Caution For Buy-Ins And Partnerships
In recent years a number of nationally known practice ownership transition companies have continuously encouraged practice owners who are nearing retirement to have young dentists buy into their practices, thereby forming partnerships, with what we believe to be less than adequate consideration given to other and possibly more suitable ownership transition alternatives.
What Partnerships Are Designed For: As a form of practice ownership transition, buy-ins to form partnerships are best suited for situations in which the practice owner has 10 or 15 more years to practice. A partnership formation then will provide the opportunity for the junior and senior dentist to practice together for many years, before the junior partner may then be expected to buy-out the senior partner at the time of his/her retirement. Partnership buy-ins are best suited for two dentists that want to practice together for many years to come.
What Buy-ins / Partnership Formations Are Not Designed For: If a dentist wants to sell his/her practice and retire now, or wants to sell his/her practice within the next 2 to 5 years, in almost all cases a buy-in to form a partnership is not the best approach. In these cases the practice owner’s goal is to sell all of his/her practice, get paid 100% of its value, and then retire at a preplanned date. Forming a partnership when the goal is to soon sell the entire practice diverts the effort away from the real goal and complicates things tremendously. It turns what might have been a simpler, single transaction (the sale of 100% of the practice at one time) into three more complex and more difficult steps:
1. The Partnership Buy-in: a complex transaction
2. The Partnership Period: a period in which co-management, co-decision making processes, and partner income division are rarely easy or simple
3. The Senior Partner Buy-out: again, because of the existence of the partnership, a complex transaction
For a dentist near retirement, these three steps/periods must be compressed into a period of just a very few years. The end result, it is hoped, will be that the practice owner will have sold the entire practice, be it in stages. If the goal is a sale of the entire practice, is it not wiser to develop a plan in which a single transaction, less complex in nature, accomplishes that 100% sale?
In addition, for the practice seller the sale proceeds may receive better tax treatment in 100% sales versus the tax treatment accompanying many of today’s common partnership buy-in and buy-out structures.
If you’re within 2 to 5 years of your desired date for your sale and retirement, before considering having anyone buy-into your practice, talk to us about both: 1) classic 100% retirement sales structures and, 2) the addition of associates in advance of the expected retirement date with contracts in place for the associate’s purchase of 100% of the practice in a single transaction at a given future date. Know and compare the alternatives to partnership buy-ins.
George D. Stollings, DDS