What to Include in Negotiating in a Successful Retirement Agreement – March 2009
Dentists should prepare for retirement and phasing out their practices long before the actual age of stopping their career. Statistics point out that only 4 out of 100 dentists have adequately prepared for their retirement by the time they reach 60. Phasing out their practice at that time has significant benefits over selling the practice outright when they are ready to retire. Hiring an associate who will be willing to take over the practice is an important solution, as long as a well thought out agreement between the two parties weighs factors for the gradual buy in of the associate to the practice. Here are some of the facts that a dentist should consider in fashioning an initial agreement or Letter of Intent with an incoming associate.
Often agreements with an incoming associate are over a period which allows the retiring dentist to work part-time as an associate until full retirement. Working 2-4 days a week can allow the dentist to ease out of the practice while still maintaining the good will built up over the years with patients. There should be an initial agreement of several months with terms of exit should the associate be unsatisfied with the buy in arrangement of the practice once starting to work in the new office. At that time the agreement of over four years or so should take effect. Points that must be covered in confirming the initial arrangement with the associate are the financial relationship of the parties with how much compensation for each party, how many hours each dentist will work during each of the years of the contract, the responsibility of the development of new patients, and terms for voluntary or involuntary exit of each of the dentists.
Future profit and equity expectations must be laid out in detail. The incoming dentist must know how much the overhead of the practice is, the number of active patients (those who have been seen once over the last 18 months), the expectation of gross production and gross receipts over the four year period and how those factors will affect the agreement, the specified dates of buy in and buy out phases and how much control the owner will have over the practice. If there is not enough income to maintain more than one dentist initially, then future development of patient requirements of the new associate must be laid out. If the owner is to become an associate then the control requirements must be laid out sufficiently to allow for legal definitions of whether either dentist is an independent contractor or employee to apply. The tax savings of having an independent contractor relationship is significant but it is difficult legally to establish the separation of control necessary to meet this definition.
Access to patient records must be laid out in the agreement, with the requirement that the HIPAA patient privacy regulations are obeyed. An arrangement as to how patients are to be transferred to the incoming associate must be included. The issues of disability of either dentist must be discussed, as well as what should occur if either dentist dies during the agreement. Time out for the vacations, attendance of seminars (and who should pay for them), and other occasions when either dentist will be absent from the practice must be considered.
The negotiations between the retiring and incoming dentist should weigh the adjustment period between the two of certain costs of the practice such as the purchase of dental supplies, new equipment and renovation or changes in the office. A statement of the amount of overhead and costs such as salaries and potential raises of employees is a factor will allow for incentives for employees to be retained in the new practice. The retiring dentist must contact the lessor of the premises if there is one about the transfer of the lease arrangement to the new dentist.
The handling of collection issues must be considered, with mention of the responsibility of each dentist for accounts receivable and how to collect on those accounts. Issues of debt liability and litigation expenses must be included in initial negotiations.
A written initial agreement between the two dentists is preferable to a verbal one. That way no surprises will occur when the sale is turned over to an accountant and lawyer for finalization.