Defining
Successful Associateships
Dr. Gene Heller
Fifty plus percent of New Dentists will begin their professional career as Associates. How successful this experience is, both professionally and financially, will be determined by the amount of preparation undertaken before the position is accepted. Understanding the different aspects of a successful Associateship will significantly enhance the chances for success. The definition of this successful relationship will be different for each situation, each Associate, and each Employer.
Clearly defined Associate’s personal/professional goals are the first aspect. Equally important are clearly defined Employer’s needs and goals. This must be followed by a careful analysis of the Employer’s practice to ascertain whether the practice is capable of meeting both parties’ goals.
Finally, everything must be reduced to writing. This requires and includes a carefully structured employment agreement. If future ownership is part of the plan, then a Letter of Intent is also required. All of these aspects must be surrounded and infused with open and honest communication between the Associate and the Employer. If this is going to be a successful Associateship, it must meet the goals of both parties.
Associate Goals
First on the list is where do you and your spouse/significant other ultimately plan to live and establish your roots? Should an interim position be where you plan to settle or wherever one can be located?
Most likely, the position will require a non-compete agreement, so its relationship to where you ultimately want to live must be carefully considered.
Does your spouse have personal, educational or vocational needs to be considered as you evaluate where your first position should be located? As a dentist, you will be able to practice anywhere, but your spouse/significant other’s career may be much more restricted and relative to where job opportunities may exist.
After determining the residency issues, the next step in preparation for assessing potential associateship positions is to rank your priorities for the associateship. What is your purpose in seeking an associateship? Is this an interim position with a probable location change when ownership is pursued? Is the primary purpose to gain immediate income, or will the practice be up for sale in the future? Are you intent on gaining clinical experience prior to ownership? Or are you trying to gain management/business experience prior to ownership? Is your associateship your first step to a total practice purchase or the first step to a partnership?
As important as setting your goals and priorities are, the difficult part is assessing the reasonableness of those goals. For this, you need the opinion of knowledgeable outside third parties. Experienced transition consultants and dental school instructors are the best source. Your peers and fellow new dentists are the poorest source. While they may all have their opinions, they do not have the experience to offer any more input than you yourself are already capable of.
Example: You have set earning an income as your priority and you will only consider a position that offers a guaranteed minimum annual income of $150,000 or 40% of your production. You will be looking a long time for this position, considering that the average “new dentist” starting guarantee is $60,000-$100,000 or 25-35% of collections. If your primary goal is to gain management experience, that is doable, but only offered by a very small percentage of employers. Most will not share that information until they are comfortable with you as a clinical dentist coupled with your commitment to buy into their practice or buy them out totally.
Employer’s Goals
As an associate, one of the first questions you will need an answer to is “why” an Associateship is being considered by the perspective employing dentist. Is the employing doctor planning a transition? Does the practice have more patients than can be ideally treated? Does the employing dentist desire to reduce his/her patient contact hours?
For some senior dentists, the ability to be a “Mentor” to a new dentist is the driving force behind seeking an associate. Others are trying to recruit an additional dentist for the community and/or maintain continuity of care for patients. Many are trying to provide on-going employment for their staff.
Less desirable reasons include the employer who sees an associate as an opportunity for additional financial gain. Money as the primary reason for offering the position typically does not work out well for the associate. Other dentists, with a high overhead, believe bringing in an associate to share the overhead is the answer. This also never ends in a satisfactory result.
For the Associateship to succeed, the employing dentist must have an equally clear and acceptable purpose for why an Associateship is being offered. This purpose must be clearly and honestly shared with the prospective associate or the odds are against this working out well for both parties.
Assessing the Practice
If the goals are aligned, then the next step is evaluating the practice itself. The first question here is critical to the success of the intended relationship. Can the practice support both doctors? Many employing dentists enter into associate relationships without careful analysis of whether hiring an associate can be supported by the existing practice.
Few dentists know the most important number in their practice. This number is the “Active Patient Count.” The Active Patient Count is the number of different individuals seen in the office during the past eighteen months. The Active Patient Count dictates: 1) The practice production potential, 2) The ability of the practice to support more than one dentist, and 3) The practice staffing requirements including, most importantly, hygiene. Many Senior dentists claim to have 2000 active patients (these turn out to be 2000 charts, not patients) but only have sufficient hygiene staff to see 800 patients in a six month recall cycle.
The following represents the minimal requirements to support a full-time associate:
Active Patients 1500-1800
New Patients 15-25/Month/Dentist
Gross Receipts $700,000+
Why? The average New Dentist has $138,000 in school related debt. The average New Dentist requires $84,000 in annual income to meet this debt, their daily living expenses and the taxes incurred. At a compensation rate of 33%, this means $255,000 in production/collections must be available for the associate. At an average per-patient annual expenditure of $400, this requires 638 patients that will be required for the associate alone to meet their personal financial needs.
What options exist for practices below the minimums? Is the employer financially able and willing to reduce their patient contact hours? Is the New Dentist willing and able to secure part-time employment elsewhere?
What options typically do not work well? If the patient base is not there, simply expanding hours to increase available production does not work. Contrary to what practicing dentists think, simply expanding hours will not generate a sufficient number of new patients to make up the difference required.
Expecting the New Dentist to “Market themselves” and expand the practice through the development of their own patient base also has major pitfalls. If the New Dentist is expected to develop their own base, why not set up across the street with new equipment and do it without the Senior Dentist? The main reason a New Dentist is interested in an associateship is the immediate income this generates and subsequently the New Dentist needs immediate access to the employer’s patient base.
The Employment Agreement
Regardless of how aligned the Employer and Associate’s goals may be, everything must be reduced to a written agreement or there is only about a 10% chance it will end in a successful relationship. There are times when, for one reason or another (such as the Associate is desperate to begin earning a living or the Employer is ill and needs somebody immediately to begin treating patients), the employment must start before the written Employment Agreement is available. However, even in these instances, there is no reason not to initially have a written list of employment terms and conditions.
Before the Employment Agreement provisions can be addressed, agreement must be reached on whether the Associate will be classified, for taxation purposes, as an “employee” or as an “independent contractor,” also referred to as an IC. The difference is who pays the matching 7.65% social security and Medicare taxes. If the new dentist is going to be classified as an IC, then they should receive an additional 3% of their collections which will off-set the additional taxation of the Associate.
From a legal IRS perspective, very few Associates actually qualify under the IRS guidelines as an IC, but it is the Employer who will have to pay the interest, penalties, and deposit the taxes for the Associate. The Employer in turn, if audited by the IRS, must collect the “tax” portion from the Employee (but not the interest or penalties) and the Employee must then file an amended return to get the money back from the IRS. This is what happens 95% of the time if the Employer is audited, and once they understand the potential consequences, most elect to treat the Associate as an Employee.
The Employment Agreement (or the “Independent Contractor Agreement” if the Associate decides to become an IC despite the above warning) needs to address the following:
- The Effective Date of the Agreement
- The Term of the Agreement
- How Recall and New Patients will be distributed
- What operating expenses will be paid by the Employer
- What operating expenses will be the responsibility of the Employee
- Who will pay for the malpractice insurance
- The compensation details
- Any other fringe benefits paid by the Employer
- Any vacation provisions
- Any continuing education provisions
- Notice required for termination of employment by either party
- Reasons employment can be terminated by Employer with cause
- Restrictive Covenant details
- Rights to assign the agreement to subsequent owners of the practice
Most of these items are self-explanatory. However, a couple of additional comments will help the process. How will patients be distributed? If you are expected to develop your own patient base, this defeats most of the reasons you might have for accepting this position.
As it relates to operating expenses, the Employer should provide almost everything. The two items that sometimes are part of the Associate’s responsibility are: some or all of the lab bill, and malpractice insurance. Within the dental marketplace, we currently are seeing the associate pay some of the lab bill in about 80% of the employment agreements we review, and the malpractice insurance is about 50/50. If the Associate is expected to pay some or all of the lab bill or the malpractice insurance, the off-set for the associate is an increase in the compensation percentage paid to the Associate.
The compensation agreement is usually divided into two parts. The purpose of the two part arrangement is to provide a guaranteed income while providing an incentive to the Associate to earn as much as possible. Therefore, part of the compensation is some type of guaranteed daily, weekly, or monthly compensation, which is typically in effect for the initial six-to-twelve months. This is normally an amount which assures the Associate that they will be able to pay their personal bills and obligations during the initial period of employment.
The second part is a stated percentage of “collected receipts” generated as a result of the Associate’s provision of services. Typically the associate will receive the greater of the guaranteed minimum or the percentage. However, the guaranteed minimum is classified as a draw against commissioned earnings, so until the Associate has generated a sufficient number of dollars to cover all cumulative advances of the guaranteed minimum, no additional monies in excess of the guaranteed minimum will be paid.
Whether or not any additional fringe benefits will be made available will be dependent on your needs versus 1) what the practice can afford 2) what the Employer must pay on behalf of other employees (although technically as a licensed professional, in most states you can be discriminated against and not be eligible for these benefits) and 3) how concerned the Employer is in keeping you happy so that you either stay around and/or become an owner in or of the practice.
Vacation is typically stated as the number of days per year that you can take. It is also normally not “paid,” because typically your ultimate pay is based on your collections, and if you do not produce during your vacation, your collections decrease and so does your compensation. The number of days available for continuing education follows a similar arrangement, i.e., normally not “paid,” and the actual cost of the CE is again negotiable.
As an initial agreement to the terms of employment, a simple list of these questions and the answers are sufficient to begin employment. An inability to reach initial agreement on these terms should be viewed as a significant sign that this will be a short-lived relationship.
Each employment agreement will normally include a Restrictive Covenant. It is not reasonable to assume an Employer will welcome you into their practice, only to allow you to leave after a year or two to set up a nearby competing practice that will not only allow you to take many patients you were introduced to through the Employer, but the staff as well. This must be addressed even in states where Restrictive Covenants are basically illegal. Without this type of agreement, very few dentists would even consider hiring an Associate.
The “Right to Assign” the employment agreement and its protections has been necessitated by recent legal case law regarding this issue. There have now been at least three court rulings in three different districts wherein, because the employment agreement did not contain this provision, the associate, who did not subsequently buy the practice, was allowed to breach the non-compete when ownership of the practice was transferred. This meant the buyer lost most of the patients and staff to the associate and ended up declaring bankruptcy. As a result of substantial financial losses incurred by the lenders, they are now looking at any existing employment agreements to be certain it is assignable, or they will not fund the practice sale.
Letter of Intent
In addition to the employment agreement, if future ownership is intended, a Letter of Intent must also be created. While it is not binding on either party, it will contain the agreements that were reached as a condition of offering and accepting employment. The basic provisions to be included are the proposed sale price or formula to be used to determine the sale price, the proposed date of sale, and any pre-sale terms or conditions that must be met by the parties. If the parties agree to the sale price and put this in writing, our experience over the past ten years has been that approximately 75% of the buy-ins/buy-outs intended occur. If this is not done, less than 10% of the associates end up owners.
In the good old days, employment typically commenced with a handshake. If ownership was intended, the simple statement “let’s work together for a while to insure our compatibility and then we can discuss a buy-in/buy-out” was the norm. Unfortunately, today that almost guarantees a failed outcome. ■
Dr. Eugene W. Heller is the vice president of Professional Practice Transitions, a nationwide dental practice sales and consulting organization. He can be reached at 1-800-730-8883.