Creating a Successful Partnership: What to Include in Your Partnership Agreement

Historically, the goal of most dentists was to form a solo practice. In recent years, this trend has shifted with more partnerships being formed than in years’ past. Coupled with the fact that many recent graduates prefer not to practice alone, the opportunities for partnerships as a career choice are definitely on the rise.

If you are planning to work as an associate and become a partner,

you need to know some of the key ingredients that can lead to a successful partnership. In this article, we’ll address several of those key points you need to consider when contemplating forming or joining a partnership.

Personality/Compatibility – It goes without saying that you have to like and respect the individual(s) that you will be spending more time with on a daily basis than with your spouse! Communication and openness are important ingredients for a successful relationship. You don’t have to be “best friends,” but there has to exist a mutual respect and trust that both parties are working toward the same goal of making the partnership successful.

Clinical Philosophy – As a young dentist, you’ll spend years developing your “own” clinical philosophy. This is not influenced just by your experiences from dental school, but by the many hours after graduation that you will be investing in continuing education and professional associations. Having a clear understanding of your mutual philosophies of patient care is a

necessary dialogue you will need to have when forming your partnership.

if overhead is not shared properly that can lead to problems as well. For example, if one partner utilizes two assistants and one partner uses only one assistant, should those expenses be shared equally? Allocating those assistants directly as part

Will you be an Equal Partner?Oftentimes, the practice owner partner wishes to maintain control when forming a partnership with an associate, so a partnership arrangement with the senior partner desiring a 51-percent interest and the junior partner a 49-percent interest is not uncommon. However, in our opinion, that sends the wrong message to the new partner. The fear of loss of control is a common feeling solo practitioners share when they decide to make their associate a partner. You will need to determine whether or not you want another individual controlling your actions as a partner. Some young doctors may agree to this arrangement for the initial few years of the partnership, but do require that the partnership become a 50-50 arrangement at a future date. Income Division – Poorly conceived division of income has led to many partnership breakups. In the dental world, partners should be compensated based on a combination of personal clinical production and their respective ownership interest. As the senior partner begins to decrease his/her production in the later years, this approach will prevent the junior partner feeling that he or she is being taken advantage of, if income were shared equally. Most arguments over money occur when one party feels they are doing more of the work and not being compensated fairly. An income sharing formula whereby each partner is compensated based on their relative ratio of personal clinical production with direct expenses being allocated accordingly, is a fair way to compensate each partner for their production related portion of partner income.ly. Conversely,

of the compensation formula is only one example of how this concept works.

Establishing Minimum Days/ Production Goals – As partners grow older, they may be unable to produce at the same performance level as they did in years past. Conversely, if a partner is financially secure, he/she may not desire to work as hard as they once did. So, establishing minimal production goals to maintain partnership status is not unrealistic criteria to include in your partnership agreement. Some agreements may also require the partners to practice an annual minimum number of days.

Premature Retirement – One of the reasons you may want to become a partner is to maintain a long-term relationship with another doctor. In the event that one partner decides to leave prematurely, a penalty should be included that will discount the buy-out value of the departing partner. We prefer to use a sliding scale discounting factor, based on a preretirement age to calculate the departing partner’s decreased value, with the sooner they retire the greater the discount to value.

Management Responsibilities – Not all partners share management responsibilities equally, and in fact, some partners have no interest in any aspects of the day to day management of the practice. They basically just want to perform only on a clinical level. In this case, the partner who is managing the practice and who probably spends many hours per week doing, so should be compensated accordingly. Negotiating either a fixed salary or a percentage of profit as additional compensation for a partner who is responsible for the day-to-day operations of the practice is a fair approach. This compensation should be considered an expense of the practice and have no relationship-toownership percentage or production-contribution levels.

In the dental world,

partners should be compensated based

on a combination of personal clinical production and their

Death and Disability – Most partners purchase life insurance in the event of an untimely death. So it is an important habit for partners to develop by reviewing the amount of life insurance to ensure that the face amount of the policy keeps up with the changing value of the practice over time. In the case of partner’s long-term disability, we have seen many lawsuits occur due to insufficient definitions of disability, as well as poorly crafted valuation formulas and payment terms in the event of a disability. Therefore, you need to have clearly defined valuation formulae in your agreement that addresses the value of a partner’s interest in the event of death or disability.

respective ownership

interest.

We recommend that a buy-out formula

be included in the partnership agreement that will reduce the senior partner value of his/her partnership interest if clinical production decreases over the last several years preceding retirement. This approach allows the junior partner to pay a fair price for the value of the senior partner’s interest. This discount, however, is applied only to the Intangible Asset (Goodwill) portion of the senior partner’s practice value. For example, if the retiring partner’s clinical production has decreased over the last three years – on average – by 20 per-

Mandatory Buy-Out – Too often, we’ve been retained to negotiate situations where the senior partner encounters difficulty in selling his remaining interest to the junior partner. We believe that the partnership transition model consists of two parts: a Buy-in and a Buy-out. A clearly defined intention of the junior partner’s expectation to purchase the senior partner’s remaining interest at a specified date is critical. This is especially true in markets where it is difficult to recruit associates, i.e. small towns and rural areas. A properly designed buy-out formula needs to be included in the agreement so all parties know what to expect beforehand. Finally, in the unlikely event that the junior partner decides not to honor the mandatory buy-out, a liquidated damages clause should be included as a financial penalty for not completing the purchase of the retiring partner’s interest.

Partnership Valuation –Senior partners sometimes expect too much for their practice’s value at the end of their career. This especially becomes a problem if they

have not been contributing significantly to the practice in their later years, and they expect 50 percent of the practice’s value.

cent, the Intangible Asset Value would be reduced by 20 percent. The Tangible Assets (equipment, technology, etc.) should not

be discounted, as these are assets having no bearing on the performance of the senior partner. So, for example if you have a 50-50 partnership, the Tangible Assets value for the retiring partner would be worth 50 percent of the appraised value at the time of sale.

Properly designed Partnership/ Shareholder Agreements must be crafted in order to avoid unnecessary problems and legal costs to avoid failed partnerships. An “ounce of prevention” is worth a “pound of cure” and spending the time and

money at the beginning of your relationship to have properly designed agreements will go a long way in solving any future problems. ■

Dr. Tom Snyder is managing partner of The Snyder Group LLC. A transition services consulting firm that specializes in practice valuations, practice sales as well as designing associate and partner relationships. He can be reached at (800) 988-5674 or email: tsnyder@snydergroup.net. The firms’ website is www.snydergroup.net

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