Bruce Bryen, CPA. Managing Partner The Snyder Group, LLC Printer Friendly Version

Evaluating Dental Practices: The Purpose of Ownership Agreements

A common goal in the financial success of a dentist is the evolution from dental school graduate to associate to owner. As an owner, the growth of the practice and professional achievements are areas to feel good about. When the practice grows, there comes a time when a partner may be added because of the saturation level of the practice and its opportunity for expansion. This stage in the dentist’s career is a turning point that will substantially improve his or her economic position or will create a set-back due to lack of attention to detail in arranging those agreements needed to protect the dentist against potential problems with a partner.

What steps should be taken to prepare the agreement?

Before a partnership begins, a necessary step is to have an effective, executed contract that lists the areas that have been discussed by the owner and the potential partner. The agreement should encompass points such as deferred and non-deferred compensation, the price of the acquisition and the terms of payment, restrictive covenants and other salient concepts regarding the ownership arrangement. It is important that advisors with expertise in the representation of dentists be retained to expedite the process. For example, the compensation package should account for current salary, retirement and fringe benefits. An advisor without experience with dentists may be unfamiliar with compensation based on a percentage of collected production. Earnings based on hours worked or an ownership formula will probably not be a good idea as time passes. A good producer may work fewer hours and create more income for the practice because of higher end cases. Earnings based on an ownership percentage do not reward someone for production. Another example for someone experienced in providing financial advice to a dentist concerns a purchase price for a practice and the terms of the acquisition. Will the payment be based on a pretax or after tax approach? Does the advisor understand restrictive covenants? Is there a provision in the agreement to buy out the restriction for an agreed upon price so that the partnership can terminate without the need for litigation?

The need for a fully executed agreement

When preparing the agreement, it is important to remember that when everyone gets along on a day to day basis, a contract is probably not that important. When there is a disagreement about a decision, the need for a fully executed well thought out document increases; and this is when the need for the agreement is essential. This is the time that the parties will be glad they hired an advisor with expertise in working with dentists and not someone with a strong background working with manufacturers or other professional fields not related to the unique qualities that dentists possess. A properly prepared agreement can save tens of thousands of dollars in legal and expert witness fees in the event of a lawsuit.

Retain the right advisors

Get referrals from colleagues who have had experience and success with advisors who have assisted them and who know the specialists. Accountants with few dentists as clients, as an example, may not have the expertise in your field. Get their resumes. Find out if they have published articles regarding your concerns. Find out how many dental practices they have evaluated. Have they assisted in the design of ownership agreements? A CPA with experience assisting dentists is an excellent source to head the team of advisors to help in preparing the ownership agreement that will ensure a safe environment in the event of a problem. That CPA will know the correct attorney who can prepare the agreement and will have a large degree of input regarding the business aspects of the ownership agreement. The termination of the partnership and continuation of the practice without interruption is the key to success in the preparation of the agreement.

The end is the beginning

Preparing the ownership agreement based upon the termination of the practice and working backwards towards the successful operation of the practice will provide the best method for the draft of the contract. What will occur if the partners do not get along and wish to discontinue the partnership? If the agreement encompasses the terms of dissolution so that the practice can continue and patients have little interruption in service, your advisors have accomplished the goal of a successful ownership agreement.

Bruce Bryen, CPA has successfully assisted dentists with their personal and financial matters for more than thirty years. As a partner in The Snyder Group, he delivers creative and prudent financial strategies to help dentists build and protect wealth at every stage of their careers. His extensive expertise includes financing, debt restructuring, retirement planning and tax advising to help dentists keep more of what they earn. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness.

If you would like additional help or are interested in having Bruce Bryen speak to your dental society or study club, he can be reached at bruce@thedentistsnetwork.net  or at 1-800-988-5674.

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