Our thoughts . . . 04-23-07
Associateships 101, Part II
When interviewing dental students that are approaching graduation, it is not unusual to hear them say they would like to find a job as an associate and then buy in or buy out the owner after a few years. Likewise, when senior doctors are asked about their exit strategy, they intend to take someone in as an associate and then sell the practice to them. One would think that this scenario would be successfully repeated over and over, but that doesn’t seem to be the case. Our observation is that dentists just don’t seem to play well with other children.
At this point in time, dentistry is still primarily a profession of solo practitioners. The majority of our transactions are walk-away sales to associate doctors that are dissatisfied with their current employment situations. There remain, however, a percentage of practice scenarios where associates can successfully transition into an ownership position. Let’s look at some steps that need to be followed to improve your chances of success.
1. The practice needs to be professionally evaluated. We recommend a true appraisal be done in order to determine the practice value and to make known certain key facts about the suitability of the practice for a new associate. A pro forma might also be constructed in order to lay out a plan for the transition of revenue and patients. If the intention is for both doctors to continue working for a significant period of time, be sure to carefully evaluate the practice to make sure there will be enough revenue to support both doctors. If you split up too small of a practice, the only guarantee we can offer is that no one is going to make any money.
2. The Employer/Seller’s real agenda needs to be identified. Are they truly ready to cut back on days and production or were they just having a bad month when they called the broker? How long do they plan to stay around and do they still need revenue for living expenses and their retirement accounts? The concept of bringing on an associate to shore up a sagging practice is probably a poor choice in most cases. With student loan debts now approaching $200,000 upon graduation, most new grads need to hit the ground running and can’t afford to help build up the Seller’s practice. Likewise, the idea of bringing on a new doctor so the senior doctor can impart their knowledge and experience on the associate/buyer is probably going to be a disappointment.
3. The Associate/buyer needs to have a clear and practical expectation of income needs and ownership compulsion. As mentioned earlier, there is a reason why the majority of dentists work by themselves—most estimates are between 75 and 85%--and you must be realistic about how long the new doctor will enjoy the camaraderie of the Seller. I recently had a young man from Nebraska ask what I thought of him becoming his father-in-law’s associate. When I multiplied the divorce rate by the failure rate of associateships, I could not help but fear that he might be taking an enormous risk. Upon further investigation, that particular situation will probably work out fine. Be realistic about the possibility of failure.
4. Finally, we think the price (or some understandable formula for calculating the price) and the date of purchase should be established up front. Without this step, the chance of failure of the relationship is greatly increased. If the intent of entering into an associate contract is to transition the practice to that associate, then a commitment to those intentions should be a part of that contract.
At this time and in this market, the majority of our buyers are former associates whose deal “just didn’t work out.” Inadequate revenue, personality conflicts and surprises about the price frequently cause young doctors to decide it’s time to be on their own. While we expect the majority of doctors to ultimately end up in solo practice, getting there by way of an associate buy-out demands careful planning and the adherence to these few basic rules.
Steve Wolff, DDS
UMKC Class 1977