Retirement Strategy Associate to Owner & When To Set The Purchase Price

Kara Tess's picture

So you’re considering retirement and feel your best option is to hire an associate then sell your practice to that associate when you’re ready to call it quits. Let me ask you this… Do you want to watch your perfect working relationship go from good to bad real quick? I’m guessing your answer is NO! One of the biggest mistakes made with this transition method is when an owner dentist hires an associate to replace him/her, but neglects to set-up a clear vision and defined plan on how the ownership buyout will occur.  Believe it or not, this problem exists and it happens on a regular basis.

The path for a solo owning dentist to sell their practice is pretty common:

Step 1: Find a good dentist who wants to be your associate and eventually buy your practice

Step 2: Hire this dentist to work as an associate in your practice

Step 3: Sell your practice to the associate when you’re ready to retire

Step 4: Either retire and walk away, or stay on and work as an associate yourself

This seems fairly simple, right?  Only four very basic steps…  BUT it’s never that simple, and here’s why:

  • Associate/Buyer Wants The Price Set At The On-set Of The Associate Agreement

The argument for the associate, soon-to-be buyer, will be, ‘I have put a lot of sweat equity into the practice, why should I pay for it?’  Many times the associate/buyer works nights, weekends, extended hours, covers emergencies, vacations for the owner dentist, helps manage the staff, develops new marketing plans, etc. all with the understanding that the practice will one day be their own.  This associate/buyer knows that the time and effort put into the practice on the front-end will benefit the practice, while most definitely increasing the value of the dental practice.  So does the associate/buyer purposely not grow the practice in order to decrease the purchase price?  That is not the type of associate most owners want or expect, but by not setting a price on the front-end this scenario tends to loom over both the owner/seller (is the associate working as hard as they could be?) and the associate/buyer (the harder I work, the more I have to pay to purchase the practice).

 

  • Practice Owner/Seller Wants The Price Set At The Time Of The Practice Sale

The argument for the owner/seller will be, ‘I am the only person at risk operating this small business.  If the associate/buyer damages my reputation and/or practice in any way, I am the one who pays the price.  The associate can go find a job someplace else, but how can I recover as the owner of a practice with nowhere to run to?’  The point here is this - the risk any owner dentist carries while bringing on an associate is profound, and with statistics showing that roughly 80% of first time associateships fail, there is a definite need to be concerned. In addition to being ‘left in the dust,’ there are other risk factors and costs absorbed by the owner dentist, including but not limited to:

  • Additional Expenses: Equipment, supplies, marketing, website updates, compensation (salary, benefits), taxes, etc.
  • Patient shift: Getting a new associate up and running requires the owner dentist to transfer some of their patients to the new associate; this decreases the owners personal revenues and increases what the owner dentist pays the associate.

So now the question begs, ‘What is the answer to make sure everyone involved in this transition is happy?’ There is an answer, and fortunately, it’s not that complicated. Here’s how we recommend the associate-to-owner retirement strategy works:

Step 1: As of the effective date of the Associate Agreement, obtain a practice valuation completed by a mutually agreed upon source (this should be a CPA/CVA specialized in dental)

Step 2: At the time of the buyout, obtain another practice valuation completed by the same source

Step 3: Average the two valuations together in order to get the purchase price

Example:

  • Practice valued in 2015 (time of associateship) for $700,000
  • Practice valued in 2018 (time of buyout/sale) for $980,000
    • $700,000 + $980,000 = $1,680,000 / 2 = $840,000 SALE PRICE

 

This model rewards the risk, headaches, and heartbreaks the current owner endures by bringing on an associate, while giving credit to the associate who came into the practice and worked to increase the value of the practice, while only having to pay for half of the increased value.

We recognize there will never be a ‘perfect’ model for this type of retirement strategy/transition; however, the team at Edge Advisors has experienced much success with transitions of this nature. There are many strategies to transition a dental practice – this is only one of them. When the time comes, each individual owner/seller will need to decide what their goals are and plan accordingly.

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