Posted on Oct 24, 2011
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Posted on Oct 24, 2011
By Peter Almonte, JD, The Almonte Fallago Group
Take from our experienced group of dental practice brokers… when a dentist retires from a group practice, it presents challenges for the retiring dentist as well as the remaining dentists. The retiring dentist wants to obtain a fair price for his interest in the dental practice for sale. The remaining dentists fear the additional financial responsibility from the retiring dentist’s buyout, a loss in income, and a different practice.
During this dynamic period, the interests of the dental practice should come first, which means all partners need to be flexible in planning for an orderly dental transition. For example, the remaining partners may be confronted with adverse conditions impacting the practice’s future earnings such as a recession, the intrusion of managed care into the practice, or the disability of a remaining partner.
Given these possibilities, the partnership should provide for flexibility in the payment terms to ensure that the retiring partner receives his buyout payments. Here are several specific suggestions by our dental practice brokers for an orderly dental practice transition:
First, when selling a dental practice the partners in the dental practice should prepare a set of cash flow projections before establishing the buyout payments. The cash flow projections will not only be helpful in forecasting future earnings, but will also aid in determining the payout to the retiring partner. These projections will also help set the term of the payout and the net income to the remaining partners.
The partnership should create safeguards to insure that the remaining partners do not suffer economic hardship in the event of a downturn in practice income. One safeguard involves setting a cap on the amount of the payment to the retiring dentist in any one year. For example, an amount can be set not to exceed a percentage of either gross income or adjusted net income.
The partnership can also guarantee the remaining dentists that their salaries will not fall below the amount earned in the year before the retiring partner’s departure. As a result if the payout to the retiring partner cannot be made in full in any one year, the amount not paid can be deferred, and paid during the next succeeding year.
The payout to the retiring dental partner should be for a fixed term, generally five or seven years. If the total payments can’t be made during the fixed term, the partners should give consideration to extending the term by a year or two. If the extension term expires, when a balance is still owed the retiring partner, then the partners might consider extinguishing the balance owed. If there is still a balance after the extended cutoff date, the payout amount was probably too large from the outset.
Another matter that should not be overlooked by the partners is the possible admission of an associate, or new dentist, to the partnership. If the retiring partner’s buyout arrangement is a financial burden, and the payment terms are not flexible, the remaining partners may have a difficult time attracting or convincing an associate, or new dentist, to buy in. As a result, the remaining partners’ later retirement from the practice could be jeopardized.
By extending the payment term when the partnership faces economic hardship, the partnership is putting the dental practice first. Flexibility in the payment arrangements to the retiring partners will minimize the risk of the remaining partners suffering a lost in income, and maximize the potential for the retiring partners to receive their total buyout payments.
Certainly, the retiring partners bear greater risk with a gross or net income cap. The risk, however, is a reasonable one. It enables the remaining partners to devote their efforts, production, and commitment to the dental practice while satisfying their financial obligation to the retiring partner.