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Issue #20 - 5.22.07
Partnership Contract Issues
More practitioners today are recruiting associates. Many are considering partnership since retirement is still many years away. Someone asked me recently, at a seminar, what percentages of partnerships succeed. Unfortunately, I don’t have a clear answer for this, since no real data has been accumulated. However, in looking at issues that we deal with on a day-to-day basis regarding partnerships, we find that we are contacted to work with partnerships that have failed. The failures, unfortunately, often relate to the fact that no partnership agreements were ever prepared. Partners working together for 20-25-30 years, and then when things go wrong, events occur that destroy life-long relationships.
Oftentimes partnership issues revolve around disability of one partner and how that partner would be bought out and what impact it may have on the practice’s future operations. It is sad to see dentists become enemies after practicing side by side for their entire career because no one took the time to really resolve how they would end their relationship, if an event such as disability were to occur. On the other hand, we have had cases where one partner decides to leave earlier than expected due to loss of interest in the profession or burnout. Agreements, again, need to address these issues, as well.
Will You Be an Equal Partner?
In speaking to dentists who desire to make their associate a partner, oftentimes the senior partner wishes to retain control, therefore requesting a partnership arrangement with the senior partner holding a 51% interest and the junior partner 49% interest. In our opinion, that sends the wrong message to the partner to be, meaning that working together as an employer-employee for several years and now becoming partners, when really there is an element of control, makes many young partners to be quite concerned.
In a legally binding partnership or corporation as a shareholder, if one has control, one has control to make all decisions, without challenge, unless agreements are put in writing to the contrary. Also, it should be remembered that if a valuation has been prepared and an equal partnership is not offered, the junior partner is entitled to a minority owner discount. This minority owner discount can vary anywhere from 15 to 30% of value, based on the amount of ownership that the senior partner retains. The larger the ownership percentage, the higher the discount. Above and beyond the minority owner interest issue is the element of control.
Allocation of Revenue
Historically, years ago, partners shared compensation equally, irregardless of effort. In today’s world, that model does not work. Income can be split based on a percentage of production and ownership as well as hygiene income. By allocating available partner profit between production and ownership, partners who work harder, spend more time in the practice, are more productive per hour, can be rewarded accordingly. Often times failed partnerships are due to the fact that the income splitting formula does not take these points into consideration, and one partner becomes jealous of the other for making the same amount of money without the same level of effort. One of the approaches that we use is to pay each partner as an associate in their own business. The percentage paid should be based on overhead, just as it would if you paid your associate. The remaining available income after the production compensation is paid to the partner, is then split, based on the percentage of ownership. This is a very straightforward method and one that acknowledges individual differences in production. Whether or not lab should be factored into the partnership equation is based upon the production profile of each partner. For example, if one partner is performing a majority of the complex restorative and cosmetic services, clearly lab expense needs to be considered just as you would with your associate. The other partner is more of a surgical partner, focusing on Endo, Perio, Oral Surgery, etc. than they would be very much in favor of an expense allocation to the other partner for lab.
Mandatory Retirement
Both parties need to critically look at their overall financial plan and goals to determine when that age will be mandatory. Most of our clients look at between 70 and 75 as a mandatory retirement age.
Establishing Minimum Days
As partners get older, obviously they may not be able to produce at the same level as they did years prior. In addition, health issues may slow them down, as well. Finally, due to their overall financial condition, they may desire to work less and can afford to do so. However, there should be a point in that partnership relationship if too much time is taken away from the practice, that can have a deleterious effect on the sustaining partner, causing him/her to feel overworked and underpaid. Therefore, we recommend that a minimum number of days and/or hours be set, that must be met by each partner, in order for them to retain their partnership status.
Minimum Production Goals
In lieu of number of days and hours, one can consider using annual production or a monthly production average as a criteria for qualification to retain partnership status. In each case, the idea is to set measurable standards where, if below those performances, an individual should not have the right to retain a partnership interest. This is particularly true if a good portion of the income is split equally. Not addressing these issues will create significant stress and lead to partnership solution issues.
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