Solo dentists shouldn't go it alone when merging their practices
by Barry F. Levin, Esq., and Philip M. Bogart, Esq.
"One is the loneliest number," goes the old song, and it can feel that way for some solo dentists. After years in practice, many solo doctors begin to consider other ownership alternatives, such as partnerships and group practices. These offer dentists the potential of enjoying more personal freedom and producing a higher income with a lower overhead. Partners benefit in a multi-doctor practice by sharing management responsibilities, marketing duties, and operational costs.
With appropriate forethought and planning, a group practice may indeed be the right choice for a dentist. However, there are potential drawbacks and pitfalls to joining a group practice. It is therefore imperative to work with trusted financial and legal advisors who understand the business of group practices. Remember, a handshake is never enough. Each group practice comes with distinct financial and legal issues. When entering into a multi-dentist practice, dentists want to ensure that the arrangement is appropriately structured and documented to deal with all of the possible consequences both now and later.
The following issues should be considered when negotiating the terms of a joint practice:
• Choice of entity: There are two primary entities suitable for group practices: the limited liability company (LLC) and the S-corp (e.g., a professional corporation). Although a dentist could be sued for malpractice, either of these entities would typically shield each dentist from other liabilities or from a liability resulting from the negligence of another dentist in the practice. In many situations, an LLC is the entity of choice because of its flexibility. However, in certain circumstances, the S-corp may offer modest savings.
• Ownership: How will the new entity be owned? In equal amounts by each owner? Will it be based on the amount of cash or other assets contributed to the entity, or the expected production of each owner? Answering these crucial questions early will help establish the practice's operations and parameters.
• Real property lease: An attorney can frequently negotiate the terms of a lease. Dentists should never simply "sign on the dotted line." In addition, if one or more of the practice owners also own the real property, the rights of each practice owner versus the right of the property owner(s) should be addressed.
• Capital: How much capital does the joint practice need to start its operations? Does each dentist contribute equal amounts? Capital can be in the form of cash, equipment, or goodwill (e.g., a patient list).
• Sharing of revenue and expenses: How will the dentists share the revenue? Will it be based on ownership, productivity, or a combination of both? How is revenue of non-dentists (e.g., hygienists) shared? How are expenses shared — based on ownership or productivity? Again, making these decisions early is key to launching a strong dental practice with understood and accepted ground rules.
• Management: How will decisions be made? Will all dentists be involved in every decision? Do they need to agree prior to the purchasing of each and every paperclip? Frequently, one dentist may control day-to-day decisions, and "extraordinary decisions" may require unanimous or majority consent of the owners. In other situations, management responsibilities may be allocated-based on the strengths of each owner (e.g., one owner may have the authority to manage staff, and another owner may have the authority to make day-to-day business and scheduling decisions).
• Restrictive covenants: If an owner decides to leave the practice, safeguards should be in place to prevent the departing dentist from "taking" patients. However, such a provision must be narrowly crafted to ensure that it would be enforceable by the court. In fact, not all states allow non-competition provisions.
• Transfers of ownership interests: May a dentist sell his interest to another dentist? Should the remaining dentists have a right of first refusal?
• Deadlocks: What happens if the dentists cannot agree? How will deadlocks be resolved? Legal counsel can help design a mechanism to resolve disputes.
• Exit strategy: What happens if a dentist dies, becomes disabled, or wants to retire? Can that owner (or his/her estate, as the case may be) require the other dentists to purchase the departing dentist's interest? What will be the purchase price? How will the purchase price be funded? Will it be funded by life/disability insurance?
Understanding the challenges
When all the factors are aligned and dentists are committed to the concept of a multi-dentist office, it can be an excellent example of delivering efficient, optimal oral health care to patients and maximum satisfaction for participating dentists. However, it's a huge leap for many practitioners. That's why we recommend working with a financial advisor and legal counsel who understand the unique challenges of merging dental practices, and who have successfully helped other dentists meet these challenges.
Barry F. Levin is a partner and vice chair of Saul Ewing LLP's Business Department.
Philip M. Bogart is an associate in the business department in Saul Ewing LLP's Baltimore office. They represent dentists, and the business entities in which clinicians practice, in all aspects of the dental practice structure including the structuring, negotiation, documentation, and implementation of associateships or employee arrangements, partnership arrangements, acquisitions, sales, and mergers of mature practices.
