Key Points to Consider When Forming a Partnership
By Thomas L. Snyder, DMD, MBA, Director Henry Schein Professional Practice Transitions
There is a growing trend for doctors to form partnerships, as over 40% of dentists are practicing in two-doctor or more relationships. Many doctors, however, still feel that partnerships will not last – but that concern is not necessarily true. Partnership failures are often related to inadequate planning or failure to consider all those key issues that can make or break a successful partnership. Here are a few key points that must be thoroughly discussed and reviewed to increase the probability for a successful partnership.
Historically, many dental partnerships were structured as general partnerships. In this model partners shared compensation equally, regardless of clinical performance. In today’s world, that model does not work. There are numerous ways to share partner income. The most important consideration is for partners to share all or a portion of their income based on their relative clinical production. For example, consider paying each partner a commission based on a percentage of clinical collected production minus lab/implant supply expenses. The balance of available partner compensation, after the production related payment, can be shared based on each partner’s ownership percentage or the relative clinical production percentage of each partner.
Another partner income approach considers the allocation of certain operating expenses to each partner on their personal clinical production ratios and with certain expenses being allocated directly to each partner. The bottom line in compensating partners is that any income sharing formula has to be fair.
Both parties need to critically assess their overall personal financial plan and goals to determine an age for relinquishing their ownership. Many doctors consider the ages between 70 and 75 as a mandatory retirement age. However, in partnerships involving partners in their 30s and 40s, we see a trend of 60 to 65 years of age as a retirement age target.
Establishing Minimum Days
A partner’s health issue may result in a reduction of work days for a lengthy time period. Conversely, based on a partner’s personal financial situation it may create a scenario where a partner is financially comfortable and desires to work less. Too much time away from the practice, however, can have a deleterious effect on the sustaining partner(s), with them feeling overworked and perhaps being taken advantage of. One consideration is to require a minimum number of days and/or hours annually that must be maintained by each partner for them to retain their partnership ownership status. Another alternative to minimum number of days is to establish minimum production goals for each partner to sustain.
One reason for becoming a partner is to enjoy a long term relationship with the other partner(s). If a partner decides to leave prematurely, that individual should not expect to receive full value for their partnership interest. Hence, consider assessing a reduction on that departing partner’s goodwill. For example, if the mandatory retirement age is 65, and if a partner leaves at age 55, the discount on that partner’s goodwill should be significantly higher than if a partner decides to leave at age 60.
Not all partners share management responsibilities equally – in fact, some partners have no interest in managing the practice but merely want to perform only on a clinical level. Oftentimes, the partner who manages the practice is probably spending considerable “non-chair” time dealing with the business aspects of the practice. It is appropriate for that partner to be compensated accordingly. Compensation can be made via paying a fixed monthly amount or payment of a small percentage of practice profit or revenue. This payment should be considered an operating expense of the practice and have no ties to any ownership or production compensation.
Retirement of Partner
In most two-doctor partnerships, this can become a big issue! Should the junior partner be required to buy out the senior partner? If so, there should be a formula written in the partnership agreement that calculates the percentage of goodwill value that a retiring partner is entitled to. If this is a 50/50 partnership and the retiring partner is not generating the same percentage of clinical production, then that departing partner should not be entitled to 50% of the available goodwill in the partnership. Rather, the relative clinical production ratio for that retiring partner is a fair way to calculate their goodwill percentage. For example, if the ratio was 45% for the retiring partner, then 45% of the available goodwill is what should be paid.
In summary, looking at as many options that may occur in your partnership is well worth the effort at the beginning of your relationship.
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