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Volume 89: Partnership Pitfalls

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Dentistry is a very challenging profession. Not only do you have to be an excellent clinician, you have to be a part-time psychologist, a savvy marketer, be knowledgeable in human resources, and understand how to run a business. For this reason, many dentists consider a partnership as a way to spread the multitude of tasks around. On the surface this makes sense, but for many reasons, it can be very tricky. I am not against partnerships, but I feel some people enter them without a true understanding of what it means to be a “partner” with someone or with a corporation.

Recently, we have been engaged to assist a few different partnerships that are being tested and I wanted to share their stories.

Two successful dentists who have known each other for many years and who have a deep respect for one another from both a clinical and business perspective, came across an opportunity to establish a new dental office in a growing area of a big city. One of the dentists has an “in” with the developer and wanted to bring the other in to share the time, effort and expense required to establish a new practice. The developer described the land surrounding the small strip mall as prime for high density residential condo development. Two towers had been started and 4 to 6 more were slated to be built. By the time the project would be completed, there would be 16,000 condo units and over 32,000 potential patients requiring care. One big box retailer had already committed and others have signed on. The developer said they were in final negotiations with McDonalds, Tim Hortons, and Starbucks, etc. who all want to be in this burgeoning area. It was intoxicating. What a golden opportunity for two dentists that already know how to run a successful practice to build a beautiful office and steer its growth.

So, the two dentists took the plunge. The minimum size the developer would let them take was 2,000 square feet, so they signed a lease for a beautiful end unit with lots of natural light and good exposure to the new buildings that were to be built. They built and fully equipped a beautiful 6 operatory facility which required heavy financing and capital injections from both partners.

Fast forward a few years, the first two condos that were started when they signed the lease are still not finished. The other four have not even broken ground yet. Starbucks is open and McDonalds and Tim Hortons are under construction. Needless to say, the rapid growth they expected has not materialized. Our firm was consulted as this has put a strain on the partnership, and both partners have had supplement the practice to cover the deficit since it will take a few more years until this practice turns the corner. Currently, they only have two options: hold on until the area is more developed and the practice grows significantly, or sell now and take a significant loss on their initial capital investment. Neither partner would have contemplated doing this deal alone, but the combination gave them the confidence to take the risk, which in hindsight, was significant.

In another situation, 3 years ago, we were asked to value the practice of a dentist who graduated over 35 years ago because the new associate expressed interest in becoming a partner. This piqued the interest of the principal because he is interested in pursuing other opportunities and may retire in 3-5 years. It was a marvelous practice, in a great facility, with thousands of patients. We are doing this We prepared the valuation and I met with the associate and the spouse, to explain our findings. The practice was worth well over $3,000,000 and was daunting for them to digest. I explained the market and the fact that this kind of opportunity does not come along often. If they were interested in making a long-term commitment to being a practice owner, this was a wonderful, low risk way to do it. As a partner, the principal would stay on, act as a mentor and continue to be a significant contributor to the top and bottom lines. The associate and spouse consulted with some other experts and decided it was, indeed, a good opportunity. They, then, purchased 50% of the practice to form an equal partnership with the principal. The contract out-lined that they would each get paid the same percentage of their gross billings and then, share the net on a pro rata basis to their ownership. The plan was to try and build the new partners revenue and have the principal slow down. Recently, we were asked to update the valuation, after 3 years have passed. I assumed they just wanted to see how the partnership was doing. We started looking at the numbers and everything is fine. Revenue is up significantly, the patient base has grown, and the bottom line is better. The practice value has increased by over $1,000,000. 

At the meeting I convened to present my findings, I learned that while the practice has flourished, the partnership has not. The newer partner has been somewhat overwhelmed with the debt involved, the level of commitment it takes to run a big practice and hasn’t really been able to grow his/her individual revenue much. The principal has cut down a day a week, and this day has been picked up by a new associate, but even still the principal produces significantly more that his partner. This has led to an inequity in the bottom line revenue sharing, which was expected at the beginning, but was supposed even out over time. It is also apparent that the new partner is not prepared to consider purchasing the other half of the practice so the principal is now left in an awkward situation. The options now are that they will either sell the whole practice or the original owner may decide to buy back the other half of the practice at a time in his life when he wanted to pursue other things.

Fortunately, there is no animosity between the partners because they respect each other and have maintained open communication.

There are many successful partnerships in dentistry, but they require commitment, hard work and effort on both parts. As I write this, I have a call this afternoon with a client who I sold a practice to a few years ago. His email indicated that his new associate has asked about buying in. You can imagine how that call will go...

David Lind is a Principal and Broker of Record in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices.  He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

 

The Professional Advisory

  1. Understanding Practice Valuations

  2. What To Expect When Selling Your Practice

  3. The Chart Sale

  4. One Year Later

  5. Dealing with Unsolicited Offers

  6. Covid-19 Practice Sales Update

  7. When is the Right Time to Sell Your Practice and Why?

  8. Partnership Pitfalls

  9. The Real Cost of a Dental Practice Set-up

  10. Smaller Practice Realities

  11. Dental Market Update - 2019

  12. Creating Your Own Most Valuable Practice (MVP)

  13. Small Practice Economics

  14. The Market is Very Efficient

  15. How Can Dental Practice Values be Rising and Declining?

  16. Hygiene as a Value Driver

  17. The Value of a Good Team

  18. Is it Time to Move?

  19. Staging A Dental Practice

  20. The High Cost of Dying

  21. Deal-Busters

  22. Patients - Attract and Retain

  23. Should I Stay or Should I Go?

  24. Is There a Buyer for Every Practice?

  25. Good, Better, Best - The Market has Spoken

  26. Smooth-Sale-ing

  27. Buying Time

  28. Patients, Patience, Patients

  29. A Real Patient

  30. Why Do a Practice Valuation? I'm not Selling

  31. Irrational Exuberance or The New Normal?

  32. Do dental equipment and dental technology affect a practice value?

  33. Finding and Being a Mentor

  34. Bigger is Better

  35. Dave's Top Ten List for Buyers (Vendors should read this too!)

  36. How Well Do You Know Your Practice?

  37. Dave's Top Ten List for Vendors

  38. What will happen to dental practice Values in the next 10 years?

  39. Your Premises Lease is an Important Asset

  40. What are Associates Thinking?

  41. There is Life Outside the GTA

  42. When Is the Right Time to Sell My Dental Practice?

  43. Mergers are a Viable Option

  44. Is Your Associate an Asset or a Liability?

  45. Has your Practice Facility Kept Up With Your Billings?

  46. The 100 per cent of Gross Myth

  47. The Past, The Present and The Future

  48. Caveat Emptor

  49. Overpaid Long Term Staff

  50. Selling your Practice in Stages

  51. A Potential Pitfall of Selling Shares

  52. Value in Your Practice Through Balance

  53. Only Trusted Staff Can Defraud You

  54. To Own or Not to Own Practice Real Estate? That is the Question.

  55. Coping With A Large Patient Base

  56. Successful Dental Practice Transitions

  57. Taking Care of Business

  58. The Investing Dentist Phenomenon

  59. Two areas to focus upon that could negatively impact the value of your practice

  60. Organize your Debt in Order to Sell your Practice

  61. Having a Better Team

  62. How Do I Prepare My Practice For Sale

  63. How Do I Prepare My Practice For Sale? Part 3

  64. How Do I Prepare My Practice For Sale? Part 2

  65. How Do I Prepare My Practice For Sale? Part 1

  66. Advice to My Son or Daughter Graduating from Dental School

  67. Transition - What to Expect

  68. Discussion on Digital X-Rays

  69. Partnerships and Shotguns

  70. Strategic Planning - How to Get Started

  71. Calling All Vendors - Practices have Gone Up in Value

  72. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  73. Matrimonial Practice Valuations

  74. Purchaser's Guide to Affording a Practice

  75. Location Improvements Throughout Your Career

  76. Small Practice Valuations

  77. Partnerships – The Best and The Worst

  78. Changing Location When the Opportunity Comes Along

  79. Visual Presentation of Your Practice

  80. Presentation of Charts

  81. Your Premises Lease Can Be Your Worst Enemy

  82. How to Select an Appraiser for Your Practice

  83. How Are Your Billing Ratios?

  84. It Pays to Invest in Your Tangible Assets

  85. The Importance of Separate Financial Statements

  86. Five Time Frame Levels to Sell a Practice

  87. 12 Suggestions to Safeguard Computer Data

  88. How to Buy a Visible Practice

  89. Why is there a shortage of good practices today?

  90. The Importance of Equipment in the Purchase of a Practice

  91. The Balanced Practice

  92. Will My Practice Be Saleable in The Future?

  93. Buyer Be Aware

  94. Excess Profit - The Second Key

  95. Patients and Profits are the Keys

  96. Plan Ahead

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