Do not be surprised when evaluating a potential dental practice acquisition to find that the amount needed to acquire a minority interest is lower than expected. Compared to the overall practice valuation, minority interests should almost always be priced lower, because the sum of individual minority interests does not equal 100% when each is considered on its own.
That seems like an impossibility. If four owners each hold 25%, how could four times 25% not equal 100%? The answer lies in what each minority interest actually conveys and what it does not.
Bruce Bryen, CPA, CVA.
Consider an ownership agreement that requires a 76% vote to approve any acquisition above a certain dollar threshold. A single 25% owner who supports the purchase of another practice cannot force that decision alone. Their vote simply does not carry enough weight. In that scenario, each 25% interest is effectively discounted to approximately 18% on an individual basis.
A dental CPA -- a certified public accountant with expertise in dental practice finance -- will explain that a minority interest lacks the voting power, management authority, or ability to compel action on its own. Four interests at 18% each total 72%, which is still below the 76% threshold needed for a binding vote. The purpose of that threshold, of course, is to require a broad consensus before a decision as significant as acquiring a practice can move forward. When all four owners vote together, they equal 100%. That unanimity is the entire point of structuring the agreement that way.
Why would a dentist acquire a minority interest with so few individual rights?
Understanding the limitations of minority ownership is important before evaluating its benefits. On an individual basis, a minority owner typically cannot:
- Elect directors or appoint practice management
- Set management compensation or approve ownership perks without full management agreement
- Establish practice policy
- Acquire or liquidate practice assets
- Change corporate bylaws or articles of incorporation
With so many restrictions, why would any dentist pursue a minority interest? The answer comes down to economics and access.
Any ownership stake provides the opportunity for current income. A minority owner may also participate in an employer-sponsored qualified retirement plan, which can allow benefit allocations tilted toward owners rather than staff employees. On the surface, this arrangement may appear risky by disqualifying the retirement plan, but an experienced dental CPA who understands how these structures work can help navigate that issue properly.
Retaining an experienced, qualified professional to enhance the dental practice
Engaging the right dental CPA can add hundreds of thousands of dollars to a dentist's wealth over time. Even without a majority ownership stake, a well-structured employer-sponsored retirement plan -- when the mechanics are prepared correctly -- can meaningfully improve a minority owner's financial position relative to the ownership percentage.
Beyond tax planning, minority owners should take advantage of the right to participate in conversations about the operating agreement. Key provisions worth addressing include:
- The right of first refusal if a partner dies so that person's shares are offered to the remaining owners on a pro rata basis before being offered elsewhere
- The same pro rata right if a partner voluntarily leaves the practice
- The right to attend partnership meetings and offer input
- A proportional share of the proceeds if the practice is sold
Each of these provisions can meaningfully increase the long-term equity value of even a small ownership stake.
Additional reasons to consider a minority interest in a dental practice
Ownership carries reputational value that extends beyond the practice itself. Introducing oneself as a dentist and practice owner signals professional achievement to peers and to the broader community in a way that employment alone does not.
A minority interest also provides the practice with additional liquidity and brings another voice into decisions about expansion and future investment. For the minority owner, participation in a multiowner practice offers stability that a solo practice cannot. When a solo practitioner is sick or on vacation, production stops. In a partnership, the practice continues to operate and generate revenue.
There is also a knowledge dimension. Working alongside experienced partners exposes a minority owner to clinical approaches, business thinking, and areas of expertise that would otherwise have to be acquired through years of independent trial and error or expensive outside consultants.
Bruce Bryen is a certified public accountant with more than 45 years of experience. He specializes in providing litigation support services to dentists, with valuation and expert witness testimony in matrimonial and partnership dispute cases. Bryen assists dentists with financial decisions about their practice, practice sales, evaluating whether to join a dental service organization, practice evaluation during divorce proceedings, and questions about the future or financial health of dental practices. He can be reached at [email protected].
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.
