The Practice Buyer's Corner - Random Musings from the Buy-Side

The purpose of this blog is to share current, real world, experiences on the topics of practice valuation, practice transition, retirement planning, and building equity value - over time - in your dental practice.

Blog By:
seanepp

New Partner Considerations

The purpose of this article is to provide an overview of the puts and takes of bringing a new partner into your practice or group.

Valuation Considerations

There has been a marked increase in independent dentists using groups for “stalking horse” valuations to boost their practice values for new partner buy-ins.  Why wouldn’t they? I can’t think of a group that doesn’t offer this service for free.  Better yet, cherry pick the best terms from multiple offers to curate a unicorn LOI!

This is most likely unfair to everyone involved as:   

- It potentially memorializes a “group fit premium” in a non-group transaction - unfair to the new partner because it overstates the value of the practice;

- It limits the lead partner's liquidity options for their remaining ownership stake to only the remaining partners, who may or may not be pleased with their deal in the future;

- It could introduce unwanted incentives to temporarily suppress practice performance for valuation purposes in the future

Exit Limitations?

In large, multi-provider settings staggered retirement horizons become part of the normal ecosystem - something that can be planned for and therefore more proactively managed.  

In a small partnership, the risks simply become amplified - increasing the importance of fit.  

If something were to require a change with either partner, it is likely to become more involved - and potentially more disruptive - than supporting the same effort in a larger group which more naturally diversifies risk.

If you’ve spent your career as a practice owner, your world view is likely to be materially different than that of younger professionals you may be recruiting to join your practice.

There are marked differences across generations and the runaway differentiator remains the heightened priority of work-life balance since Gen X.

“Full-time” for most doctors remains four days per week.  For associates, their “free time” is truly free, with limited obligations outside of patient hours.  For owners, some portion of that “free time” usually gets repurposed into practice building and sustainability efforts.

That same elbow grease and hustle usually associated with ownership may not even register with doctors who do not seek ownership.  Or, it is specifically not of interest to them, at all.  If ownership is not important to them, then they are not going to value the actions ownership otherwise tends to promote.  Know thy customer!

Humans tend to human all over the place and it can get messy!

It is not a terrible idea to experiment with some of the better known personality testing tools to review compatibility with any new doctor (e.g. DISC or Myers Briggs).  There are professional match-making services available to assist.

I’m not suggesting this as a go/no-go determinant, but potentially as a path to better understanding how your prospective partner is thinking.  This is particularly helpful to understand when things are not going as planned.

Independence
I strongly recommend independent legal and tax advice.  Yes, even if there are only two partners.  This is a business marriage.  Whatever money you think you are saving on the front end could cost you exponentially more on the back end.  It may sound counterintuitive, but negotiate key terms from a dissolution mindset.  This can help focus the lighting on any elephants in the room that are still trying to hide.
Stay frosty!

Sean