How to Structure a Small Group Dental Partnership Agreement Part 2: Succession Planning

By David Haynes, MBA

Succession planning is critical for the long-term sustainability and success of any small group dental practice partnership. Without clear and agreed-upon succession plans, practices may face significant risks and uncertainties. This article will outline a few considerations and strategies for structuring a dental partnership agreement to address succession planning effectively.

Reduction in Partner Hours

The partnership agreement should outline how to handle permanent reductions in partner hours. These provisions may include a required notification period or a forced buyout.

Liquidation of Shares

One of the biggest challenges in a small group partnership is the liquidation of shares. It is often difficult to market fractional ownership in the open market, so practices should consider building a bench of associate dentists. Associates who have familiarity with the group may be more likely to proceed to partnership. This approach helps create a pool of potential buyers who are already integrated into the practice.

Growth

Partners should decide future location growth and doctor capacity. While also introducing some complexities, growth can create the need for more associates, who can become future buyers as mentioned previously.

If the practice grows in terms of location and revenue, some of succession planning challenges might become less relevant. For example, if a high-performing associate wants to become a partner but no partners are willing to sell, a group might consider diluting their ownership to accommodate a new partner.

Cash and Accounts Receivable

When succession planning, a clear policy should be established on how to handle cash and accounts receivable in the event of a transaction. Partners are often eligible for their proportionate share of cash and accounts receivable (net patient credits and work in progress) at the time of sale. This may vary depending on the operating agreement.

A suggested approach is to temporarily distribute cash down to a feasible level for a partner buy-in. For example, if the temporary cash level is set at $100,000, the outgoing partner would cash out their 25 percent share, and the incoming partner would contribute an equal amount of working capital. The account would then be grown back to its normal operating level.

Sale Proceeds

Sale proceeds should be split according to the partner’s operating agreement, assuming there have been no breaches in a partner’s contract. This can ensure fairness and clarity in the distribution of proceeds.

Some groups may want to penalize partners who have reduced their hours. However, if the partner has built up an associate to maintain overall production, they should be eligible for their full portion of the proceeds.

Share Valuation

Adopting a simplified calculation to value shares can reduce disputes and streamline the process. If a member desires to sell shares, the portion of ownership could be valued at, for example, 70 to 75 percent of the trailing 12 months’ revenue. If the partners disagree on valuation at the time of sale, a third-party appraisal can serve as a backstop. For forced buyouts due to non-participation, the percentage of sale revenue is often reduced. The goodwill allocation to the seller can also be predetermined at 80 percent, for example.

DSO Sales

Depending on the size of the practice, the highest and best valuation might involve working with a dental service organization (DSO), which can also solve partner exit liquidity issues and provide operational support. As a practice grows, fewer individual buyers may be willing and financially able to support larger purchase prices, making DSO sales an attractive option.

A well-structured dental partnership agreement that includes detailed succession planning is vital for the stability and future growth of the practice. Establishing clear policies and procedures now will help protect the practice and its partners from potential challenges and uncertainties in the future.

If you need assistance in structuring your dental partnership agreement or exploring succession planning options, the team at Menlo Dental Transitions is here to help. Contact us today to ensure your practice’s long-term success and stability.