Considering a Buy-Out Arrangement?
Every dentist within ten years of retirement, or new dentists wishing to buy into an established practice, should consider the variety of buy-out arrangements that can be used to accomplish a smooth and mutually successful transition of the practice from the retiring or selling dentist to the incoming dentist. Here are the most common arrangements to consider:
The simplest method is the complete sale, where the transition takes place from six months to a year, or longer by mutual agreement. The transfer of patients and the finishing up of current cases takes a certain amount of time, and in the meantime, the selling dentist should be compensated for his mentoring or transitioning duties. The purchase should be made by cash, although sometimes seller financing can be arranged in larger or more complex practices. The selling dentist can be compensated at a daily rate or a rate of the percentage of collections on work done. The selling dentist becomes an employee of the practice, since independent contractor arrangements are usually prohibited by law in this situation.
Hiring an Associate with a Later Sale:
There are several methods for hiring an associate with written arrangements for a later sale, and dental sales experts have been creative in fashioning some interesting alternatives with different ownership structures set up for different circumstances.
The solo group arrangement is a very popular arrangement, since it doesn’t mandate the sale by the seller after a certain period of time, or obligate the buyer to purchase if circumstances change. For instance, a six year agreement is made up so that the associate works for the selling dentist for three years, and then the selling dentist works for the associate for the following three years. The buyer purchases one-half of the assets initially, and then decides whether to purchase the other half after the first three years of the arrangement. An agreement is made as to the allocation of the expenses of the practice, either proportionately or according to production.
The co-ownership arrangement is another alternative, and is more common in larger practices. Financing of the buyer’s portion can be made in part through a lien on the practice if no buyer financing is arranged, but otherwise the new associate should pay cash for his or her ownership share. The proportion of ownership can be shifted by agreement during the course of the co-ownership agreement. The mandatory buy-out provisions required here are one drawback, and the tax consequences may be less favorable.
Three entity method is a alterative arrangement which involves the setup of three separate entities, one for the buyer (usually an S Corporation), one for the seller, and then a third entity, usually a partnership or LLC, which distributes the profits to the buyer’s and seller’s companies according to production. The buyer and seller split the ownership of present assets, and the new LLC or partnership makes any new purchases. The present assets are kept with the buyer and seller because if they are transferred it is a taxable event. The compensation arrangements can change and shifts of personal goodwill can be made throughout the life of the LLC or partnership.
The merger alternative is often done with small practices or those which may not be as salable. The incoming dentist purchases the patients of the outgoing dentist over a period of 12 months or longer, with a percentage of good will of the practice being transferred and paid for initially and then finalized when the outgoing dentist retires.
The walk away alternative allows a dentist to solely ease out of his or her practice over period of two years or so, with time practicing decreasing during that period. If a buyer appears after one year or so, then he or she will pay an appropriate portion of the collections, or if no buyer appears, the owner will walk away from the practice.
Needless to say, written arrangements which cover all the many different situations and legalities of a transition period need to be prepared by an attorney familiar with the drafting of the documents for all the alternatives.