How to Structure a Small Group Dental Partnership Agreement Part 1: Compensation and Distributions

By David Haynes, MBA

A dental partnership can offer numerous benefits, including shared responsibilities, combined expertise, and mutual financial growth. However, the success of any small group partnership can hinge on a well-structured agreement, especially regarding compensation, distributions and a proper buy/sell agreement. Clear guidelines and fairness in these areas can help prevent misunderstandings and promote productive working relationships. Here are a few suggestions on how to structure these elements effectively:

Owner Compensation

A simplified compensation structure can streamline financial management and reduce administrative burdens. One approach is to compensate each partner based on their individual productivity. For example, each partner could receive X percent of the collections attributable to their work. This model can incentivize productivity and helps ensure that partners are fairly compensated for their contributions.

Payment on collections may discourage some partners from treating health maintenance organization (HMO), Medicaid or insurance patients, who often reimburse at lower rates than other payors. Partners should consider whether seeing fewer HMO, Medicaid or insurance patients is acceptable. Filling vacancies with more profitable fee-for-service patients could benefit the practice financially. Small groups should have open discussions about the types of patients the practice aims to serve and how compensation models might influence these decisions.

Owner Distributions

After paying all expenses and compensating each partner according to the operating agreement, any remaining funds should be distributed to the partners based on their proportionate share of ownership.

To reduce administrative burden, distributions should occur on a periodic basis, such as quarterly. Setting a base cash amount to trigger distributions can help ensure financial stability before funds are distributed. For example, the group may agree on $100,000 as the minimum amount required before making a distribution.

Associate Compensation

Consistency in compensation models can simplify financial management and ensure fairness within the practice. In many practices, associates are paid for performance. This approach can maintain equity and make it easier to attract and retain talented associates.

Employment and Operating Agreements

Compensation should be outlined in a formal employment agreement for each partner and associate. These agreements should also outline provisions for changes in hours, share sales and forced buyouts. A required notification period, such as 12 or 24 months, can give the practice ample time to plan for adjustments and avoid disruptions if a partner wants to permanently reduce their hours or sell their shares.

A forced buyout provision could also be considered to ensure fairness and prevent partners from reducing their commitments without consequence. For example, if a partner works less than a certain number of days per week or per year, they may be required to sell their shares at a substantial discount from their proportionate share of appraised value. It’s recommended to consult with an attorney to define specific triggers and events for a forced buyout option.

Structuring a dental partnership agreement with clear guidelines on compensation is crucial for the success and harmony of the practice. At Menlo Dental Transitions, we understand the complexities involved in forming and maintaining successful dental partnership. If you’re considering a partnership, our experienced team is here to help. Contact us today to learn how our practice appraisal and transition services can help you achieve long-term growth.