Partnerships: Selling, Buying or creating new partnerships. What should you consider?
For those looking to sell a share of their dental practice, bringing in a business partner or where a group of people are purchasing a whole practice, consideration should be given to the partnership routes carefully. What is often overlooked is that each partnership type will impact on the partners income, and because of this, the valuation of the practice. In addition, whilst the partnership type can be suitable at the time of creating, it needs to be able to adapt for the duration.
So what are the typical partnerships?
Expense sharing – as the name suggests, each of the expense sharing co-principals take on the responsibility of the overheads (typically 50:50), regardless of the gross fees generated. This could mean one principal generates £400,000 of income with another generating £250,000 of income. If the total expenses of the practice were £300,000 this would leave one principal with £250,000 profit (£400k – £300k/2) and the other with £100,000 profit (£250k – £300k/2).
Whilst this can seem a fair calculation, as it takes into account that each principal has the same facilities it often does not give much flexibility for changes. It should also be noted, that during the term of the partnership should any income/patient base be transferred to someone else, then a valuation and payment to the partner should be made to keep the balance of what is owned, as it were purchased or gross fees split in this way from the start.
True Partnership – this type of partnership is very rare due its nature, other than for married couples. Each principal will potentially generate different fees, work different days, but the profit is shared equally between the number of partners. Whilst a group of friends may purchase a whole practice together, potentially buying equal shares, this is often a recipe for disaster, as someone may wish to reduce their working commitment in the future which would directly impact the other partners and could feel an unfair balance of work to profit.
‘Associate led model’ partnership – This is certainly becoming a more popular model, in which the partner receives an associate payment for the gross fees that they generate, with then a split of the remainder of profit (or loss) in accordance with their ownership. This is often considered a partnership with more flexibility, as if a principal wishes to reduce from 5 days to 3 days, then their ‘associate’ income will drop, however if an associate takes up the other days/income then this would not impact the other partners. The (surplus) profit should also remain the same.
Valuations – As the profit split would be different for each of the partnership models, the valuation of each would be different. As such when selling or buying into a partnership, it is important to get expert advice to not only assess the profit models but value of the practice under the partnership type that you are entering into. Sometimes where there is an existing partnership with one person retiring with say an associate buying in, if the associate is buying a different level of gross fees to what the retiring principal is selling then this affects the remaining partner’s share and may mean a payment to them is also required.
Where there is a collective of people all purchasing a (whole) practice, they again, would need to consider the type of partnership that they are wanting to enter into. This would impact the amount that each pay (which can be different), borrowing and future income.
PFM Dental have been helping partnership buy-ins, and sales for over 30 years, as part of the valuations and sales service.
