What you need to know about partnership agreements
If you’ve been thinking about buying a practice with a partner, then you will most likely know by now that joint ownership can be extremely rewarding and advantageous – if executed well, of course. The problem is that partnerships don’t always work out. There can be several reasons for this, from poor choice of agreement type to disagreements between partners. If you want to get the most from your partnership and enjoy success right to the end, here’s what you need to know…
There is no one size fits all partnership agreement. In fact, there are several ways you can enter into a partnership, so it’s up to you to figure out which one would best suit your joint needs. Naturally, there are specialist advisers that can help with this, though it will be advantageous to have a basic knowledge of the different pathways yourself.
The most common structures in dentistry are either Expense Sharing Partnerships or Quasi Expense Sharing Partnerships. The latter often involves each partner having their own surgery, where they retain all of the gross earnings and bear responsibility for the expenses of the same, whilst any additional surgeries operate on more of a profit share basis. If there are associates within the practice working in these surgeries, then their profit is split equally between all partners. (There are nuances to this, for instance, if one partner works part-time then the part-time associate working in their surgery is sometimes treated as their associate rather than the partnership’s associate.) Besides the obvious financial benefits, Quasi Partnerships also allow each partner to retain complete control and autonomy over their clinical decisions and to work as hard – or as little – as they like while operating within a bigger practice.
One alternative to this is an Expense Sharing Agreement (ESA). Unlike with Quasi Partnerships, dentists working in an ESA setup don’t share income or profit, but they do split all expenses such as staff wages, equipment, rent, supplies and so on evenly. There’s also a Profit Sharing Agreement, which is where the profit ratio can be divided in any way imaginable, as long as it’s been agreed by all partners.
If none of the above tick all the boxes for you it may be that Capital Contribution is the way forward. This ensures that profits are based on the amount of capital each partner invested when buying the practice – a ‘get out what you put in’ kind of structure. The other option is a Silent Partner Agreement, which is where one or more partners act as an investor, but have absolutely nothing to do with the day-to-day running of the business or clinical practice. For obvious reasons this type of partnership tends to be less popular with dentists, though it’s worth bearing in mind as it can be useful in situations where one partner decides to sell.
However, this is not a situation you want to end up in, because the aim of a partnership is to maintain a successfully functioning relationship right until the end. In order to achieve that you need to make sure that the person you’re entering into an agreement with has the same intentions as you in terms of retirement and selling up. All too often disputes occur because one partner wants to sell and the other doesn’t, and it’s usually down to an age gap. The problem is that if one partner wants to sell, their share value is significantly reduced, not to mention that there’s a limited market for people who only want to buy a share. That’s why it’s always best to agree on a timeline before committing to anything.
The other thing you can do is carry out due diligence on your partner. If there are any differences in work ethic and culture, they will almost certainly be highlighted. All being well, it’s then just a matter of putting your partnership agreement in place, taking care to include details such as critical illness, potential resale, marketing, managerial responsibilities, and a dispute resolution procedure to protect you should things turn sour. We also advise that you include some sort of valuation methodology. That way, if one partner wants to sell but the other doesn’t, partner one has the ability to buy the other one out – ideally at the value of 50% of the whole practice so partner two doesn’t make a gain from partner one’s early exit.
Other than that, it might be worth addressing what would happen with leasehold or freehold charges if one partner were to leave. With a third-party buy in, the lending bank will request a charge over the property or lease, which is often rejected by the partner staying on as they have already made their contribution and are likely to be commercial mortgage free. That can make funding of the partnership buy in almost impossible for the buyer if they end up without consent to the charge, so it’s definitely worth including in your partnership agreement.
Altogether, there’s a lot to think about when buying a practice in partnership, but there is support available to help guide you through the process should you need it. For advice that you can trust, contact Dental Elite. The specialist team has years of experience in navigating dentists through partnership agreements and purchasing a practice.