Associate to Purchase: Is this the right dental transition strategy for your practice?

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By Brannon Moncrief of McLerran & Associates

As a dentist nears retirement age, it becomes important to address the best way to transition ownership of the practice. One popular option is to bring an associate into the dental practice for sale with the expectation that he or she will purchase the practice at a predetermined date (typically one to two years from joining).

This “Associate to Purchase” dental transition strategy can be advantageous for a number of reasons:

Find the Right Fit: It provides the practice owner with the ability to evaluate the associate dentist prior to the sale to ensure the successor is a good fit for patients and staff. During the associate period, the senior dentist has the opportunity to mentor and train the associate, helping ensure a successful and smooth transition.

Increase Revenue and Cash Flow: An associate with a vested interest in the success of the practice will be motivated to increase new patient flow, revenues, and cash flow, maintaining the dental practice value and possibly increasing the practice owner’s personal income during the transition period. The addition of another dentist may also allow for increased office hours and services, further increasing revenues and cash flow.

Reduce Hours, Maintain Practice Value: Practice revenue and cash flow have the most significant impact on dental practice value. As a dentist approaches retirement, there is a tendency to reduce hours and spend time pursuing other interests without considering the adverse effect these actions have on practice value and marketability. Bringing on an associate prior to selling a dental practice may allow the senior dentist to reduce workload while maintaining personal income and dental practice value.

Mentorship: The associate phase provides the young dentist with the opportunity to work alongside the senior dentist on a day-to-day basis, learning the basics of operating a business and advancing clinical skills.

Reduce Transition Risk: During the associate phase, the young dentist has the opportunity to build rapport with staff members and patients and network in the community. There is less noticeable change for patients when the dental transition occurs.

Build Equity Prior to Purchase: A correctly structured formula will establish a base value and give the young dentist incentive to actively market and grow the practice prior to purchasing the office, thus building equity prior to the practice purchase.

Once the selling dentist and associate decide to move forward and enter into a purchase arrangement, there are a few additional considerations:

Seller Considerations From Your Dental Practice Brokers

Set Clear Expectations Upfront: It is crucial to establish clear expectations as to how the transition will be structured prior to the associate joining the practice. The associate needs to understand the expectation to enter into a purchase agreement after a predetermined period of time. Once the parties agree to move forward with an associate relationship, it is important to discuss the purchase price or formula for determining the purchase price, sale date, seller’s practice involvement after the sale, and any other important factors that could potentially derail a successful transition if left until the closing date. We have heard horror stories from both associates and sellers that are almost always attributable to not setting clear expectations at the start of the relationship.

Communication: While this may seem obvious, it can mean the difference between a successful or failed transition. The transition period from the time the associate joins the practice until the sale occurs or the selling doctor leaves the practice can last anywhere from one to five years. Communicating issues and setting expectations prior to and throughout the process helps ensure that a positive relationship between the doctors is maintained and the goodwill of the practice is effectively transferred at the time the dental practice sale occurs.

Before investing the time and energy in building a relationship with an associate who will eventually purchase your practice, be sure to establish the foundation for a successful dental practice transition by consulting with a local, reputable dental practice broker and addressing the key issues covered in this article.