Equity vs Cost Sharing Partnerships

My business is brokering dental practices. My objective is to help my clients maximize the return on their practice investment when they do sell. My blog posts are all about sharing skills and strategies that will ultimately maximize your cash flow and practice value – enjoy.

Practicing in a dental partnership can be a great experience or a nightmare, and your experience will likely be affected by the kind of partnership you are in. There are primarily two different kinds of partnerships that you will find in dental offices, Equity Partnerships and Cost Sharing Partnerships, and they are very different. There are several differences between the two; however, what you are sharing as a partner is the main difference.

In an Equity Partnership, the partners share income, expenses, and net profit. In a Cost Sharing Partnership, the partners have their own income streams and share some or all of the expenses. In an Equity Partnership, there is one practice that the partners jointly own.

In a Cost Sharing partnership, each partner has his/her independent practice that shares space and certain expenses.

One of the other fundamental differences is that typically in an Equity Partnership, all of the partners are involved in making and ratifying the partnership’s decisions. Typically, in a Cost Sharing Partnership, each practice owner gets to make their own decisions, usually without any ratification from any other Cost Sharing Partner.

The ability of individual Cost Sharing Partners to make their own decisions about how they are going to operate their practices can present real problems. For example, imagine a scenario where a cost-sharing partner decided to discount his prices by 20% to 30%. This created significant problems for the partner who was not going to discount his fees, particularly given that the two dentists had patients from the same families. This arrangement led to confusion and resentment amongst the many common patient families for obvious reasons. In this case, the changing practice philosophies caused the partnership to be dissolved.

If you are considering any kind of partnership, here are a few things to keep in mind:

  1. Ensure you have the appropriate Partnership Agreement drawn by a lawyer who deals primarily with dentists.
  2. When either partner departs, the remaining partner must purchase the departing partner’s interest in the equity partnership or the departing partner’s cost-sharing practice. Either way, the remaining partner usually needs to buy out the departing partner on 12 months’ written notice – some exceptions do apply, such as bankruptcy or loss of license.
  3. Provide a provision whereby a partner in ill repute can be removed from the partnership.
  4. All decisions in a two-person partnership should be unanimous – one vote for each partner unless one partner owns less than 25% of the partnership.

If the partnership you are considering is a cost-sharing partnership in addition to the above, consider the following:

  1. Agree that material changes (which should be identified) in the administration of each practice must be ratified by both Cost Sharing Partners.
  2. Make it a requirement that all parties maintain their licenses and liability insurance in good standing and that they refrain from any activity that could reflect poorly on the practice’s goodwill.
  3. Make it mandatory that the partners share their financial statements with each other to ensure that each partner is aware of the overall financial stability of the Cost Sharing Partnership.

Your lawyer will have a host of other legal requirements applicable to the type of partnership you are forming – make sure that any partnership agreement addresses the issues above. It is generally easier and more profitable to sell part of an equity partnership than a stand-alone practice in a cost-sharing arrangement. The reason for this is that being a partner in an Equity Partnership provides both partners with a safer investment than investing in a practice that is part of a cost-sharing partnership.

Closing Thoughts: After working exclusively with dentists for the last 40 years I have seen great partnerships and terrible partnerships. It can be very rewarding to work in partnership with a colleague but like anything, if it’s worth doing it’s worth doing right.  If you have a partnership question, send me an email.  Check back often because there will always be something of value here whether you are selling or not.

 

Written By: Derek Hill, CPA., CA., Broker of Record