Should I Enter Into a Dental Practice Partnership?

Of all of the practice transition strategies available to dentists today, one of the most popular is the buy-in. Buy-ins involve buying and selling interests in a dental practice. The interests may be any size - 10%, 49%, 50 % or more. Sometimes it involves selling progressive interests and other times it involves selling a remaining interest by a retiring shareholder.

While the buy-in can take different forms, such as a traditional partnership or a corporate structure, the principle is the same. A buy-in involves purchasing an undivided interest in a practice. This process converts a real tangible practice into several intangible interests. These interests are undivided and do not represent any actual assets, such as equipment or goodwill. For example, a share of Google stock is an undivided interest - it represents ownership in Google, but the bearer is not entitled to any asset such as a computer or chair.

Buy-ins have been popular and alluring, but there are downsides to the arrangement that buyers and sellers should be aware of. Think seriously about the following 4 pitfalls before you decide that a dental partnership is right for you.

Loss of control

When a shareholder has less than a majority interest, they are considered a minority shareholder. Even a 50/50 arrangement results in two minority partners, which means neither person has control of decision making or policy establishment. Important issues often reach an impasse when neither party has the final say. The ultimate resolution to these dilemmas is the dissolution of the partnership, which can be as contentious as a bitter divorce.

Loss of freedom

Smart dentists will want to own a majority interest, but this depends on another dentist being willing to be a minority interest, which is hard to find. Buying a minority interest is similar to buying a job, and today dentists are in sufficient demand, so there is no need to pay for employment.

Loss of marketability

An interest in a dental practice is characterized as a Closely Held Minority Interest which is not freely marketable or readily sold, if it can be sold at all. This means that it can be difficult to capitalize on or profit from.

Loss of value

Dental practice buyers are generally not interested in a career that has no control associated with it. Thus, the demand for a minority interest is lower than the demand for a majority, or controlling interest, and results in lower offers for minority interests. Too many times a dentist will seek an appraisal for a whole practice and then divide the price by two in order to price a 50% interest. In reality, a minority discount must be applied to know the true value of the minority interest and the range of minority discounts may be extreme, depending on the quality, location, history and characteristics of the practice.
Dental Practice Partnerships are often plagued by shareholder conflict. It is a result of all parties being subject to the same practice policies and structure, even though a single given policy may be inappropriate for one or more of the parties. Each management decision will affect all shareholders universally and decisions on pension plans, renting or building an office, staff, equipment, compensation, and the hundreds of other administrative details of managing a practice will undoubtedly raise controversy and ill will in the subordinate party. The constant need for consensus increases the potential for conflict between the shareholders.

When a partnership goes bad, it can be a harrowing experience. I have seen partnership dissolutions take years to resolve, rife with litigation and legal expenses. Partnerships are rarely an efficient or effective management structure, which is why you rarely see partners commanding successful businesses.

However, there can be circumstances where long term, stable group practice organizations are necessary, and there are alternative structures that can achieve group practice benefits without the pitfalls of partnerships. At Menlo, we can help make sure that your partnership works for you.