When a practice is first set up, seldom is a great deal of thought given to the long term future of the practice. More often than not, everyone is focussed on getting the practice up and running, and starting to generate profit. That is totally understandable. However, if there is more than one partner or shareholder involved, thought should be given to a range of topics so that everyone is clear on how the practice will be managed, what will happen in various eventualities, etc.
Practices which aren’t owned by one principal alone can take a number of formats, the most common being:
- Expense Sharing Arrangement
- Limited Company
Each of these structures has its own specific issues to address, but there are common themes which run through each of them, and which we would recommend are agreed and recorded in a written Partnership Agreement or Shareholders Agreement.
We would add that expense sharing arrangements are not, technically speaking, partnerships from a legal perspective, and so a different form of agreement is required for them (a subject in its own right and which we won’t cover in this article).
In the context of a partnership, a partnership agreement is required, the equivalent being a shareholders agreement for a limited company. In either case, the agreements should be put in writing, and drafted by advisers who understand dental practices.
The agreements should ideally be put in place at the outset of the business. It is possible to do them at a later stage, but the risk there is that issues arise before an agreement is signed, and it may be too late to reach agreement then. So it’s far better to produce the agreement before that happens.
The precise content of the agreements will vary between partnerships and companies, and indeed they will vary from one practice to another as there is very little set in stone when it comes to what your agreement might say. However, there are some key threads which will run through most agreements.
Contribution - that might be initial or ongoing financial commitment, treatment/management time commitment, etc. Recording what everyone will bring to the party makes a lot of sense. For example, don’t assume that each of you wants to work the same number of days going forward.
Return – closely linked to contribution, rather obviously, is financial return. How will the profits of the practice be shared? This might be on an equal footing, or partly linked to income generated from the treatment carried out by each principal. However you want to share the pie, make sure everyone is clear on that, and take early advice from your accountant so that you can be comfortable that your financial aspirations can be met. There is nothing more likely to create tension than individuals not earning what they expected.
Decision Making – most day to day operational decisions will be taken without any difficulty. However, there may be certain key decisions which you would want to only take by unanimous agreement. That can be as narrow or as wide a list as you want it to be, but might include such matters as hiring and firing staff (and associates), borrowing money or otherwise entering into financial commitments, taking on premises, etc.
Retirement/Departure – what happens when one of the principals wishes to leave, either on retiral or otherwise? How do they realise the value of their interest in the practice, how is that interest valued, and so on. The details of this will vary between partnerships and companies, but thinking ahead and planning out what happens in this situation will make a departure from the practice easier to deal with.
Death – sadly, we can’t predict everything in life, and the death of a principal can have serious commercial implications for the practice, beyond the obvious personal loss. Whilst it may sound like a very morbid subject to consider, having provisions for what happens in the event of a death is important both for the practice and the continuing principals, but also for the family of the deceased principal.
This isn’t by any means a full round up of what might be contained in a Partnership or Shareholders Agreement, but it covers the key areas which we regularly see as problems (and are often asked for advice on) when there is no agreement in place. Unfortunately, the absence of an agreement can leave some or all of the principals in a really difficult situation when an issue arises. Putting in place a well drafted agreement at an earlier stage, with input from your professional advisers, should hopefully reduce the risk of any of these issues becoming a problem which can’t be overcome, and we always strongly recommend that our dental clients take the time at the start of their business relationship to put an agreement in place which will create a strong structure for the future.