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Transitions, Part 1: The Associate Buy-In and The Straight Sale Douglas Carlsen, DDS

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The buy-in associate is not the only way to transition. This spring I conducted interviews with a variety of retired dentists for a CD series. Many of them had great insights for transition methods. I'll detail different approaches over the next two months.

The Associate Buy-In
A favorable outcome of the associate buy-in is the ability of the transitioning doctor to "hand pick" a successor.

Darrell Cain, of Cain, Watters and Associates, PLLC, has been a provider of associate buy-in transition advising for many years. He sets up the situation:
A young associate-to-partner joins an elder dentist's practice, helps grow the business, and becomes a partner, purchasing a portion of the practice. The elder dentist invests the profits, which grow over subsequent years. The elder dentist may wish to bring in another associate to purchase the other portion of the practice as the elder dentist slows his practice, ultimately retiring. Thus the elder dentist has the opportunity to sell part of his practice twice, realizing significant growth over the years from the first sale.¹
Mr. Cain provides a detailed video series of the process at www.cainwatters.com and has worked with many successful associate buy-in transitions.

Dr. Marc Cooper, consultant for dental partnerships along with large health care systems and other corporations, offered a more measured assessment in his March 2010 newsletter. His research has found there to be zero statistical evidence regarding the success or failure rate of associate buy-ins. In his anecdotal evidence, failures grossly outnumber successes. He illustrates one method he has seen succeed often; he called it "sponsorship."² From his newsletter:
What I mean by sponsorship is the senior dentist directly contacts residents or dental students himself or herself, who have a strong interest in practicing in their area. This is done two years ahead of when the associate is placed in an office… the senior dentist takes a student or two under his or her wing and generates a relationship as a mentor.

…They stay in communication with the student to assist them in navigating the issues and concerns that invariably arise in the student's life and training. They emotionally support and nurture these individuals. They become a true sponsor of these students.³
I recommend reading Cooper's book, Partnerships: Why They Succeed and Why They Fail.

Further comment was recently provided to me via interview with Dr. Peter Mirabito, founding partner of ADS Precise Consultants of Denver. Mirabito has been a practice broker since 1986 and facilitates buy-in partnerships. Mirabito has extensive experience with both straight practice sales and associate buy-ins. I'd like to share part of this interview with you.

How might a dentist evaluate whether an associate buy-in makes sense?
Mirabito: The dentist should first look at his or her situation. Does the dentist wish to cut back on office hours? Is he way too busy? If both of these are true, it makes sense to consider a partner. If only one, it might make sense. If neither, then I would discourage the arrangement.

Further, for a buy-in to work, the elder dentist needs to consider whether he is willing to give up working time and some income to the new partner. If either is a "no," then the arrangement probably will not work.

What steps are involved in the actual associate buy-in process?
Mirabito: First and foremost, a professional practice appraisal must be done. The associate needs to know, up front, what the eventual price for the practice will be. Second, a buy-in purchase agreement, detailing the "when" and "how" of the purchase needs to be constructed. Third, an employment agreement, identifying whether the associate doctor will be an independent contractor or employee, is constructed. Fourth, a partnership agreement, enumerating how the partnership will be legally maintained, as an LLC, PC, etc., is drawn up. And fifth, an operating agreement is needed. It details how the partners will be compensated and how practice management decisions will be made: Will the doctors be paid by a set percentage of production? Will leftover profits be divided according to percent equity in the partnership or the production percentage of each doctor? How much of those profits will be spent on capital improvements?

A frequently overlooked matter is possible dissolution of the arrangement. All possibilities, including practice vision differences, income disparities, disability and even death, must be discussed with solutions put in place at the beginning of the relationship.

The entire package needs to be assembled before a dentist searches for an associate or partner.

What potential problems may arise?
Mirabito: The elder dentist often does not have excess patients and may need to grow the practice substantially to accommodate another dentist. Often, the elder dentist assumes the younger colleague will be able to grow the practice while learning the ropes. This seldom works out.

Also, the entire process is much more stressful and requires much more detail than a simple practice sale and may take several tries to find the right partner.

Mirabito can be reached for further information at peter@adsprecise.com or 800-307-2537.

The Straight Sale
Let's now examine the straight practice sale, which is the most popular transition option.

I also recently interviewed Mr. Ken Rubin, CPA and owner of Ken Rubin & Company, Dental CPAs and Ken Rubin Practice Sales in San Diego. Rubin's company works strictly with practice sales.

Please relate advantages of the straight sale versus the timed buy-in.
Rubin: Most importantly, a selling dentist will come out farther ahead economically using a straight sale instead of a timed buy-in. With a timed buy-in, the elder dentist gives away significant profits every year during the transition period that otherwise would have stayed in his or her pocket. Since selling half to a partner prematurely (rather than simply hiring an associate) rarely makes up for the loss of income suffered during the transition, it's like giving away half of the practice for free.

The other main advantage is simplicity. The outright practice sale is infinitely less complicated than a staged buy-in and the issues that inherently arise with any partnership. The stress of growing a practice is absent.

Furthermore, staged buy-ins actually have a high failure rate for many reasons: lack of production to support two dentists, incompatible personalities, practice styles, speeds and skill sets, inability to make joint decisions, and unfair allocation of income and expenses, among other complications.

There are many steps involved in selling a practice. Please provide thoughts on key areas.
Rubin: First, preplan and make sure to keep your office in prime condition financially, cosmetically and personnel-wise leading up to the sale process.

Second, selection of a broker is key. Interview several brokers and call references. The right broker will make the process much easier and put more money in your pocket.

Next, assemble a top quality team including a CPA, attorney and practice consultant. Your broker can assist with this step.

Make sure that the practice information package put together by the broker is accurate, and your financial records are in order for the buyer CPA's due diligence.

How long does it typically take to find a buyer?
Rubin: In the San Diego area in 2009, we often found buyers within a month. In 2010, it is slower, with a couple months [being] the normal time frame. There is a high demand for Southern California dental practices, so they sell quicker than in the rest of the country.

Ken Rubin can be contacted at ken@kenrubincpa.com or 619-299-6161.

Obviously, there is disagreement among the experts regarding the associate buy-in process success rate. Be sure to carefully evaluate all options and vet any adviser or broker carefully before proceeding with either option.

Next month, in part II, we will examine other transition options available.

*Note: I have no financial or business connection to any transaction specialist, broker or consultant.

References
  1. Comments paraphrased from part 3 of video series at www.cainwatters.com/resources.aspx?section=video&subSection=cain3.,
    viewed July 1, 2010.
  2. Dr. Cooper's Web site is at www.masterycompany.com.
  3. Downloaded on June 13, 2010 from http://archive.constantcontact.com/fs067/1011201218140/archive/1103124932897.html
Author's Bio
Douglas Carlsen, DDS, founder of Golich Carlsen, has provided independent financial education to dentists since retiring from his practice in 2004 at age 53. Golich Carlsen, an approved AGD PACE organization, delivers common sense consulting, efficient CE lectures, and smart continuing education CD/workbooks – all backed by academic research. Visit the web site at www.golichcarlsen.com for archived articles, information on services, and to sign up for Dentist's Financial Poll and Newsletter. Contact at drcarlsen@gmail.com or 760-535-1621.
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