Recently a dentist asked me a question about practice acquisitions, as he thought there may be an opportunity to expand. His question, What is important to ask when deciding between a partnership or a buyout, is one that many dentists may find themselves asking as more seasoned dentists look to retire. Here’s the scenario.
The dentist I’m talking to, let’s call him Dave, is looking for a new space and wants to expand his hours slightly. He has an opportunity to either partner up with a dentist near him or buy him out. This dentist wants to work less and will probably retire in the next two to five years. His practice is slightly smaller than Dave’s current one.
Dave is worried about paying too much if this other dentist’s practice declines each year, since he knows that some patients definitely won’t hang around after the other dentist retires. The benefit to a partnership is that Dave may not have to get a bank involved, but he doesn’t know the first thing about partnership agreements.
My response to Dave was to pursue buying out the other dentist completely as a first option, even though it may mean getting financing from a bank. The second option would be to enter into a space sharing arrangement wherein Dave pays a lease to use the other dentist’s space and equipment. Both dentists agree on hours and a schedule, and what role the other dentist’s staff have, if any. Then, get an agreement in place that states first right of refusal on the practice if he decides he wants to buy it later when the other dentist is ready to sell – completely.
The third option, and least attractive one in my opinion, is to “partner” with the other dentist. The problem is that Dave could lock himself into a purchase he may not want. As he said, he’s worried about a declining practice and there isn’t a definite retirement date on the horizon.
Why is a partnership a last resort option? For one, without clearly documented legal agreements for everything, in the event of a practice failure or dissolving of the partnership, Dave could stand to lose a LOT! Dave may not be able to control the practice’s finances or operations. Worse, when the other dentist decides to start working less, he could still refuse to sell to Dave. Can a dental partnership work? Yes. But it’s not my first choice in this specific situation.
The upfront investment will save countless hours and headaches later. And control of the practice would remain in Dave’s hands. The second-best option, the space-sharing agreement, would let Dave expand his own practice while getting a feel for the flow of the other one, without a permanent commitment.
What do you think? What has been your experience in a similar situation?
If you have questions you’d like answered in a future blog post, email him at tlott@dentalcpas.com.
About Tim Lott
Tim Lott, CPA, CVA has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator on Dentaltown.com. You can reach Tim at tlott@dentalcpas.com or any of the other dental partners/principals at (800) 772-1065 or info@dentalcpas.com.