Unfortunately, there are times when partners get into trouble with partnership responsibilities and details in the management of the partnership. These problems seem to occur more often with the administrative and management side of the partnership, rather than the clinical side. Examples include defining who is in charge of personnel matters, financial decisions, or legal and accounting questions. It may be easy to comment if you are not part of the organization and merely say, "Look at the operating agreement"; however, sometimes dental practices have no operating or shareholder agreements.
This may sound like an impossibility, but ask yourself if you have one, prior to commenting. For those who do have these in place, the normal operations may be a result of someone taking a position of authority and continuing with it, even though that is not his or her responsibility. The other partner may be satisfied with the results of the operations and leave things as they are out of expediency, following the adage of "Don't fix it if it isn't broken." That is fine conceptually -- until there is a problem. Changing the responsibility without an amendment to the operating agreement is fine based on expediency. However, when a problem arises, the finger pointing starts. The more successful and detail-oriented dental practice management teams always suggest a dental practice valuation at least once a year. This coordinates well with the operating agreement, shareholder valuation page, or formula for future valuations if that is inserted in it. It also assists in reviewing the responsibilities assigned to each partner in the operating agreement.
The dental practice's worth and each dentist's contribution
When a dental practice partnership exists and a valuation preparation is requested, how often is the evaluator asked to prepare the valuation with separate inserts for the value of each of the partner's shares? This is especially important when considering an acquisition or merger.
Bruce Bryen, CPA, CVA.The production and collection metrics of each provider are almost always asked for when the data needed to complete the valuation are desired along with the tax returns and other information. It would not be difficult to segregate each partner's criteria so that the valuation reflects the partnership value as well as the individual partner's contribution to that value.
When a dispute occurs, besides reviewing the operating or shareholder agreement, the valuation can be examined so that the owners of the partnership understand who is contributing what amount to its worth. This may be an additional chore to evaluate, but it will assist the operators of the partnership in determining who is responsible for the overall appreciation in the dental practice from year to year.
Besides being available to assist in settling disputes, it also clearly helps when a potential transition is approaching to deflect any problem that may occur when determining which partner gets what amount of the transition funds. When considering a new partner who may be acquiring an interest in the partnership and where the funds go from that partial purchase, the presentation of each partner's worth to the partnership also reduces many of the headaches that may occur in that regard.
If the partnership retains the money from the new partner, how are those funds distributed? It may be that the money from the new partner remains in the partnership for expansion, new equipment purchases, or other partnership needs. If that is not the case, how are the proceeds allocated from the interest that is being sold in the partnership?
These are some of the many questions that can be more easily resolved when each partner has his or her own financial status inserted to provide its benefit to the partnership value.
The good, the bad, and the ugly
Reviewing the understanding of each partner's contribution to the partnership is the first important step. Committing to the memorialization of the facts in the valuation is now appropriate. Retaining the evaluator for preparation of the valuation and interviewing those who have this expertise should occur quickly so that this point is not lost to delay. Once completed, the valuation along with the formula for the computation of future value and the individual partner's contribution to the partnership can be used each year with little additional cost to the partners or the partnership. In the event there is a material change in the organization, there may be an extra charge.
The good news is that many partnerships exist for years without drastic change such as disability or death. If something unfortunate with a material effect does occur, at least there is a guideline for the distribution to the heir of the deceased or disabled so that a date in court may be avoided. Finally, if no actions are taken after understanding the consequences of being exposed to a lack of value, the dentist should expect things to get ugly. The retention of an expert evaluator who delivers an opinion is a good insurance policy for the dental practice and partners. If dentists do not avail themselves of this ounce of prevention, they are setting themselves up for an ugly experience and the proverbial pound of cure. It will probably involve attorneys and experts to be hired for appraisals that could have been prepared where there was no duress and plenty of professional fees that could have been avoided.
Bruce Bryen, CPA, CVA, is a certified public accountant and a certified valuation analyst with more than 45 years of experience. Learn more about him and his services.
The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.
