Associate pay, ownership lead small-group formation issues

2018 09 05 19 19 7060 Woods R Craig 400

Whether you are an associate in a practice that is in the process of being acquired or the doctor who is launching a small-group practice, one of the main practical issues to be negotiated is associate compensation.

R. Craig Woods, JD, is a member of the dental services organization group of the Dykema law firm in Dallas.R. Craig Woods, JD, is a member of the dental services organization group of the Dykema law firm in Dallas.

R. Craig Woods, JD, of the Dykema law firm in Dallas works on small- and large-group acquisitions every day as a member of the firm's dental services organization (DSO) group. He spoke with about options to help both entrepreneurial dentists and associates navigate these issues.

A typical situation might involve the formation of a DSO entity, perhaps by an entrepreneurial dentist, that would consist of separate nonclinical and clinical entities, Wood said. During the negotiations, two issues often arise:

  • Which associates will be joining the new entity?
  • Are these associates interested in participation in ownership?

"Will these associates who are moving over to the new clinical entity be owners or employees?" Woods said.

Generally, what happens is based on the associate dentists' current position and ambition. If the associate dentists are already owners in the selling group, they may get a rollover piece in the new entity.

However, as many associates are not part-owners, Woods tells these dentists to discuss their role in the new entity with the buying dentist or organization.

" 'What kind of opportunities exist? Will I be an owner or at least have an opportunity to buy in or will I be a salaried employee?' These are the types of questions the associate should ask," he noted.

Production and noncompetes

Associate dentists often ask what they can do to give themselves a better chance of having an equity position offered to them in the new entity. The decision can rely on a number of different factors, according to Woods.

“Will these associates who are moving over to the new clinical entity be owners or employees?”
— R. Craig Woods, JD

"It can be a combination of both [experience and production], but I think we're seeing it become more merit-based," he said.

The value of an associate who is a high producer becomes even more heightened when looking at it in the context of a sale, he noted, because the value of a particular deal is really in the hands of a practice's top producers.

"When someone is looking at a potential deal, you are going to look at who are the performers and how do we incentivize them to stay," he said.

The buyers examine all of a practice's numbers, including each dentist's production numbers, according to Woods.

"You can put as many different valuations as you want on a practice or on a DSO, but if the people who are treating patients are not performing, not attentive to detail, and not giving top-notch treatment to patients, you can have all the fancy formulas in the world but your enterprise is going to fail," he said.

One key element of every deal that affects an associate dentist is the applicability of any restrictive covenants, Woods noted.

"Associates joining any dental practice, including ones managed by DSOs, need to understand the scope and range of any applicable noncompetes," he said.

By range and scope of a noncompete clause, Woods means an agreement that defines the geographic range where an associate might be excluded from practicing dentistry or owning and operating a DSO. These clauses will include an expiration date and potential exceptions, he noted.

Increased activity

The Dykema law firm has seen an increase in the number of DSO and small-group acquisitions lately, according to Woods.

"The volume of deals is double what I saw two years ago," he said. "We expect to see rapid and continued innovation and growth in this space."

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