How To Deal With An Interesting 3-way Dental Practice Partnership. Photo AI generated.
By Bruce Bryen, CPA, CVA
Dental practice transaction can come with a variety of obstacles in the most normal of circumstances. Let’s take a look here at a not-so-normal situation.
The dental practice is in the process of having one of the partners, a son with plenty of experience in practicing dentistry as well as in running the operations and business side of the dental practice, buy out the other son who also is a dentist with plenty of experience in practicing dentistry. The third equal owner of the practice is the elderly father of both sons with almost 40 years as a practicing dentist. The one son has bought out his brother at a fair market value price. There is no question that all of the partners have agreed that the steps required to establish the fair market value and to conclude the transaction at that price were successfully completed.
This would make those interested in this transaction think that there was a price established at fair market value for a one-third interest in the dental practice. The big wrinkle to the transaction is that the father and son who bought out the other son are both now each 50 percent owners of the dental practice and the elderly father is thinking of leaving his ownership interest in the partnership to the son who previously sold his ownership interest. In the event of the father’s death, what a mess this would create.
There are methods around the problem that astute dental practice advisors would know and be sure to include in the original agreements or in amendments to those agreements. Some of the methods will be described in the following paragraphs and the parties involved would know what to do in advance of any signatures being executed on the partnership acquisition papers during the first acquisition.
This successful partnership faces the dilemma of what must occur next.
To keep things operating smoothly without the patients or staff being alarmed about any material changes in the dental practice format, the son remaining in the dental practice must speak to the staff to calm their nerves. They are probably worried about their jobs and their compensation, especially those who have families to support. First let’s discuss the solution or solutions to the problem for the son who thought he would end up being the sole owner of the practice. He must be sure that the father cannot leave the son who sold his interest in the partnership his shares in the event that the father passes away prior to him selling his share to the son remaining in the dental practice. This can be rectified by having an agreement prepared while the negotiations are proceeding with the father to sell his share to the son in the dental practice. That agreement would state that the father will not leave his shares to the son who sold his partnership interest to his brother in the event that he passes away prior to the completion of his sale to the son remaining in the dental practice.
There would be consideration for this agreement paid to the father with a completion date settled in this agreement of the final acquisition by the son remaining in the dental practice of the father’s ownership interest, with an option to be exercised by the son remaining in the dental practice if the completion date of the transaction is delayed. The legal agreement would include best efforts clauses so that the transaction can not be delayed or there would be penalties assessed against the party responsible for the delays. Each party would have advocates representing them. There wouldn’t be a question of the price to be paid since the opportunity for another dental practice valuation would present itself and there would be a precedent for the price and the term of payment based on the first acquisition.
The speed at which the acquisition occurs and any barriers to the successful conclusion to the purchase of the father’s interest.
The father knows that the remaining partner is one of his sons. He understands the heartache that he and the son have gone through during the acquisition of the other son’s interest. He does not want this to happen again as he and his wife are both elderly. He also knows that the son who is his partner currently will provide for he and his wife’s future upon the success he continues to derive from the dental practice. As part of the benefit package the father will receive, its income source will be the continued successful operation of the dental practice. Each party will be in a winning situation if things proceed according to the long range plan of the parties. The ultimate goal was for the son who stayed in the dental practice to take the responsibility that he has been undertaking. That is to manage the financial and clinical sides of the dental practice and watch it continue to prosper. It won’t be a simple job, but it will be much more pleasant for the remaining son without the problems created and time and money expended during the buyout of the son who sold his interest during the first acquisition. If things go smoothly with the elderly father, and the remaining son in the dental practice takes control of everything, his life will be much easier as will the father and mother of the son who will become the 100 percent owner.
Is this an unusual situation or do you see something similar in your practice?
This may seem like an unusual situation but it really is not that unusual. The story does not have to be about relatives who are partners in a dental practice. It can be about any 3-way partnership situation where an elderly partner may want to keep a protégé’ who has sold his interest to have the right to reenter the partnership even if the remaining partner does not wish that to occur.
Editor’s Note: Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He is a regular contributor to Dentistry Today and more articles on finance and practice acquisitions can be found at dentistrytoday.com. Bryen specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. You may contact him at [email protected].
