Thomas L. Snyder, DMD, MBA Managing Partner The Snyder Group, LLC Printer Friendly Version

An Alternative to Forming a Partnership

I’ve often been asked the question, by successful solo practitioners who are still in the early stages of their careers, whether or not they should form a partnership with their associate. I am sure you’ve heard stories that partnerships have a high failure rate. That may be true to an extent. However, no research has been conducted, to my knowledge, to document partnership failure rates. One can only assume that if you form a partnership and continue practicing for 20 to 25 more years, a true co-ownership relationship may encounter some problems along the way. Most successful practitioners desire to maintain control, so why risk their success in sharing ownership with someone else. If control is paramount and maintaining your personal and financial flexibility is key, then you may want to consider an alternative strategy. 

The alternative is forming a solo-group relationship. Typically, several business entities are formed in this model. If you’ve had an associate working in your practice for a few years, rather than offering the traditional partnership buy-in, consider this approach. If you are a sole proprietor, the first thing you need to do is to form a new business entity such as an LLC/LLP, or PC. 

Your associate candidate, in turn, will form his/her own business entity. A third entity (facility sharing entity) is then formed that will employ your staff, collect all fees, and pay certain operating expenses. After these predetermined operating expenses are paid by this entity, the respective net income for each doctor flows to your respective business entities. This third entity can be an LLC or PC, as well.

Valuing the Associate’s Patient List
For those practices that have been employing an associate, one way to value the patients they will purchase is determined by applying a multiple of the last 12 month’s associate collections. Other formal valuation methods may be applied as well. This patient list is the goodwill payment to the owner for the associate’s patient base.

Purchasing/Leasing Tangible Assets
Based on the personal financial situation of the owner, the owner can sell an undivided interest in the practice’s tangible assets, or the associate can lease the half or a pro-rata share of the tangible assets. Appropriate contracts must be prepared, such as an Asset Purchase Agreement, Promissory Note, or in cases of leasing, an Equipment Lease Agreement. If the host doctor owns the facility, a Security Agreement may also be in order.

Staff Issues
All staff will be employed by the Facility Sharing entity.  Typically, staff costs will be allocated based on time spent with each member’s practice. Fringe benefits are also included. Health insurance and, most importantly, pension plans fall under certain state/federal requirements - especially if the employee works more than 1,000 hours a year in both practices. So you need to be very careful if either member has a different pension plan, for example.

Dental Supplies and Lab Expenses
In many facility sharing arrangements, dental supplies and lab expenses are paid directly by each solo-group member. Sometimes, pro-rated formulas on clinical production by provider can be used to allocate supply costs. A pro-rata approach becomes less feasible if one member is placing implants and doing ortho.

Facility Sharing Arrangement
A Facility Sharing Agreement between both members’ entities needs to be prepared. If you own the facility, a lease must also be prepared between your real estate entity and the facility sharing entity. If you are a tenant, you’ll need to negotiate a new lease with the landlord to include the other solo-group member on the lease. Some of the items to include in your agreement should be:

• Facility management and decision making
• Division of certain facility related expenses
• Facility repairs and maintenance
• Sharing of certain staff members as well as respected payment of staff compensation, including fringe benefits and retirement plan  
• Use of telephone lines
• Termination provisions

Death and Disability
Cross Purchase Agreements between the members need to be included in your Facility Sharing Agreement in the unlikely event of death or disability. Specific formula for valuing the Intangible Assets of each entity should be prepared as well as a mechanism to determine the Fair Market Value of each respective partners’ Tangible Assets.

Buyout Clauses
Part of the proper transition planning for the “host” doctor is whether or not there will be a mandatory buyout upon retirement. This issue has been a major problem in many “true” partnerships, as the younger partner often refrains from a buyout, not wishing to incur more debt, or doesn’t need the other half of the practice to be successful. The solo group model affords more flexibility in succession planning in the sense that you can recruit a third party to purchase “your interest’ in the solo-group. The successor would then abide by the terms and conditions in the Facility Sharing Agreement.

In summary, solo-groups are viable alternatives for young practitioners who are uncertain about successfully co-owning their practice for 20 to 25 years.

If you would like additional help, email Dr. Snyder at drsnyder@thedentistsnetwork.net.

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