Associate to Partnership by Timothy Lott, CPA, CVA

The buy-in opportunity: A strategic guide

by Timothy Lott, CPA, CVA

On Dentaltown, we often see doctors exploring the opportunity to buy into a practice. Whether you are a current associate moving toward ownership, a newcomer eyeing a future partnership, or a buyer collaborating with an owner who is not ready to fully sell and retire, the goal is the same: building a successful shared future.

Transitioning from an associate to a partner is a long-term commitment akin to a “business marriage.” Whether you are a long-term associate or an outside buyer, you must evaluate the entire opportunity with a focus on four main financial points: price, structure, ownership percentage, and the ongoing operating agreement. You should also weigh several non-financial aspects: practice philosophy and style/culture, patient mix, team support, and operating procedures and policies.


1. The buyer scenarios
Your approach to due diligence depends on your current relationship with the practice:

• Current associate: You should already understand the culture and team; your focus should be primarily on the financial “math” and the ongoing operating agreement.

• Associate-to-owner: You should agree on price, percentage owned, structure, and ongoing operating agreement before you start, then use your associateship to evaluate the culture and other non-financial concerns.

• Immediate buy-in: This is the highest risk for both buyers and owners. Because you have not worked together, you must verify the team dynamics and patient base with eyes wide open. Assessing all the financial aspects is still important.


2. Financial foundations
Sometimes the asking price is less critical than the structure and the operating agreement.

• The three-entity structure: For maximum tax efficiency and flexibility, consider a structure where you and the seller own individual entities that then form a third “operating entity.” This allows for favorable tax treatment on both sides and simplifies future buy-ins or buyouts.

• Cash flow analysis: Hire your own team (CPA, attorney, lender) to verify that the practice’s performance can support your debt service while providing a comfortable income. There are many threads and blogs on Dentaltown, including my own, that take a deeper dive into this subject.

• Equity share: If offered less than 50%, clarify the timeline and path to equal ownership.

• Initial associateship: For those who will likely have a two- to three-year employment arrangement with the owner, that employment agreement will also have critical components that need to be assessed.


3. The operating agreement: The partnership “prenup”
This document is the most vital piece of the puzzle. It should clearly define:

• Compensation: How partners are paid for clinical production vs. management duties, and how remaining profits are split.

• Time commitments: Required clinical hours, administrative responsibilities, CE time, and vacation allotments.

• Professional expenses: What professional expenses the partnership will pay on behalf of the partners.

• Governance: How decisions are made and how deadlocks are resolved.

• Exit strategies: Triggers for buyouts (retirement, death, disability, or “for cause” events like loss of license). Will an independent valuation be performed, or will a predetermined formula be used to determine the practice value?
  » Buyout triggers for retirement, death, and disability usually provide the outgoing partner with full fair market value, while triggers for cause come with a penalty or discount on full value because of the suddenness and circumstance.
  » For retirement and voluntary withdrawal, you may not receive full value for your interest if you haven’t met a required number of years of service and a minimum retirement age. The agreement may also define a mandatory retirement age.

• Valuation: Generally, there are two ways to value the departing partner’s interest in the practice: you will use a formula that is spelled out in the agreement, or you will engage an independent party to value the practice and then the departing partner’s interest.
  » Consider using a pre-agreed formula to value the practice during a buyout to minimize future costs and potential legal battles. I prefer the formula path. Test it against a couple of variable examples to confirm it generates a value that falls within a reasonable range before you settle on it.
  » If the formula method isn’t used, the parties will have to agree on an independent party to perform a valuation. I usually see this spelled out so that each party identifies a preferred valuator, and those two valuators choose the firm that will perform the valuation.


4. Non-financial due diligence
A partnership will fail if the partners do not get along, regardless of how good the numbers look. Ensure you are aligned on:

• Clinical philosophy: Do your treatment styles and standard of care match?

• Support team: Do you believe you can work with this team? Does the practice have proper systems and policies in place?

• Patient base: Is the mix (PPO, fee-for-service, out-of-network, Medicaid, etc.) sustainable for your goals?

• Location: Can you see yourself in this community for the next 15 or more years?

Do not rush the process. A well-drafted operating agreement is invaluable to a partnership and the partners. It should be reviewed every five years or so to remain current with your state laws and other changes in the dental practice space. For you and your partners, this document is the best defense against costly legal disputes, and it ensures a healthy, long-term professional relationship.

Timothy Lott, CPA, CVA, provides consulting services to health care professionals and practices. He offers expertise in startups, mergers, transitions, tax and retirement planning, financing assistance, and budgeting. Tim has a specific concentration on consulting to dental professionals on associate, partner, and shareholder arrangements, practice management, revenue enhancement, practice purchase, sales, buy-ins and buyouts, and the related tax issues.