During the process of negotiating an associate buy-in, parties have various legal issues they will need to address. Developing a checklist can help them avoid overlooking important details.
Understanding the Buy-In Agreement
An associate buy-in agreement allows a dental practice owner to let associates buy into the practice, usually as part of the owner’s transition into retirement. As a result, buy-in agreements include various provisions, such as:
- The ownership percentage the associate will receive
- The purchase price for the ownership interests and the method for valuing the practice and the associate’s interest
- The timeline for the buy-in process
Having a clear, comprehensive buy-in agreement can facilitate a smooth transaction for an associate to buy a stake in the practice. Understanding the agreement’s terms before signing can help parties avoid disputes later.
Practice Valuation and Financing
An associate buy-in deal will require a practice owner to determine a valuation for the business, which in turn determines how much the associate must pay to buy an ownership stake. Calculating the fair market value of a dental practice will require an evaluation of important assets for the practice, such as medical equipment, real estate, goodwill, and accounts receivable. Parties may retain expert business appraisers who can value the practice under one of the common valuation methods, such as a discounted cash flow analysis, capitalization of earnings, multiperiod excess earnings method, or market-based approach.
Associate buy-in transactions will also require consideration of how the associate will finance their purchase if the associate does not have the cash on hand to pay the purchase price. Associates may finance their buy-in through a bank loan, which can complicate a transaction as the bank will want to evaluate the practice to assess the risk of a loan. Alternatively, the parties may agree to seller financing, where the current practice owner accepts payment of the purchase price over time.
Structuring Ownership and Management Roles
Next, parties must structure their ownership relationship and management roles. A buy-in agreement or the governing documents of the legal entity that operates the practice (e.g., corporation, LLC) should describe the associate’s voting rights and profit distribution once they become a part-owner. Parties may also negotiate the associate’s management responsibilities as a part-owner, especially as the current owner transitions into retirement.
For example, parties may agree that the associate buying into the practice will assume authority over daily operations, while the current owner retains authority over significant transactions or strategic decisions, such as opening or closing new practice locations or taking out commercial loans. Defining the parties’ initial roles after a buy-in can help set expectations for the associate and prevent power struggles between the parties.
Employment and Compensation Issues
Parties must also address how an associate’s employment and compensation will change once they become a part-owner of the practice. For example, transitioning from an employee to a part-owner role may affect an associate’s salary, benefits, or profit sharing. Parties may agree that the associate’s base salary will decrease as a part-owner, with the difference made up by their share of the practice’s profits. Finally, parties should also have a clear understanding of how the associate will balance their clinical duties with new and increasing ownership responsibilities.
Restrictive Covenants and Exit Strategies
Finally, parties can negotiate exit policies and succession planning. For example, exit strategies may cover what happens if an associate changes their mind about taking over the practice and wants to leave. A succession plan can provide a roadmap for the associate to assume full ownership or management authority gradually as the current owner transitions into retirement. Finally, whenever either party leaves the practice, a buy-in agreement can include restrictive covenants, such as non-compete or non-solicitation agreements, that prevent the departing party from immediately opening a competing practice or soliciting employees or patients.
Contact a Dental Attorney Today
When negotiating an associate buy-in transaction, understanding the necessary legal steps can help you protect your interests and ensure a smoother transition. Contact Mahan Dental Law today for an initial consultation with a dental attorney to develop a checklist for your associate buy-in deal.
