ASSOCIATESHIPS, PARTNERSHIPS, ACQUISITIONS, OHH MY!
Jason P. Wood, Esq. and Patrick J. Wood, Esq.
As you walk off of the stage, your hand still clutching the document which you have spent your entire adult life persevering for, it hits you, causing you to freeze. You look around and the same blank expressions emanate from your fellow graduates: “Now what?”
In far too many dental schools across America the “after life” is not discussed, or is rushed through because of other curriculum requirements. This is unfortunate because far too many of your colleagues make egregious mistakes that derail the full potential of their career simply because they didn’t know better. This article provides information that will allow you to avoid pitfalls during your career, whether in an associate position, entering into a partnership or acquiring a practice. Since The New Dentist is geared towards recent graduates through the initial ten years of one’s career, we will be biased in our analysis of such career stages.
In a perfect world, you wouldn’t desperately need a job as a dentist to pay off your massive student loan debt, which would afford you the ability to negotiate every provision in an associate agreement. However, chances are you are kicking yourself for ordering pizza for the last 3-4 years because “my loans can pay for it”. Therefore, we need to focus on a few main points:
Compensation. Many owners will attempt to negatively impact your compensation in two main ways. First, they will make you an “independent contractor” rather than an “employee”. This impacts you negatively because you do not get to participate in any employee benefit programs (ie, health benefits, 401k) and you pay more in taxes because you will pay a “self employment” tax. Secondly, owners will try to compensate you based upon “collections” rather than your “production”. The problem with this is you are now bound to how good the office is at collecting money from patients, something that you have no control over!
Restrictive Covenants. In some states, covenants not to compete are unenforceable against associates after the contract has been terminated; however, in all states they are enforceable during the duration of the contract. If you plan on staying in the area and you live in a state which allows covenants not to compete against associates after the contract is terminated, then focus on either the radius restriction or the duration of time, but not both.
Potential Buy-in. This must be negotiated in connection with the associate agreement, not after you have been there for a year! Your right to acquire needs to be addressed in the document, otherwise it is merely an idea. The formula for the buy-in should be clearly spelled out in the document so there is no confusion later, and, if possible the purchase agreement and partnership agreement should be agreed upon as well.
Far too many companies nationwide have gotten on the partnership bandwagon. Due to the complexity of a partnership, many companies have successfully created a “perception of value” seemingly based upon the more confusion they can create! The problem with this approach is that it interferes with the proper formation of the partnership structure. A partnership strategy is not complex, it is simply two parties coming together to allow for a greater return for each individual doctor. The complexity lies in whether or not these two parties are compatible, both in their personal lives and their professional ones. Just because one doctor wants to spend more time with her children does not mean they are a good fit for a partnership! Questions involving patient care, treatment philosophy, career goals, family stability, whether or not there has been a previous divorce, future children, retirement, etc. all need to be addressed prior to the parties even contemplating forming a partnership. Even once the parties are compatible, the partnership document itself must fit the unique nature, set of skills and personality of the practice. Questions regarding new patients, compensation structures, discrepancies in production figures as well as a myriad of other questions need to go into the proper formation of a partnership structure. In short, no two partnerships should be alike.
Also, the doctor who is buying in should not have to wait 3-5 years to move forward with the acquisition of the partnership interest, a model used by some companies. This unjustifiably places the young doctor in a position where they can be terminated at the very moment they are to buy into the practice. If you have met with this model you must secure your future by locking in your right to acquire the practice in 3-5 years, otherwise there is an actual economic benefit to the owner doctor to terminate you the closer you get to actually acquiring the partnership interest. The practice value is typically determined prior to the associate’s compensation being added to the practice. As such, as you approach your acquisition, the practice may have increased 50-100% in production. But, in the owner’s eyes, the practice is now selling for less than what it is worth. Because of this, many transactions typically are terminated during the year the associate was supposed to become an owner.
First and foremost, be objective when evaluating a practice that you are thinking of acquiring. If you become emotionally attached to a practice, you will find yourself making decisions based upon emotions, rather than logic. Be methodical in your approach. Our firm typically recommends staying away from seller’s who are attempting to sell their practices on their own for three reasons: 1) owners are unrealistic about what their practice is worth, 2) there is a much higher cost associated with a for-sale-by-owner (FSBO) transaction, and 3) the likelihood of the transaction falling apart is much greater in FSBO transactions. As such, we recommend looking at practices that are being sold by reputable dental brokers, with extensive experience in the local marketplace. However, as the buyer, you must always remember that the broker’s true client is the seller, not you, even with companies claiming to provide “dual agency”. The following is a quick checklist of some of the things to be prepared for when acquiring a dental practice:
PRACTICE PRODUCTION. If your personal monthly expenses are relatively high, you cannot search for a small practice with “room to grow”. You need to find a practice that will allow you to pay your practice expenses, service your debt and still provide you with enough money to pay your monthly expenses and save. Do not focus on the purchase price or the monthly loan amount when searching for practices, instead focus on the profitability and the salary you should receive after you pay your bills. Does this practice provide you with income needed to match your lifestyle?
DENTAL PROCEDURES. Are you skilled in the procedures performed by the owner at the practice? If not, this practice is not for you. Our most successful clients find a practice where they can do all of the procedures the current owner does but also have additional training to provide added services to the dental practice, thus allowing the buyer to increase the per patient revenue of the practice.
LEASE. Far too many dentists never have their lease reviewed by a dental attorney. As such, there are far too many provisions lurking in a “standard” lease which can be utilized against the future saleability/transferability of the dental practice you are attempting to acquire. Deal with these issues prior to you acquiring the practice, rather than subsequent to it. That way, the owner’s problem will not become yours.
PRACTICE SYSTEMS. Invest in a knowledgeable practice management consultant to evaluate the practice systems in place at the practice. These advisors can provide valuable feedback which will allow you to maximize your internal marketing, streamline your practice procedures and increase the productivity of your employees. They can also let you know if your philosophy matches the philosophy of the owner’s, thus preventing a patient exodus after you acquire the dental practice.
PURCHASE AGREEMENT. As shocking as this may sound, your colleagues do not always have your best interest at heart. As such, you need to protect yourself and the investment you are about to make with a strong, enforceable purchase agreement. You need multiple restrictive covenants which prevent the owner from raiding your patients and employees as well as protecting you from the owner competing against you. You need a myriad of representations and warranties which the owner must stand behind, such as: did the owner waive co-payments? Has the owner accelerated treatment prior to the closing date? Provisions regarding retreatment work and uncompleted dental work need to be properly addressed to avoid patient confusion and frustration after the sale. All of these issues, as well as a host of others, are what protect you from being sold something that isn’t true.
As you can see, your career will not just be about the clinical decisions you make. The milestones of your career will be in areas which, as a profession, dentists have been ill equipped for and there are a multitude of people who are trying to take advantage of this. Be prepared for each stage in your career and this will allow you to focus on what you have been trained for, rather then being involved in legal and personal quagmires which can derail your career.
Jason P. Wood, B.A., J.D. and Patrick J. Wood, B.A., J.D.
Jason is partner in the law firm of Wood & Delgado, and Patrick is the founder and senior partner of Wood & Delgado, a law firm which specializes in representing dentists for their business transaction needs. Wood & Delgado represent dentists nationally and can be reached at (800) 499-1474, www.dentalattorneys.com or by email at email@example.com or firstname.lastname@example.org.