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Issue #46 - 5.27.08
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An Alternative to a Partnership Arrangement
It has often been said that many dental partnerships do not survive. Although there is no hard research to support this statement, you probably know of a dental partnership that has failed. Of course, many partnerships do quite well; their success is attributable to well-designed agreements incorporating “win-win” compensation arrangements and a well-planned exit strategy for the retiring partner that assures a fair buy out at the end. Conversely, partnerships that have been established for many years sometimes run the risk of failure due to changes in the goals and objectives of individual partners resulting from financial problems or personal matters.
In our experience, we have found that partnerships that fail usually have no written agreements to address the many components that need to be considered to function properly. If you are contemplating a long-term partnership and if you are concerned about future problems surfacing in your new relationship, you may want to consider an entity that maintains your independence. That entity is called a Solo-Group.
Establishing a Solo-Group
If, for example, your associate has been employed for several years, he/she can purchase the list of patients that have been assigned to the associate. Valuation methods vary. One approach uses a multiple of associate gross revenue to calculate the value of the patient list. Another method determines a per-record acquisition cost. If you are selling an interest in the practice’s tangible assets and if it is decided that there will essentially be an equal utilization of practice assets, you would sell 50% of the fair market value of all tangible assets. The associate will then have an undivided interest in the tangible assets of the practice.
Tax-Planning Advantages
In a solo-group, there are often advantages for creative and flexible tax planning. The associate will establish his/her own business entity: either an LLC or a professional corporation. If one partner wishes to purchase an equipment item that the other doctor has no interest in using, it’s up to the first doctor to finance it and gain the tax benefits as well. All direct expenses such as lab, dental and office supplies are paid by each entity. Shared expenses such as rent, utilities and common equipment leases are paid equally.
Staffing
Staffing is the major issue that needs to be carefully addressed when forming a solo-group. Often a third entity is formed and sometimes becomes the employer of all staff. A management company would be formed as the third entity. Staff would be paid by that entity. In this particular case, it is assumed that many staff members would be shared in varying proportions by both businesses. In some solo-group practices, a management company may not be established and staffs are paid by each entity. The real problem occurs when staff members are shared by both parties. If each entity employs the same staff, the employee will receive two W-2 statements, which can become cumbersome and expensive with double payroll tax costs for each staff member. Heath insurance and retirement plans complicate the situation if each entity has a different plan. It is critical to consult your accountant or tax advisor to avoid violation of any state or federal statutes that apply to these fringe benefits.
Transition Planning
Sometimes solo-groups can be as difficult to transition as true partnerships. Receiving fair market value for a retiring doctor’s entity can be a challenge. A potential purchaser has to accept the rules and regulations of the existing office-sharing arrangement as well as accept the personality of the other solo-group member. In the end, solo-groups make sense in certain cases, particularly where there may be a long-term relationship. Relative independence, which most dentists prefer, is preserved to a greater degree in a solo-group versus in a partnership where decision-making is always bound by two or more parties. Professional advice, as always, is required to determine the best path to take in the transition planning process.
Dr. Thomas L. Snyder is Managing Partner of the Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With more than 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can be reached directly at 800.988.5674.
If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.
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