Episode 107 – Dental Practice Buy-In

“As you know, being a dental business owner isn’t easy. But it’s human nature for an associate to see a successful dental practice and think ‘Oh, being an owner must be pretty easy.’”

I got a question from a listener recently and it’s a really good one:

“I am a 44-year-old solo doctor. I built my practice from scratch and my associate, who has been with me six months, wants to buy in. But it seems so early. I can’t imagine asking a 50/50 partner for permission on business decisions when I built this practice from scratch. So, how long should I make him wait? How much should I let him buy?“

This is a loaded question. A great question! But a loaded one. There are so many different options. So join me today as I walk through this question about balancing your business, associates, and the future of your practice:

• What you want as a practitioner
• Owner mentality vs. associate mentality
• Percentage and ownership options to consider

EPISODE TRANSCRIPT

Hello, this is Dr. Bruce Baird with The Productive Dentist Podcast and this is episode number 107. And today, you know I got a lot of comments over last week’s two part series on love and respect and divorce in dentistry. So if you haven’t heard that one, I’d love for you to go back and listen to that. But today I’m going to do a podcast based upon a question that I got from another doctor here in the last hour in the last couple of weeks. And so I’m going to start out with that. We’re going to be going over a question from one of our listeners. 

And this was the question: I am a 44 year old solo doc with associate and a six chair practice doing a total of $2.9 million a year. – Awesome job by the way – My associate wants to buy in, but he’s only been with me for six months. He really seems like a great guy. But it seems so early. Also, I can’t imagine asking a 5050 partner for permission. When I did a scratch start 15 years ago and have created when I have we need to expand to at least 12 ops and have everything in place to do that. And it will happen early next year. How long? Do you think I should make this guy wait to buy some equity? And how much should I let him buy? Should I let him buy some now and some later? Should we end at 5050? Or should I keep majority until I’m closer to retiring in a decade or so? Or should I just go through the associate male and grow EBITDA and eventually go DSO? appreciate the wisdom, Bruce? 

You know, this question? is a loaded question. It has got so many different options that are available to this doctor. And in fact, I told him, I just called him and talk to him on the phone, we spoke for probably 30 or 40 minutes. Because there are so many different options. And it really comes down to what you know, what do you want, as a practitioner. My experience with associates has been there’s an associate mentality and there’s an owner mentality. And what I mean by that are associates are going to produce whatever they produce it rare and they may go up a little bit in production numbers as we talk about production per hour. But for the most part, an associate mentality means they’re going to be happy with what it is they’re making.

That doesn’t mean they’re always going to want to stay in that situation. But when somebody converts from a, from a associate to a owner, things change. And I’ve told a story about Jeff Boesky, my partner, he was producing, you know, probably 500 an hour 550 an hour and when we became partners, he jumped immediately to 809 100 I said, buddy, even hold Matt on me all this time, but it really is just human nature. It’s just like when you when you’ve got when you’re on the line, your production is very different than when you’re not Kane waters talks about that as as being you know, an associate and then having them be like an owner, you know, they put what they call at risk. So, you know, when they’re at risk, their production numbers change because they feel it. Whereas an Associates going to get paid. 

But let’s get back to the question. You know, the dentist seems like a really great guy. And so we were talking about it, I said, Are you pleased with the clinical work and everything else? He’s Oh, absolutely very, you know, very good dentist, three to four years out of school. And you know, and the question have been, I can’t I can’t imagine asking a 5050 partner for permission when I did a scratch start 15 years ago. Well What I would say is, you know, owner Doc, you’re gonna be in a mentor position. And you have options. You know, one is the kind of a classic equity associate equity associate model, where you bring in a dentist and that dentist works with you with the intention, it sounds like you guys get along great. And you have the intention of, of doing a deal and becoming partners. Now, and that will happen over a period of time, let’s just say an example would be, you’re paying that dentists now 30%, of cod gross collections. And let’s just say they’re not paying any lab bill, you’re taking care of that, well, you have an option to do something like this equity associate where all of a sudden, you begin to pay, instead of 30%, you’re going to pay the associate Doctor 35%. 

Now they’re still an associate. And this is a transition period that happens over a four or five year period of time. And what you do is you’ll take that 5% extra, and you’ll put that into an escrow account, that escrow is actually the practices money, but as this doctor, and it’s actually the doctors money to the associates money. However, if the associate decides in the future two years down the road, or three years, as this money is accumulating, that they want to leave and go set up their own deal, that money goes right back to the practice or back to you as the owner. 

So they can build a war chest, an equity war chest over a period of four to five years, which gives them plenty of money to go to a bank and buy in to your practice, add a set valuation, now that valuation is usually set before you work during the time when you’re doing this equity associateship. So I tend to beginning the big complaint that I hear over and over again, is Associate say, Well, I helped you build the practice, now I’m paying you for it after I built it. Well, that’s true. Let’s use an example. Let’s just say this practice well, and good example of say it’s $3 million dollars. So it’s a $3 million practice, and to buy 50% of that practice, and we’re going to just use a kind of a simple, you know, simple number, but maybe that practice has a valuation of 3 million. So let’s say that’s the value and this associate is going to buy in at a million and a half.

That’s great during the equity associateship period, let’s just say over the next five years, that associate now has an owner mentality. And now the practice itself, let’s just make a statement that says, Now all of a sudden, the practice has continued to grow, the associates been a part of that growth or the future partner. And now the practice is worth, let’s just say they’re doing $5 million in revenue. Well, now the practice valuation has gone up to, you know, let’s say 4 million. So the associate doctor now is buying in at a predetermine million and a half. But not only does the owner doctor get the million and a half dollars cash, but his 50% has now grown to a $2 million valuation. 

And so this can go on and on where you can actually sell to multiple partners over a period of time. And there’s lots of, there’s lots of strategies out there, for sure. But this is one that has been fairly popular. I know MTS manager used to use that during the exponent days years ago. And there are multiple attorneys that that work along this equity associate ship, or this, you know, by and type deal over a period of four to five years. What ends up happening is you let’s just say and it doesn’t have to be 50%. Let’s just say our goal is to grow a fantastic business. 

And what you’re going to do is a million and a half you’re going to buy into let’s say it’s 25% of that 3 million. Well, now they’re buying in at $750,000. And now they own 25% of the practice, but it’s grown to 5 million. So you’re as the owner, Doctor, you’re actually growing your own portfolio, your own business. And so is the Associate doc he just bought 25 million for 750. But by the time the equity associate chip reached its conclusion where they the doctor buys in, they now have a million In a million and a half dollars worth of value, or 1,000,002 50, but they’re buying it for 750. So it’s a really good deal for the associate, to become a partner. 

And with a thought process in my business, my thought process was I wanted to have three or four partners at a certain time, but I’m the senior Doc, I grew it. So I take my practice, I sell it, we call it multiple sales, you know, you sell your practice over and over again. So you sold 25% of your practice for 750. But your portion of the business has grown, your 75% has grown by another million and a half during that time.

Then you bring in another associate, and that same, you know, now you have to eat because you certainly want your 25% partner or 30%, or whatever it is, to be able to help you with making decisions or who’s a good fit in the office as you grow that business. That’s one option. Another option would be to say, Okay, how, you know, how long do you think I should make this guy wait to buy some equity? That’s a question where, you know, you either go the equity associate route, I wouldn’t let a dentist go too long without having the conversation of what you’re willing to sell, because then they start to get a little antsy, they start looking down the road, where can I go, they start looking at other lease bays, and pretty soon, and ultimately, they think it’s easy to be an owner, which most owners out there, no, it’s not that easy. But when you have an associate with you six months, and he sees you doing 3 million a year and your practice with only six chairs, which is certainly doing very, very well. It’s really easy for that person, it’s human nature to say, oh, it must have been pretty easy to do. Especially if they don’t have a lot of experience, I love them. 

I love them having associates who’ve been beaten up before, you know, that way, at least they know what it’s like, you know, to be involved in a practice. But that is something that is extremely important and how much you should live by that’s really the determination is up to you. Big by some now by some later you can keep an equity deal in place. Or you could just, you know, you can go to the bank and, and, and do it that way. I like I like it when the practice continues to grow, everybody’s on the same page. And your wealth is actually growing during that time. The other thing is head, or maybe I just keep the majority and until I’m closer to retiring in a decade or so and should just go through associate male or grow grow even out eventually go DSL, meaning sell to a DSL and that is you know, that’s become kind of the option. 

But I like the super the supergroup, the supergroup is where you bring in dentists, and they become part of your business. And as this business continues to grow and get bigger and had a bigger footprint, marketing well, doing all the things that that you do to grow a successful practice. And then what you do is you can look at having the supergroup but you have literally sold that practice for more than you could have ever sold it because you did it over a period of time, which is the growth phase of your practice. 

You’ve got associates who turned into owners who have turned into higher producers don’t just by taking an associate and turning them into an owner with an owner mentality, you’re going to grow your business 15 to 20% right off the top. So these are you know, these are suggest different strategies to start to look at. And, you know, we didn’t come to a conclusion with this with this conversation with this doctor owner, because it really isn’t. It isn’t one person’s idea to make it a certain way. It’s that owner and what do you want as an owner, but I want you to know that there are lots of options out there. 

And you can certainly talk to us at Productive Dentist Academy. We have coaches, we have people that that do this and look into this. We have attorneys that we work with that do things different ways. So you know, we’re more than happy to help along this. My ultimate deal is no matter whether you sell now or sell later, grow your business. And that’s what Productive Dentist Academy does. 

We grow business from, you know, from a 800,000 to a million dollar practice to a $3 million practice. This doctor said 3 million, even with just associates, Productive Dentist Academy can help him grow to a $4 million practice and maybe he wants to do that over the next 18 to 24 months and then talk about how Having a partner or associate come in. So these are all issues. These are all things to think about. And hopefully I’ve given you a few things to think about. I look forward to next week’s podcast and tell your friends, please and let’s, let’s get the word out. So thanks so much. I look forward to talking to you guys next week.