Is A Partnership Right For You?

by Larry M. Chatterley & Randon J. Jensen

Some joint-venture business partnerships work very well, while others drag on in disappointment or end in agony. If you are contemplating some type of partnership, please consider the following points to help you enter into, structure and maintain a successful partnership.

Underpinning any successful business agreement is a mutual and abiding trust between the parties. It is this mutual commitment to the relationship and the success of the other party that is truly the foundation of a long lasting and profitable relationship.

Our experience in the industry over the last 29 years has exposed us to a myriad of different methods for structuring partnerships. Many of these methods are similar, yet some have worked better than others. Regardless of any commonalities, most methods will require customization in order to meet the specific needs of the dentists and address the issues surrounding each unique situation. That being said, the ideas presented here are simple and essential elements common to successful partnership arrangements.

The goal of any partnership type arrangement should be to create and maintain a mutually rewarding personal and professional relationship between two or more doctors. There are six major points to consider when considering a partnership arrangement:

• Does the practice have the financials capacity to sustain two or more doctors?
• Are the doctor’s values and practice philosophy similar?
• Are the doctor’s goals complimentary?
• Is the structure fair to both partners?
• What is a fair profit distribution structure?
• Have you sought professional help and have you properly defined your partnership agreement in writing?

Point #1: Evaluate the financial and patient flow capacity of the practice in advance. Sometimes the host dentist will bring a doctor into a practice that does not have enough patients to go around or is not in a fiscal position to support two dentists financially. An associate leading to partnership started under these circumstances will find the relationship of the doctors soon strained and will more than likely result in the associate looking for additional work elsewhere or leaving the practice all together. Be sure to count the costs and review the numbers before committing to an associate/partnership. Just because the practice feels busy does not mean it is ready for another dentist.

An exception to this rule may be a practice in a high growth area, i.e., a practice with a high new patient flow. Even then the host dentist must be committed to growth and in a financial position to subsidize an associate during the short term.

Otherwise, the practice will need a sizable active patient base sufficient to keep both doctors busy. If the host doctor is only booking a week or two in advance, there may not be enough volume to justify an associate. The only way to make this arrangement work in that case is by cutting the host dentist back both in terms of schedule and income and/or finding another part time position for the associate.

Point #2: Evaluate your own work ethic, practice philosophy, leadership style, and personality type. Then compare these characteristics to those of a prospective associate-partner. Although matching your values with a dentist possessing similar values is very important, we find there are certain ”default” values both parties must possess if a successful relationship is to develop between them:

• Honesty. Are you honest in all of your dealings? Does he or she tell the truth?
• Integrity. Do you keep your promises? Do you do what you say you will? Does he or she?
• Consistency. Do you vacillate on issues or do you make a decision and stick to it? Are your actions congruent with your words? Are you effective in communicating your thoughts and expectations?
• Compassion. Do you have a genuine concern for those you treat and those you work with? Does he or she? Do you seek to understand others first before being understood yourself?
• Skills & Knowledge. Are you confident in your level of knowledge and skill? Are you confident in his or hers?
• Conscious. Do you exercise good judgment and make decisions based on what is best for all concerned? Does he or she?
• Motivation. Are you motivated to always do your best? Do you inspire others to be and do the best they can? What about him or her?
• Humility. Are you willing to learn new things or is your way the only way? Is he or she teachable?

In some cases, it might be wise to do a working interview for a day or two to get a true sense of the other party’s values. Involve your staff in this process and seek their feedback. Have them rank the prospective associate on a scale of 1 to 10 in relation to each question stated above and see how well he/she matches with you and the practice. Then have the staff rank you on a scale of 1 to 10 in relation to the same questions and match those results with the associate. Also ask your staff whether or not they feel you and the practice are prepared to bring on an associate/partner.

So what if you have evaluated your personality and determined that you like to be the "captain?" Some co-captain arrangements can be successful and rewarding. However, in many cases if both of the parties have a strong need to be in control, the arrangement will likely not last over the long term, regardless of how well it is structured.

Some doctors are just not "partnership material," and that’s okay. Some dentists are not cut out to work in a close professional relationship with another dentist. Frankly stated, some doctors are meant to be the “captains of their own ship.” They have a certain way of doing things and prefer not to be encumbered by another doctor. If you think you might be this type of doctor, don’t feel bad, but don’t kid yourself into thinking that a partnership will be right for you. Everyone has a different approach to business and a different way of doing dentistry.

If a doctor is adamant about having controlling interest in the partnership (i.e. a 51% interest), that doctor definitely needs to remain a solo owner. He/she is not partnership material.

Point #3: Define your expectations and motivations in advance, communicate them to the other party, and seek to understand his or hers in return. Partners may each be pursuing a partnership arrangement for different reasons. The challenge, then, is to find two parties with similar motivations for entering into such arrangement. As mentioned before, it is important they have complimentary needs, like-kind values and compatible personalities.

Failed partnership arrangements usually fail because the parties have incongruent expectations. In other words, one of the parties is expecting something to happen or for things to happen a certain way, yet somehow those expectations were not met. Do not wait until you are working together, with the thought that you will “just address those issues when they come up.” An ounce of prevention is worth a pound of cure. Similarly it is more difficult to turn back time in an attempt to correct a problem than it is to address the issue in advance.

So then, what are some of the issues, the expectations that are so important to address? We touched on one of them in the previous paragraph. Determine if your needs are complimentary with the other party’s. For example, you might ask about your income needs and expectations as they pertain to scheduling, i.e., how much will each of you be working. A common mismatch we see in this regard has to do with what we call the host dentist’s “motivational status.” Is he/she an “increaser” or a “decreaser?” If you can hardly wait to get back to the office on Monday morning, if you still enjoy managing and motivating your staff, or if you are constantly looking for ways to grow and improve your practice, then we consider you an “increaser.” On the other hand, if you have seriously entertained thoughts of cutting back the time you spend in the practice, if you experience a lot of stress and fatigue, or if you are bored with the practice and just marking time until retirement, you would likely be deemed a “decreaser.” (Note: There is nothing wrong with being a decreaser. It simply means that you are in a different phase of your career and have different goals and needs than an increaser or a “sustainer.”)

A decreaser host and an increaser associate are likely to have complimentary needs; each is filling a need for the other. Be aware, however, that in some cases decreasers may want to spend less time in the office, yet he/she cannot afford to take home less than he/she is presently earning. Often host dentists in this situation think their solution is as simple as hiring an associate to perform all of the “grunt work,” i.e., the lower-end procedures, while they continue to perform all of the high-end procedures, thereby allowing them to earn just as much in fewer hours. We call this “dumping” since the associate feels “dumped on.” He/she is limited as to which procedures he/she can render and the operatory time available to him/her, and thus he/she is limited in his/her income earning potential. Obviously it does not take long for an associate to become disenchanted and disgruntled with such a situation. Unfortunately, too many host dentists feel this situation is perfectly acceptable because, in their mind, “the young doctor has to earn his/her keep and pay his/her dues, and if he/she wants to be busier or perform certain treatments, then he/she should work hard to build up his/her own practice.”

From our discussion on decreasers it is easy to see they make good candidates for associate relationships, but not many associate dentists are in the decreaser mode--most are increasers. So what if the host dentist is also an increaser? If both the host dentist and the associate/new partner are in increaser mode, chances are a partnership arrangement between them will only work successfully if the new associate is given a clearly defined opportunity to become an equity owner down the road and neither are caught up in being a captain that requires sole control of the practice.

Point #4: Make the arrangement as fair as possible for both parties. A truly successful partnership arrangement is one in which both the parties feel they have been fairly treated. Although it may sound overused, the arrangement must be win-win. Look at the proposed transaction from the other party’s viewpoint and consider their needs. Then match that viewpoint with your own.

If you have a spouse who works for you in the practice, you may have to consider firing him/her. Partnerships in which the spouse of one of the doctors works in the practice end prematurely in separation and/or dissolution almost 90% of the time. Since a spouse's loyalty usually lies with his/her spouse (which it rightfully should) their position in the office invariably ends up polarizing the relationships between the business partners if--or rather whenever--there is a disagreement between the spouse and the non-spouse business partner.

Point #5: Compensation and Structure. The former of these two items deals with the associate’s compensation. What is typical and what is fair? Most associates are paid a percentage of their adjusted production. In most markets and most situations, this percentage is about thirty percent (30%). (Note: Specialty practices/specialist associates are often paid a higher percentage.) It is not uncommon, however, to see flat wages or salaries paid as well, or variations of the two, such as a draw against future compensation in which the associate is paid a flat rate or a percentage, whichever is higher. Then, as his/her production increases, any draw that was taken is paid back. This method is particularly effective in situations where it may take the associate several months to “ramp up.” However, the host doctor should expect to see a consequential decline in income over the short term as he/she subsidizes the associate’s income via the draw. This will last until the associate’s percentage wage is sufficient enough to cover the minimum wage and pay the draw back, at which point the host should expect to begin earning a profit override on the associate’s production.

The inclusion and terms of a restrictive covenant is an important consideration in any associateleading- to-buy-in arrangement; however, this can often be a sensitive subject for both parties. Our experience has taught us that--in most cases--a non-compete agreement from the associate may not be necessary during the first six months of his/her employment. A non-solicitation agreement may be more prudent during this time, while a non-competition agreement makes more sense after six months of employment, when it appears that the arrangement will last long term. It is rare for many patients to follow an associate to a different job or different location after only six months (or less), as long as the associate is not allowed to solicit patients.

An alternative to the non-solicitation clause, however, is a covenant “option.” This arrangement allows the departing associate to determine the price and terms of a restrictive covenant upon separation. The host dentist is then free to choose either to purchase the covenant or sell it. By purchasing the covenant, the host is paying the associate consideration for his/her adherence to the terms of the covenant. Conversely, by selling the covenant, the associate is paying the host consideration for freedom from any restrictions on his/her practice of dentistry in the area of the host dentist’s practice. Obviously these provisions can be complicated and delicate to negotiate, structure and enforce.

At the end of the associate period, the buy-in occurs with agreements that define the expectations, obligations, and benefits of and to all parties. The structure of the agreement should provide incentive to both doctors to facilitate the success of the other. Typically these agreements will be structured such that each doctor receives two types of income. The first form of income is referred to as provider compensation. The second is distributable profits. Provider compensation should be calculated as a percentage of the production collected from services provided by each doctor, respectively. This percentage varies depending on overhead expenses and is usually paid monthly. The distributable profits can be paid whenever the partners elect, but are usually paid quarterly and are based upon the percentage ownership (i.e. 50/50) each doctor holds in the partnership (or more commonly, the jointly held limited liability company).

Point #6: Seek professional help and define your partnership agreement in writing. Contracts define and memorialize promises between two parties, including their mutual and respective rights and obligations, as well as the consequences for upholding or breaking those promises in the forms of rewards and penalties, respectively. Ideally these promises create a win-win outcome in which both parties are pleased. However, problems often occur when one or both of the parties seek only their own interests with little or no consideration for the other or without considering the longer-term impact of their actions. Sometimes negotiations result in one party getting their ideal result, but at the expense of the other party. Unfortunately, we far too often see contracts that are not designed to create win-win outcomes and end up failing miserably to meet the respective or mutual needs of the parties. Most could have avoided such undesirable results by asking the following questions before entering into any agreement:

• Does the agreement further your personal long-range goals? Does the outcome of the agreement fit into your objectives?
• Have you considered and are you attempting to meet the other party’s goals and objectives without compromising your own?
• Does the agreement fall comfortably within the goals and limits that you set for this particular negotiation?
• Does the other party feel good about and comfortable with the terms of the agreement? Has any possibility of resentment as a result of uncomfortable compromises been removed?
• Can you perform your side of the agreement to the fullest?
• Do you intend to meet your commitment?
• Based on all the information, can the other side perform the agreement to your expectations?
• Based on what you know, does the other side intend to carry out the terms of the agreement?

Obviously a best-case scenario would involve answers in the affirmative to all of these questions. If you are unsure about any one of them, take some extra time and review the entire situation. Assess how the agreement could be changed in order to create a "yes" answer to each question.

Although it may not be found in any mainstream business management textbook, we often counsel clients to check their “gut feeling” on an issue. If it does not “feel” right, then they should seek greater understanding and obtain additional information until it does feel right. If they still feel uncertain about it, they should either ask for revisions to the agreement or no longer pursue the transaction.

For example, associateship contracts may seem a bit confusing to a first time doctor looking for employment. Some may assume that since other dentists before them have entered into similar arrangements, it must be acceptable for them to do the same; however, as time goes on, incongruencies may arise in the expectations of each party. Contention will result, and if not addressed and resolved, even the “best” of contracts may not be able to hold the professional relationship intact and the parties will part ways.

A contract is only good as the person(s) entering into it. In other words, contracts do not perform, people do.

There is always an element of trust when entering into a contractual arrangement. Each party trusts that the other party will uphold their side of the agreement. When that trust is damaged, it usually takes a lot more than just a contract to restore it. The key is to get to know people and trust them to be who they are. Instead, we all have a tendency to trust people to be who we want them to be, and when they are not, we question their trustworthiness. Trust is developed based on the integrity exhibited by an individual.

Sadly, most of us have had or will have experiences in which we enter into some form of contractual agreement with the best of intentions only to end up frustrated and dismayed by the outcome—due either to the performance of the other party, or our own. If you doubt your trust in yourself or the other party, seek first to build that trust. Ask questions. Seek to understand and seek to be understood. It may be wise to also seek professional guidance and counsel to assist you in communicating your position, understanding the other party’s position and building a mutual framework of trust before entering into any agreement.

If handled correctly, a partnership should be very rewarding--personally and professionally--to both doctors. Success is the goal of virtually every business venture. And although business is inherently risky (particularly in light of the number of associate and partnership arrangements that fail), you can still structure and benefit from a successful partnership arrangement by following the information we have outlined above. In summary, remember to be fair, define your expectations, crunch the numbers, make the right match, do your homework, and seek advice. Attention to these things will increase your likelihood of beating the odds.