In the past, dental entrepreneurs had few transition options when a doctor owner was ready to retire while the other wanted to stay on. Typically, they were pigeonholed into either selling the practice outright or bringing on one or more associates to eventually buy into the practice. The problem with bringing in associates is that it rarely works out -- the success rate of associateships is as low as 20%.
One of the biggest reasons associateships don’t work is due to differing expectations. The doctor and associates need to have complementary skills, share similar business philosophies and priorities, and be compatible with each other’s management styles.
For example, there might be a conversation between the doctor and the associate about buying in after two years. However, one of them could change their mind because of reasons such as undefined milestones or a transition road map that was not in place. It’s common for there to be disagreement on time horizons, and resentment can grow if both parties aren’t on the same page, which can result in the associateship dissolving.
Those are just a few reasons why this strategy has become outdated and antiquated. Fortunately, doctors today have more options available to them than dentists who transitioned practices in previous eras. Partnerships, especially with dental service organizations (DSOs), have emerged as top choices for many docs at this stage, when one owner is ready to hang up their coat and the other wants to keep practicing.
So if you’re at a crossroads with your practice, where one partner wants to continue working and the other is ready to retire, read on for an overview of modern practice transition options,tips on what to consider, and how to proceed to generate the most value for your business.
3 options for transitioning a dental practice
Understand your options
Today, there are more choices than ever for transitioning a practice, especially with the growing number of DSOs. For docs who are looking to retire, they can typically get a higher value when selling their portion of the practice. They can even roll the equity into the practice or DSO to keep growing their investment after retiring.
For docs who are staying on, they may also have the opportunity to roll equity into the practice or DSO along with receiving support from the purchasing DSO, like managing business operations, bringing in associates, and providing managerial and clinical support so nothing slips through the cracks post-transition.
Some popular transition options include the following:
- Merge practices to form a group. This option requires working with other practice owners to merge into one group. It benefits doctor owners within the group because there are now more doctors to share the workload. Even if a dentist chooses to retire, there are providers who can cover the work. This option maintains stability at the practice level and can make the group of practices an even more attractive option to sell to a DSO in the long run. While it can be an excellent option to keep scaling the practice, it’s important to note that you may have to give up some control over the practice’s business strategy post-merger if you go this route.
- Pursue a group buyout or a joint venture. This transition option entails bringing in a group to purchase the practice (or a portion of the practice) from the existing practice doctors, who will then offer the newer doctors the option to stay at the practice. That way, a doctor who’s ready to retire can step away while the other can stay on for however many years until they are ready to retire.
- Roll your equity. This option can come in many forms that allow the doctor owners to sell all or some of their portion of the practice to a DSO and invest cash or a percentage of the transaction into the DSO at the holding company level.
At the end of the day, the best choice for you depends on your personal and business objectives and your risk profile.
Compare offers apples to apples
There are hundreds of DSOs operating in the U.S. that offer a wide range of deal structures across diverse time horizons, including equity partnerships in the practice or parent company. Before making a decision, it’s critical to understand how the potential options available are structured and how that impacts both the doctor staying on and the one who is retiring.
It can be incredibly challenging to discern how the offers in front of you could impact you and your business partner, so it’s a good idea to seek expert advice. They’ll walk you through how to properly compare and contrast the offers you receive.
An experienced dental practice broker can also help determine the practice’s value and provide tips on how to leverage up offers so that a deal satisfies the needs of the retiring doc and the one who wants to keep practicing.
Plan ahead for practice transitions
Careful advance planning is one of the most important steps a dental entrepreneur can take toward a secure financial future for their practice. It’s even more important when there are two or more practice owners, because it gets trickier to plan and execute when there are more stakeholders impacted by the transition outcomes. For instance, they may have different goals for retirement, their timelines may be different, etc. It’s best to plan a transition sooner rather than later to ensure all business owners’ needs are accounted for and taken care of with the eventual transition.
A five-year time horizon is ideal so you can consider your options, analyze the market, get ahead of emerging trends in the industry, and take steps to maximize practice value to get the best return. In a scenario where one partner plans to keep working, planning ahead expands available options.
It's a challenging situation when one practice partner is ready to move on and the other wants to keep working, but the fact is that associateships are an antiquated transition strategy and are more likely to fail than not, so bringing in an associate isn’t necessarily the right answer.
The good news is that you have options, and the sooner you explore them, the faster you can reach an agreement that works for everyone. With careful planning, a better understanding of the marketplace, and the guidance you need to find the right option for your practice, you can move on to the next phase with confidence.
Brent Anderson is a practice transition consultant with Professional Transition Strategies.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
