improve Your Chances of Success? Contact Rhonda Today!  Email  |  404.445.7730

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