If you’re considering retiring or stepping back from your dental practice, you might also be thinking about passing it on to one of the junior dentists in your office who wants to have a practice of their own. However, you’ll need to follow specific steps to ensure a smooth transition that ensures the practice’s continuity and gets your successor started on the right foot.
Confirming the Associate’s Suitability and Developing the Transition Structure
The first step in transitioning ownership of your dental practice to a junior associate is to assess their financial and professional readiness to take over the business. As you consider the junior associate’s financial readiness, focus on whether they have the personal financial resources to assume responsibility and take on the risks of owning the practice.
For example, does the associate have sufficient personal funds to invest in the business, or sufficient creditworthiness to obtain capital or operational loans as needed? For professional readiness, you may want to begin delegating management responsibilities to the associate so you can observe them handling both daily operations and critical events that arise, while remaining available to advise and make final calls when necessary.
You can pursue one of several transition plans for handing over the practice to your chosen successor, such as:
- Gradual buy-in, where you slowly hand over clinical oversight and operational management duties and allow the associate to increase their ownership stake over time
- Immediate sale, potentially with seller financing
- Phased ownership with specific performance milestones
A transition plan should minimize disruptions to staff and patients to limit employee turnover or shrinkage of the patient base. Most importantly, you should ensure your successor understands your plans for the transition timeline, the process for transferring control, and how compensation will work through the end of the transition.
Determining the Practice Valuation and Purchase Price Considerations
You will also need to set a valuation for your business, even if you’re conducting an internal transfer of control and ownership rather than shopping the practice around. Having a professional valuation in hand can minimize the risk that IRS regulators suspect you conducted a below-market deal for tax advantages. To determine the purchase price, you will need to allocate the valuation among asset classes such as real estate, equipment, patient lists, and goodwill.
Organizing Legal Documents
You will need various documents to complete the sale of your dental practice to a junior dentist in the office, including:
- A letter of intent to establish primary deal terms after initial negotiations
- Asset purchase or equity/stock purchase agreements to provide the finalized deal terms
- Updated bylaws, operating agreements, stock ledgers, or stockholders’ agreements
- Employment or independent contractor agreements for the seller, if the transition plan assumes the seller will continue in a practitioner role with the practice post-closing
You must also transfer licenses and certifications with the state dental board, the state corporations division, and local business licensing departments as necessary. The practice must also update its insurance coverage to reflect the new ownership.
Common Mistakes That Can Create Problems
The most common mistakes that dentists make during internal transitions of dental practices include:
- Relying on oral or “handshake” agreements instead of putting everything in writing
- Not updating corporate governance documents and registration statements
- Failing to account for regulatory approval timelines
- Not having an arms-length negotiation on purchase or seller financing agreement terms
- Not having a plan to loop patients and staff in on the transition
Contact Our Firm Today
If you’re a dental practice owner who wants a junior dentist within your practice to succeed you in your management or ownership role, you can make the transition process as smooth as possible by getting legal help now. Contact Mahan Dental Law today for an initial consultation with an experienced lawyer to learn more about what to expect as you pass on your dental practice to a junior associate.
