The number one problem of every group dental practice is attracting and retaining associates.
Creating the right partnership solution for your business will improve patient care and continuity, increasing financial performance and helping you keep your sanity while trying to run your business.
Here are 10 essential questions you must solve to bring associates into your business effectively.
How Much of My Business Should I Control?
You want to ensure your associates feel appreciated; however, you also want to prevent being voted off your own island as you add potentially more minatory partners.
What are we trying to solve from the associate’s standpoint?
Remember, you want to maintain majority control of your business, so “voting percentage” is what matters to you. And for the Associate – We’re trying to create a “pot of gold at the end of the rainbow” scenario for them. Why would associates want to take on the risk of building a business independently when they can have a more significant economic outcome with you that also involves less risk?
How should I manage voting rights and distribution rights?
Associates want to have a say in the business, and they want to feel like they matter. When you bring people into the ownership structure of your business, you want to ensure the shares they earn have full rights and privileges. This means your associates have a full vote and distribution rights.
What are my perks as an Owner?
When somebody earns equity at the same level you do, they should be privy to the same privileges of ownership that you are. Before adding associates, you must clean up your business and protect yourself from unfavorable situations.
Should we create a partnership opportunity at a practice or management company level?
Everybody says to keep the management company equity for the founders because that’s the most valuable level. That is true. Allowing your associates to earn equity at a management company level is better. Why is that? From a corporate governance standpoint, creating a partnership pathway from a management level is also easier. If your and your associate’s equity is at the same level of the cap table, all parties are interested in maximizing that level of the cap table. Anything that happens at a practice level impacts all of us according to the number or percentage we own.
What about current debt and future debt?
The existing debt is debt that you have personally guaranteed up to this point that you will be responsible for, regardless of how somebody earns into the business. So, what about future debt and growth? Well, that becomes a matter of where the debt resides: practice level or management company. Again, we would advocate for a management company, but there are some reasons to do it at a practice level if that is where the associate’s equity resides. There is not a one size fits all approach to this. It can be complicated, and it’s something to consider when you’re building these types of structures.
What is vesting? And why do I have to do it?
Vesting is a complicated topic. The reason you need to have a vesting schedule is to protect yourself from associates who might come into the business, post a huge collection number, earn a lot of equity, and then leave your business. Remember, this is real equity. If an associate leaves, you must buy them out. A vesting schedule will allow your associates to earn equity, with the value of that equity gradually becoming theirs over time. This is a retention mechanism for you, and that’s what you’re trying to solve. Not only do you need to understand what vesting is, but you also need to explain to your associates why there is a vesting schedule.
What if an associate leaves early?
There are a variety of ways to solve this. You don’t want somebody to earn a lot of equity in the business to leave and for you to have to borrow a lot of money to buy them out. That should never happen. If that does, you’re going to encumber the business with more debt leverage to solve, and that is categorically the wrong thing to do. What you need to do is create an exit formula. You want to create a vehicle to pay them out over time. And ideally, the business would be able to fund that through cash flow and would never have to take on a loan to do it.
What happens if I have to terminate an associate?
If you terminate a partner, it can be from a standpoint of what they call “cause” or “not for cause.” “Termination for Cause should be defined in the operating agreement. It goes without saying that in both instances, an associate/partner leaving prior to a liquidity event means they forfeit any unvested shares.
What happens when I sell the business?
If you have the opportunity to go to market, you’re going to have to include your partners or partners in that discussion. You want to ensure they’re happy with the potential buyer and the opportunities post-sale. Associates heavily impact the sell-side process.
In today’s world where associate recruitment and retention is a challenge, associate equity solutions can be a key not only for creating a high-value team, but also form the building blocks of a successful group dental practice.