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Partnership Buy-in |
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Strategies for Partnership
Buy-in
Many practitioners who have built successful practices in their mid careers need associates. After several years of employment a common strategy to take is to offer your associate the opportunity to become a partner. This is typically the beginning of a two-step process toward your retirement. The partnership typically lasts anywhere from seven to fifteen years with an eventual buy-out of your remaining half of the partnership interest.
Once the purchase price has been decided, the next and most important step is to determine how the funds will be paid to the “senior” partner. There is more than one way to structure a buy-in. If not properly designed, the buy-in can become a very costly venture for the associate. Let’s examine several different buy-in strategies.
1) Cash Buy-in. Based on the financial needs of the host doctor, the associate can pay for the partnership interest in cash. This is typically funded by a bank loan. The practice’s assets are used as collateral and often times the senior partner co-signs the note. The senior partner gets the cash and after taxes, can invest the proceeds. This provides an immediate return on investment. In this instance, if the entire partnership interest was paid, the Junior Partner immediately receives all rights and privileges of ownership. A potential downside for the associate may be the manner in which the transaction was structured, from a tax point of view. If, for example, the associate purchases stock in the professional C Corporation, this transaction will be very tax inefficient for the associate and maximally tax efficient for the senior partner. The senior partner receives capital gains treatment on the sale of the stock and the associate will get no write off since he/she purchased stock. Therefore, the after-tax consequences can be severe based upon the personal income tax bracket of the associate and also the state in which the transaction occurs. This could mean that the junior partner may have to earn 40-45% more income to pay for the buy-in since payments are made in after tax dollars.
2) Senior Partner Loan. Another approach to providing funding allows the senior partner to provide a loan to the associate for a buy-in over a period of years. Historically, Senior Partners would function as a bank, charging an interest rate and receiving principal and interest payments. A potential downside for the Senior Partner is giving the new partner 50% of the profits before they have paid their full share for that interest. Often times in this scenario, the senior partner really sees no appreciable growth in income, rather just the opposite! The senior partner is sometimes getting paid back with the very profits he/she just gave the new partner via a loan funding the entire partnership interest!
We suggest a more conservative approach funding a 50% buy-in over a five to seven year period. In essence, you purchase what you can afford. This approach works with younger associates who want the security of becoming a partner but are financially unable to handle a 50% cash buy-in or who are still growing in their annual clinical production. For example, 10% of interest is offered annually for five years. Each year the associate receives an additional 10% ownership interest. In this approach, the junior partner takes no financial risk and just receives the benefit of partnership interest through Seller financing. The junior partner gets limited deductibility for a seller loan as principal is not deductible. However, if the seller accepts the allocation as goodwill, the junior partner will be able to write off that portion allocated over a 15-year period.
3) Management Fee. Another strategy, which really benefits the associate, is having a portion of the buy-in paid through a management fee. This approach allows for an income transfer enabling the associate to pay for a majority of the ownership interest in “pretax” dollars. Effectively, pretax dollars allows for a reduction in income with the income differential going to the senior partner. However, the management fee is considered as ordinary income and taxed accordingly. The senior partner receives considerably less from the sale of ownership interest than if it were structured as a capital gain. The approach to “soften the blow” of ordinary income tax is to calculate the differential between the capital gains rate and the seller’s personal income tax rate and increase the payment to the seller for that differential. This charge is a consideration to allow the selling doctor to have additional funds to pay the taxes due as ordinary income. This still is a more effective approach than having the associate pay for this transaction in after-tax dollars.
4) Qualified Pension Plan. The most innovative and tax efficient approach to structuring a buy-in for both parties is to use a qualified pension plan for a buy-in strategy. First, you need to conduct a pension study to determine the most effective pension plan that will factor in staff and doctor age and income. The junior partner’s buy in is the pension plan contribution over a specified time frame. Since a dental practice can have more than one pension plan, your current plan may still be maintained with an additional pension plan or perhaps a complete plan redesign. Be advised that all “qualified” pension plans are termed “qualified” because they are approved by the Internal Revenue Service. This is again a tremendous benefit for a junior partner since he/she can pay their ownership interest in pretax dollars. A significant benefit for the senior partner, if funds are not current ly needed, is to allow the buy in proceeds to accumulate on a tax-deferred basis in the pension plan with no taxable event occurring until retirement or the age of 70 ½! Of course, there is always the risk of paying higher taxes in the future, but to allow your buy-in proceeds to grow in a tax sheltered mode is the most efficient way to get a return on investment for selling an interest in your practice. As always, when these transactions are structured, appropriate tax and accounting advice is required. We recommend using advisors who have worked with other dental professionals in this fashion. For more information on how you may benefit from the tax advantaged buy-ins, please contact Snyder Group partner, Mr. Bruce Bryen, CPA. Call 800-988-5674, extension 112.
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Questions regarding Partnerships? Email Dr. Snyder at Drsnyder@thedentistsnetwork.net.
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VOIP Phone Technology
The dental marketing world has changed dramatically thanks to a powerful new technology called VOIP phone service. The acronym VOIP stands for “Voice Over Internet Protocol” but in a nutshell it is just telephone service using an internet connection in place of the standard phone lines we have had for decades. Several companies such as Vonage have made telephone service available using a standard high speed internet connection, allowing consumers to completely shut off their existing telephone service. About a year ago I switched to Vonage and instead of paying upwards of $100 per month, I now pay a fixed $20 per month regardless of the number of calls I make or whether the calls are local or long distance. Sometimes the quality isn’t perfect and sometimes the service isn’t available because if your internet connection goes down so does your phone service. Some businesses have completely switched over to VOIP phone service and save thousands of dollars every month in long distance expenses.
Now let me cut to the chase and tell you how this technology has revolutionized dental marketing. One of the advantages of VOIP phone service is that all inbound phone calls can be tracked at a website provided by the VOIP service company. In many cases the level of data that is provided for each caller is absolutely amazing. With the service that my company currently recommends to dental practices, the name of the caller, their address, a Google map, demographic information, call time and call length are all available to review in real time. The system we recommend even captures an MP3 recording of every call in its entirety! Imagine being able to listen to every marketing call made to your practice from any advertising effort and being able to actually listen to how your office team handled the call!
It is important to understand that VOIP service requires a practice to “rent” one or more new telephone numbers. These numbers are usually only used within the confines of marketing efforts and are local numbers with the same area code and prefix that is already used in that area. This new telephone number is automatically forwarded to the existing phone system and doesn’t require any changes to be made to the phone service. For example, an office may assign a new phone number to be used as the contact number on the direct mail postcard, as well as in the yellow page ad and at the website. The reason for the new number is to be able to track the unique calls that come into the practice as a result of any marketing efforts. Existing patients will continue to use the phone number already in place.
When a call comes in to a dental office from the new marketing number, the person answering the phone hears an announcement that the call is indeed a marketing call. This is called the “whisper feature” and it allows the person taking the call, to gather their thoughts and quickly prepare themselves for the ever-important marketing call. After the call is completed, all of the caller information already outlined can be accessed online immediately.
The list of benefits from this amazing technology are as follows:
- Being able to track each and every call made as a result of investment in advertising efforts. Never has call tracking been so easy and so accurate.
- The ability to carefully analyze the day of the week and time of the day that marketing calls happen. Often dentists are surprised to see how many calls go unanswered because the office hours of the practice don’t coincide with consumers’ calling habits. When calls are missed the data provided for each caller allows for a follow-up call to be made to the prospective patient.
- Being able to carefully review the way calls are handled by every team member and to hear how the caller’s questions and concerns are handled. Many dentists have been shocked after being able to witness first-hand the lack of skill and phone etiquette displayed by their office staff.
- Having the whisper feature notify the person answering the phone that a marketing call is coming through.
- Having access to valuable demographic information from each caller to help practices determine if their marketing message is attracting the appropriate patient type for the practice.
In my opinion VOIP phone technology has already revolutionized the way dental marketing will be executed, tracked and analyzed. Any practice that is investing important dollars in a marketing campaign should carefully consider the value and benefit of finally being able to track without question the results of their marketing efforts.
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To reach Joel Harris Email him at Joel@thedentistsnetwork.net
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