Dental business partnerships or equity associateships can have huge advantages when everyone is getting along. They usually result in access to greater funds, skills, resources and an ability to share costs. However, even the most successful among them have one big downside…individual exit-planning. One partner will often lose interest, have personal issues to attend to, or just simply want to sell earlier than the other.
Sure, the remaining partner should get offered the other partner’s equity before anyone else; the shareholders’ agreement will often specify that this happens. But what happens if the remaining partner doesn’t want the exiting partner’s equity? Their money could be tied up elsewhere, or perhaps they don’t want to own 100% of the practice. Maybe they simply can’t agree on a price. When this happens, the equity share of the exiting partner needs to go on the market, and that’s where things get interesting for everyone involved…
Selling an equity stake in a practice on the open market is very much like selling a house that comes with a marriage.
Just like any other sale, the exiting partner needs to find a purchaser who likes the business, premises and location enough to offer a price and terms that make sense to the vendor (the equivalent of “the house” in this analogy).
However, on top of this, they also need to find someone to take their place in their partnership (their “marriage”). This is no small thing…an equity partnership in a practice links the fates of the clinicians involved. Their individual reputations are linked. Decisions to renovate, hire/manage staff or advertise are linked. Their very success or failure as a business is linked. A partnership needs a level of compatibility, trust and respect, and a mutual vision for how you will behave going forward.
An equity partnership cannot be sold effectively by satisfying the success criteria of the buyer and vendor like a normal sale. To do so is to ignore the elephant in the room…the remaining partner.
Once price and terms are agreed in principle, the purchaser and remaining partner need to agree to be in business together, and this is where the whole deal usually starts to unravel.
Sometimes the details of the partnership arrangement can’t be agreed upon. Other times, the remaining partner doesn’t like the plans or character of the purchaser (or vice versa). Sometimes, the remaining principal can have a mild, unstated annoyance that:
- they are being “presented” with their new partner, rather than being involved in the selection process (an arranged “marriage”).
- they are being asked to make compromises on how and with who they want to practice, and the exiting partner is the beneficiary of this generosity.
Selling an equity stake in a practice often needs to be an inclusive and transparent process for both the exiting and remaining partners, in order to maximise the chances of success.
The vendor (or broker) should consider:
- Meeting with the remaining partner as early as possible in the process and acknowledging the impact that this transaction will have on him/her going forward. They should let them know that, even though this is a financial transaction, compatibility with them will be an important part of the way the practice is put to market and the buyer found.
- Asking the remaining partner what their success criteria is in a future partner. Are there any must-haves or cannot-haves, in terms of clinical or practice philosophy? Are there any plans for the practice going forward (like renovation) that should be taken into account? Even if they cannot answer these, they will appreciate being asked.
- Asking them to be part of the process and meet with any serious prospective buyer to get a sense of suitability. Ask them for feedback when they meet these buyers, take this feedback seriously and be able to do some course correction in order to achieve a successful transaction.
- Being transparent with the process. Provide updates on how things are going throughout the process, so that they aren’t blindsided when a suitable candidate is found.
This inclusive and transparent process can be very challenging for an exiting partner to manage. Including the remaining partner’s preferences in the process can sometimes make them feel as if they are leaving their retirement plans to the whims of an external third party. However:
- A remaining partner can scuttle any equity sale that doesn’t leave them sitting well. To leave the remaining partner’s preferences out of the process will severely limit the chances of a successful sale.
- Achieving a financially successful transaction does not have to be at the expense of compatibility.
- If an exiting partner finds it hard to handle a sale process based around compatibility as well as financial success, any competent dental practice broker should be able to help.
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