Dental Partnership/Shareholder Agreements: The Good and the Ugly

I guess you were thinking that the title should be, “The good, the bad, and the ugly? Here’s why it’s only the good and the ugly:

For dentists, any agreement between two or more participants that is not good probably will turn ugly. In my 40 plus years of experience, I have found that many dental agreements are not even in writing.  It may take some time and effort, but without the fine points being included in the written agreement, the venture is at risk.

Most waking hours of a dentist’s life are spent with the partner/shareholder of the dental practice. Dentists in partnership often spend more daylight, and sometimes nighttime, hours together than with a life partner or spouse. One of the biggest differences in “living together” as dental partners rather than as life partners may be the ability to have everything in writing in advance. The financial terms of a resolution can be available so that the courtroom is not an outcome, as it may be in a personal relationship such as a divorce.

Is Everything About Money? 

After being involved with the financial side of over 1,000 dental practices covering more than 40 years, my experience is that almost all disputes are resolved over issues regarding finances.  Many exceedingly intelligent dentists that I have worked with will not spend money on advisors, even though they can offer their experience and present issues they have seen so that the dental client does not make the same mistakes as other dentists have made.

The up-front price of preparing agreements in advance may seem too expensive, but it is important to do so when there is time to consider things carefully and fully understand the situation, rather than to retroactively memorialize a verbal agreement so that a dispute has settlement language in the document. Once a dental practice is open for business, dentists are typically too busy to sit down and listen to an advisor, who could save them thousands of dollars in future legal fees and incredible aggravation if a problem occurs after it’s too late to start over. When things reach the legal stage without an agreement, the time spent in preparation for court will also result in lost patient fees as well, because of specific deadlines imposed by the court on the dentist.

To Whom Does the Dentist Turn for Advice? 

Most dental CPAs can give the dentist a good understanding of the points needed for drafting the partnership or shareholder agreement.  Many would ask, “Why not go to an attorney for this type of information and document preparation?” As an experienced dental CPA, I can tell you that there are few attorneys who have ever worked with a dentist. An attorney will eventually be needed to prepare the legal agreement, since the dental CPA can’t do so from an ethical standpoint. However, the dental CPA would be the one to assist the attorney with the language necessary such as provisions for work in progress, remake work, collection of accounts receivable after the closing, etc.  A business attorney may be able to include certain business points such as non-compete and non-solicitation clauses, the discussion of the allocation of physical assets for tax purposes, and various penalty clauses for non-compliance. Only an attorney with dental experience would understand about goodwill allocations between the enterprise and the personal assessment. Since there are few attorneys who have dental experience, the dental CPA would fill a need to assist the dentist in understanding what should be included in the agreement and to assist the attorney with that language as well.

What Process Begins the Task of the Preparation of the Agreement?  

Assuming that the dentist and partner to be are in agreement about joining together as a single entity, my recommendation for an effective process is to start with a dental practice valuation.  The actual value of the dental practice may be more or less than what either dentist may think.  A professional valuation will set aside any differences that the owner and the potential partner may have. After the valuation is completed, its points can be discussed as to why the value is at the level estimated and what methodology was employed to determine that estimated value.  Once this has been completed, a conference with the dental CPA would be the next step. That advisor can lead the discussion and present points to be considered prior to approaching the attorney for the document preparation.  

About the Author
Bruce Bryen is a certified public accountant with more than 40 years of experience. He is the principal in the firm of RKG Tax and Business Services, LLC, located in Fort Washington, Pennsylvania. Mr. Bryen specializes in retirement planning design, income and estate tax planning, determination of the proper organizational business structure, asset protection, and structuring loan packages for presentation to financial institutions. For more information, please visit www.rkgcpa.com.