25 May What is Associate Earned Equity?
It is very common for a young, inexperienced dentist to begin his or her dental career as an associate for an established practitioner. Such relationships have been the norm in the dental profession for decades and are generally entered into with the thought that the young dentist will one day become the owner of the practice. Unfortunately, it is also a very common occurrence for such associateship relationships to end abruptly and often with a lot of resentment and anger. In fact, such associateships fail about 90% of the time! Why such a huge failure rate? There are several reasons but each can be traced back to one common denominator… Ambiguity!
For years the most common method of two dentists establishing an associateship relationship has been: “Let’s work together for a while, just to see how we like each other and if we get along fine we will work out the details later.” This is obviously a totally ambiguous relationship and quite comparable to boarding an airplane without knowing the plane’s destination!
There are many unanswered questions that will come back to haunt this associateship relationship. For example, how and when does the associate become a partner or the sole owner of the practice? How will the purchase price be determined? What events will trigger the buy-in or buy-out? How will the growth the associate contributes to the practice be handled? Will the associate be expected to pay for the portion of the practice equity that the associated added?
Not knowing the answers to these questions prior to the beginning of the relationship is what causes these relationships to fail 90% of the time. But oddly enough, doctors continue to enter into these uncommitted associateship relationships every day without addressing any of these issues on the front end.
The one unanswered question that causes the biggest problem is: How will the growth the associate contributes to the practice be handled? No matter how well you preplan an associateship or how well you draft the contract, it is this “sweat equity” issue that virtually always destroys all hopes of an equitable conclusion. If associate’s “sweat equity” is not addressed properly BEFORE the parties begin the associateship relationship, the chance of completing a successful practice transition is virtually impossible.
Without a written plan in place, the two viewpoints can’t help but be contradictory. When the practice (or an ownership interest) is being sold, the seller (who owns 100% of the practice) naturally wants to receive full value for the practice… this is a logical viewpoint.
But, the associate feels that he or she has contributed a significant portion of the current practice value and does not think it is fair to be required to pay for that portion he or she contributed… this also a very logical viewpoint. Associateships are not doomed to fail as often as they do. In fact, PARAGON’s associateships have a virtual 100% success rate! PARAGON will assist you in determining all the who’s; what’s, when’s; where’s; and how’s of your associateship relationship. We will also help you develop an equitable valuation formula that allows the associate to earn ownership credit (“earned equity”) as the practice grows. We will also help you structure these important points into a formal agreement that leaves no room for misunderstanding. If your associateship relationship is not left to chance, a positive outcome can definitely be expected.
The PARAGON Earned Equity concept and Associateship Agreement creates a logical way for an associate to earn “sweat equity” towards either a partial practice buy-in or a full practice buy-out. It is also a way for the Host to profit from the added production the associate is contributing. Another PARAGON “Win / Win” arrangement!