Dental Partnership Advice

[Tooth Wizard]

Hello All - Long time reader, first time post. I know this situation is hard to explain, ill try to keep it simple.

I am currently 4 years out of residency and have been working in the same private practice since as an associate, lets call this CURRENT PRACTICE. For the past 12 months I have been in negotiations to become a 50-50 partner of the current practice with the head doc. My advisors have warned me that the deal that has been put forward/the price is 20-30% too high and is very unrealistic in terms of cash flow. The current owner is not willing to come off the price that her CPA/Retirement planner has come up with (which is around 1.3M). The owner knows that from day 1 I have been interested in owning and running my own office or with another partner. He/She is currently 55.

Fast forward to 2 weeks ago. Another very profitable practice has come up for sell in my area (a very affluent area, dental school in the area; practices like this one do not come to market often). Lets call this NEW PRACTICE. I did the legwork and had my transitions team run the numbers on the practice and it is much more attractable. They perform the same type of comprehensive dentistry, but currently do NO surgery, which is in my wheelhouse. They have entertained other offers for this practice, but want to sell to me because of my dental philosophy and personality line up with the current owner.

The dilemma: I have signed a non-compete that from what I understand is enforceable (many lawyer friends have chimed in). The agreement is a 15 mile radius and to sit out 12 months in that radius if I leave. I do not want to move cities and I do not want to sit out 12 months. I have built a significant patient base where I currently work and collect around 1.2M a year on 4 days. My current "sub-speciality" are dental implants - I've taken about every course possible and have become very efficient at placing anything from single units to full mouth reconstruction.

 

The current proposal: The head doc at my current practice does not want to see me leave (presumably because I collect ~35% of the overall collections), but claims she can not discount her current practice. She would like to be 50-50 partners on the new practice I found. She would like me to continue to work at the current practice 1 day a week performing dental implants and surgery and continuing to see the patient base I have built. I would work 3-4 days at the NEW PRACTICE, and 1 day at the CURRENT PRACTICE. She would work 2 days at the current practice, and 1 day at the new practice. The other days will be filled in by an associate that is currently at the new practice and staying on.

Pay: Currently the proposal is that each partner would be paid 35% of collections. We would split remaining profits, expenses, overhead 50-50.

 

My questions:

1) Can a 50-50 partnership work in a scenario when one partner owns another office?

2) Can a 50-50 work when one partner is working 3-4 days a week and the other is only working 1?

3) What would an agreement look like in terms of fair compensation? For example, if I am doing 80% of the hygiene checks would it be fair to split hygiene revenue down the middle?

4) Any advice would be appreciated

 

[Kamban]

Your old practice owner is shrewd and trying to screw you. Why should she become a 50-50 in your new practice and also make you work like a slave in the old practice. Never get into another agreement with her.

[Zaphod]

I wouldnt want to give up the new place at 50-50, you found it and she gets a totally asymmetric benefit from it. Harsh. There is probably some way to finagle the numbers to much more representative but I think you're in a pickle due to this non-compete. One of the reasons I like California, non competes are completely illegal and if put into a contract (mine has some) actually puts the writer at risk of liability.

You may have to swallow a bad deal to make it out of this at all but 50/50 is awful, or you are going to have to consider leaving altogether. Maybe you can at least put up a reasonable front or actual possibility of quitting, working outside the 15 mile radius all the while owning and setting up your transition to the other place 12 months later. That would be the best plan imo. She isnt devaluing her practice it simply isnt worth as much as she hopes.

If you could actually trust your current owner to have a more partner like mentality and growing the businesses for the mutual benefit of the partnership than some variation of the plan would actually be awesome, you could all the sudden be a large dental franchise...but it doesnt seem like that is the view, it seems like someone is trying to ride you for dividends.

[Bartl007]

I think your old practice owner needs a new advisor. It sounds like you're not sure of the exact amounts of overhead/collections/profits for your current practice. "Presumably because I collect ~35% of the overall collections"

 

If your serious about buying in, I would have a look at the exact dollar amounts you're bringing into the practice to get a better idea of your worth to the practice (it may be far more than she has let on). request the last 3 years of tax records, profit and loss statements, and collections by provider and any other financial records of importance (practice debt, real estate holdings, etc).

 

[Sergio Estavillo]

What's her/his production in current practice?  Reach out to Jason Wood at Wood & Delgado about the non-complete clause.

[eaglecap]

You have multiple issues at play and it quickly becomes a run-on problem.

1. You are stuck in a non-complete that prevents you from working in the area you want to live/work. You need to move and wait out the year somewhere else, or buy a practice out side your non-compete.  Either way your are leaving more and more money on the table with each day going by that you are working for someone else.  If you work for yourself based on your past production and the addition to hygiene, you should be able to run a practice that collects 1.5M annually.  If your overhead is 70% that would be 450k take home and if your overhead was 60% your take home would be 600k.

2. Your hope to buy into your current practice appears to not be on track.  However, I do not have enough information to concur with your advisers.  If you are responsible for 1.2M in production, plus her production, plus hygiene; the annual collection should be near 3M.  The purchase price is based on production and is usually 70-80% of annual collections, but in high demand areas 100% of collections is not unheard of.  The real issues is that she is not going to negotiate price because she does not have to and has no intention of retiring any time soon which is confirmed by her desire to partner with you at a new location.  If you could not conduct negotiations for a fair price to buy her practice now, this is a preview of more to come if you purchase a practice with your current employer.

3. I have a hard time seeing you get out of a non- compete in this situation, but you could give it a try.  Can you buy out your non- compete, or purchase patients that follow you to your new practice?  Can you trade working at your current practice on production placing implants one day per week in exchange for release of your non-compete which would allow you to purchase the new practice?  If you purchased a practice a few miles away you could potentially gut her practice of half her annual doctor collections. The purpose of the non-compete is to protect her from this very situation.

Unfortunately this is a difficult situation. I also agree with discussion with Jason Wood (lawyer) and Tim Lott (Dental CPA), you can find them on DentalTown if you have not yet heard of them.

[pulmdoc]

1) Current owner is ACTIVELY trying to screw you. Practice valuations generally consist of hard assets (buildings, equipment etc), accounts receivable and then a fuzzy "goodwill/name recognition" part. 1.3M for 50% of a (3 person) dental practice seems extremely exorbitant, unless the practice owns (not rents) multiple buildings in a high-cost area. The fact that you are still "negotiating" 12 months out tells me that current owner has 0 interest in making you a partner but is trying to string you along as far as they can. In addition to that, she wants you to be a 50/50 partner in a new practice while you work full time including doing surgery while she works 3 days a week!

2) Restrictive covenants are guided by state law, so you will need a lawyer to guide you on what is allowable and what is not. Many times, they are limited to the length of the original contract. If you have been negotiating partnership for the past 12 months, I am betting your associate contract is up or almost up. Hopefully you have all the original documents you signed when you joined to review.

3) Even if your lawyer tells you that the restrictive covenant clause in your contract is enforceable, it does NOT prevent you from leaving and buying the new practice. Instead, either there are specific financial remedies spelled out in the contract for violating restrictive covenant, or current owner would have to sue you to try and recover damages. Depending on your current income vs projected cashflow, it may be advantageous to leave, even if you end up losing a lawsuit because of increased earnings. Also, if you focus your practice on something current owner doesn't do (eg implants) it would be an uphill slog for current owner to prove injury.

I am obviously of the opinion that you should leave your current practice ASAP. Current owner is negotiating in bad faith, and the sooner you remove yourself from the situation the better. Even if she backs down and gives you a better counter-offer, I still think you should leave. Why? Because she has made it clear that she sees you as a cash cow to be exploited, not as a business partner to share growth with. The next time an opportunity arises to screw you over, you can bet she will take it. Save yourself the heartache and don't look back.

[Zaphod]

pulmdoc wrote:

1) Current owner is ACTIVELY trying to screw you. Practice valuations generally consist of hard assets (buildings, equipment etc), accounts receivable and then a fuzzy “goodwill/name recognition” part. 1.3M for 50% of a (3 person) dental practice seems extremely exorbitant, unless the practice owns (not rents) multiple buildings in a high-cost area. The fact that you are still “negotiating” 12 months out tells me that current owner has 0 interest in making you a partner but is trying to string you along as far as they can. In addition to that, she wants you to be a 50/50 partner in a new practice while you work full time including doing surgery while she works 3 days a week!

2) Restrictive covenants are guided by state law, so you will need a lawyer to guide you on what is allowable and what is not. Many times, they are limited to the length of the original contract. If you have been negotiating partnership for the past 12 months, I am betting your associate contract is up or almost up. Hopefully you have all the original documents you signed when you joined to review.

3) Even if your lawyer tells you that the restrictive covenant clause in your contract is enforceable, it does NOT prevent you from leaving and buying the new practice. Instead, either there are specific financial remedies spelled out in the contract for violating restrictive covenant, or current owner would have to sue you to try and recover damages. Depending on your current income vs projected cashflow, it may be advantageous to leave, even if you end up losing a lawsuit because of increased earnings. Also, if you focus your practice on something current owner doesn’t do (eg implants) it would be an uphill slog for current owner to prove injury.

I am obviously of the opinion that you should leave your current practice ASAP. Current owner is negotiating in bad faith, and the sooner you remove yourself from the situation the better. Even if she backs down and gives you a better counter-offer, I still think you should leave. Why? Because she has made it clear that she sees you as a cash cow to be exploited, not as a business partner to share growth with. The next time an opportunity arises to screw you over, you can bet she will take it. Save yourself the heartache and don’t look back.

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Agree with the sentiment, but probably would try to avoid litigation at all costs depending on the state. Would be more advantageous to work elsewhere as an associate for a year (if possible geographically) while buying and setting up eventual practice after 12 months. Do agree getting away will be better long term as you're definitely not in an agreeable situation.

[Hatton]

It has been my observation that practices that stay together for the long term do not "screw over" new doctors, dentists, lawyers etc.  Practices that last to be "passed down" to a younger generation just don't do this.

[pulmdoc]

Re: Buying practice and risking being sued vs commuting for a year is a risk/reward decision. Obviously the more lucrative the new practice is, the easier the decision is to risk being sued. As I pointed out in my previous post, although nobody likes being sued, it's far from automatic loss. Current partner would have to prove injury and that the contract was still in force. Focusing the new practice on procedures not performed by current partner would help, unless current partner could prove that they financially supported these procedures (eg bought new equipment) even if they couldn't do it themselves. Bottom line, a healthcare attorney can help you sort through these issues including giving a precedent-based guesstimate on financial liability if you were sued and lost.

[Rb52dds]

I'm and owner and one of my current associates wants to buy in and what you have laid out here shows a lot of the issues that come up.

In the end this is a business decision. I would not buy 50% of the new practice with the other owner... so scratch that because it just doesn't end well for you.

Good partnerships can be very profitable. You've been there for 4 years which makes me think you have similar philosophies and work well together.

The practice you are in now you have a lot of good will and know the practice. The one thing you haven't told us is the gross collections for the office you are in now. It's unfair for us to say the partnership is overpriced when we don't know the numbers. I'd be willing to pay a bit more for something I know well and won't have any patient attrition than something I'm buying from someone else and half the patients may leave.

Also profitability is often higher in a partnership due to shared overhead.... so back to the point that in the end it's a business decision... run the numbers for profitability (after debt service) and see if they are close. If so you may just want to stay put and buy 50%....it sure would avoid a lot of headache.

Hard to say how much the practice is overpriced without gross collections. In my area nice offices can sell for 80%+of gross ... I've heard of areas where it's 100%+...

[CanaDMD1]

Rb52dds wrote:

I’m and owner and one of my current associates wants to buy in and what you have laid out here shows a lot of the issues that come up.

In the end this is a business decision. I would not buy 50% of the new practice with the other owner… so scratch that because it just doesn’t end well for you.

Good partnerships can be very profitable. You’ve been there for 4 years which makes me think you have similar philosophies and work well together.

The practice you are in now you have a lot of good will and know the practice. The one thing you haven’t told us is the gross collections for the office you are in now. It’s unfair for us to say the partnership is overpriced when we don’t know the numbers. I’d be willing to pay a bit more for something I know well and won’t have any patient attrition than something I’m buying from someone else and half the patients may leave.

Also profitability is often higher in a partnership due to shared overhead…. so back to the point that in the end it’s a business decision… run the numbers for profitability (after debt service) and see if they are close. If so you may just want to stay put and buy 50%….it sure would avoid a lot of headache.

Hard to say how much the practice is overpriced without gross collections. In my area nice offices can sell for 80%+of gross … I’ve heard of areas where it’s 100%+…

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Yep. Here in Canada, many dental practices (especially in Ontario) go for much higher than 100% of gross.