How to Handle a Partner Exiting the Practice Before You
According to the ADA1, 91% of practicing dentists were in ownership positions and 67% of those were solo practitioners in 1991. By 2012 there was a shift away from solo practice ownership – 84.8% of practicing dentists were in ownership positions with 57.5% of them in solo practices. Why the shift? There are a number of reasons for the rise of partnerships and group dental practices – rising costs, better unit economics, PPOs and dental school loan debt. Solo practitioners can exit and transition a practice fairly easy. Exiting a partnership practice can present some complications if you aren’t well prepared and aware of potential issues upfront.
Successful Partnership Transitions
Say your partner wants to retire while you want to continue working. This can create a number of issues that a solo practitioner would never face. For instance –
- How do you value each partner’s portion of the practice?
- Does that valuation change if the partner wants to scale back their production prior to retiring?
- How do you sell a portion of a practice?
First off – dissolving or changing your partnership is partially determined by how the practice was initially structured. If the practice operates as two separate companies only sharing expenses – congratulations you’re in a very good position for a fairly uncomplicated transition. If you didn’t establish your practice partnership this way – you’re not alone. Most dentists establish their practice partnerships either from the start or when a younger partner buys into the practice. In either case, the practice transition must be determined by establishing a fair valuation that all parties can agree upon.
#1 – Establish Practice Value
The valuation formula for dental practices is based on the entire practice. Even practices that operate as two separate businesses (only sharing space & expenses) will be valued as one entity. That’s because shared expenses are rarely completely separate. The value of any business is typically based on cash flow, the risk of investment and return on investment for the buyer. Dental practice valuations are no different. However partnership valuations tend to increase because there’s a lower risk due to a more consistent cash flow and shared expenses. It’s important to note – most often the value of a partnership practice is greater as a whole than as two separate practices.
There are three primary dental practice valuation methods:
- Income Based
- Market Based
- Net Asset
To learn more about each method and how they differ, checkout our blog article – A Dentist’s Practical Guide to Dental Practice Valuation Methods. Establishing the value of a partnership is done the same as a solo practice because it must be viewed as one entity. Dental practice brokers or an accountant should be able to help you derive the fair market value of your practice.
Once you know the value of the entire practice – you’ll need to determine each partner’s share of value. This is where the initial partnership structure/agreement comes into play. It’s important all partners are in agreement and have it in writing. Many partnership sales have been derailed because the partners could not agree on the allocation of shares or proceeds.
#2 – Determine How Your Partnership Transition Will Work
It’s important to structure any partnership transition to fit each partner’s needs. Be sure to clearly understand the exiting partner’s expectations and retirement timeline. There are three common ways partners can exit and transition their practice shares –
- Cash-out & continue practicing as an associate
- Cash-out & scale back schedule until retirement
- Cash-out & retire
If a partner wants to scale back their schedule or retire, you need to maintain practice production otherwise the value of your dental practice will quickly decline. When taking on a new partner who assumed debt to buy into the practice – maintaining production becomes that much more important!
#3 – Know Your Options
Once you know the practice valuation and your exiting partner’s goals, you can then determine the best transition strategy. Here are several partnership transition options.
If the practice has associates to take-up production, this provides an ideal situation for the remaining partner(s) to buy-out the exiting partner. In most cases, banks will finance a partner buy-out because there’s a clear record of cash flow. It’s also the best way for the exiting partner to scale back their schedule and ease out of the practice (as long as there are associates to pick-up production).
Associate Partnership Buy-In
In an ideal world you’ll have an associate ready to buy into the practice. Most dentists prefer this time-tested model. That said, complications can happen. With any type of associate partnership buy-in, be sure to think through –
- How new associate will replace exiting partner’s production to maintain practice value & cash flow
- How to successfully transition the exiting partner’s patients during scaled back schedule or gradual retirement. When a partner immediately retires, it prevents the new associate from working together and transitioning his/her patients.
- Will the entire partnership (or remaining partner) provide financing to the new associate? If so, will there be a bank loan? Note – most banks will not finance a portion of a practice sale. If a bank does provide financing, it requires all partners to sign the loan agreement.
Partial Practice Direct Sale
Selling one partner’s share of a partnership to a third party is usually where problems occur. It’s complicated by many factors – the biggest one being most banks won’t finance partial practice buy-ins unless all partners sign the loan agreement. This also puts more risk on the remaining partner(s) with no additional return on their investment. Additionally this type of transition becomes an arranged marriage for dentists. Do so carefully and make sure you really know the new partner. Remember – you’re going to be working together 30+ hours a week for many years to come.
Entire Practice Direct Sale
There are times when partners cannot agree on any terms and decide to sell the practice. In hindsight, this might be a great opportunity for everyone. When selling the entire practice, the new owner brings on new dentists to take-over production over a gradual, agreed upon timeframe. This allows all partners to gracefully exit the practice. If the new owner is a group practice, financing the deal is usually easy – which in turn doesn’t require any loans/financing from the remaining partners in the practice.
Dental Service Organizations
Dental Service Organizations (DSOs) are a growing buyer segment in the dental industry. Why? Because top-tier DSOs know how to efficiently & effectively operate as large group practices. DSOs are able to provide flexibility in deal structures that most individual buyers cannot. In many cases, DSOs can structure partnership transitions whereby one-partner exits while the other partner(s) continue to practice and maintain their equity and cash flow.
Partnerships are Great!
Partnerships can create some of the most rewarding and lucrative practice business models in dentistry. But along with the good comes the eventual need for those partnerships to evolve and change. With careful planning and upfront partnership structure, all partners should be able to have long careers and successful transitions out of the practice when it’s time for retirement.
If you, or your partner, are thinking about an exit strategy, look no further than Benevis. Benevis has extensive experience working with and structuring successful partnership transitions. We are the only DSO that customizes terms based on your needs and works with you throughout the entire process of selling and transitioning a practice. Give us a call – (844) 879-0087 or email – email@example.com to learn how Benevis structures equitable & successful partnership transitions.
1 Guay, A., D.M.D., Warren, M., M.A., Starkel, R., M.A., & Vujicic, M., Ph.D. (2014, February). A Proposed Classification of Dental Group Practices. Retrieved August, 2016, from http://www.ada.org/~/media/ADA/Science and Research/HPI/Files/HPIBrief_0214_2.ashx