20 Jun Office Sharing: Practice Equity Suicide
Most of you realize that dentists encounter numerous options as they progress through the dental career. However, many may not know that there are certain common career choices that can be extremely detrimental to practice equity. Many decisions are made based on what is happening today, with no consideration for the long-term financial ramifications. In the dental environment, today’s decisions are typically made to either eliminate overhead or increase income. But unfortunately, while today’s decisions may save a few dollars in overhead or even earn a few more dollars of monthly income, many of these decisions can often cost a dentist hundreds of thousands of dollars down the road!
The Office Sharing arrangement has historically been a very popular option for dentists. Office Sharing arrangements are often initiated because a dentist has built a facility much larger than he or she really needed in anticipation of future expansion. At some point it becomes evident that the expansion will not occur, so the doctor begins exploring ways to utilize the unused office space. A common choice has been to enter into an Office Sharing arrangement. Seems logical, but, is sharing a facility really a wise financial maneuver?
The reality is that Office Sharing arrangements can be (and frequently are) financially devastating to BOTH doctors!
What begins as a seemingly innocent attempt at saving a few dollars in overhead can easily end up costing BOTH office sharing doctors hundreds of thousands of dollars in practice equity!
POSSIBLE ADVANTAGES OF OFFICE SHARING
- Allows two or more dentists to use the same office facility (or provides the building owner with a nominal rental income source on otherwise unused office space).
- May occasionally allow for sharing of staff (but typically does not).
- May occasionally allow for sharing of equipment (but typically does not).
- Allows savings from quantity purchases of supplies (but these cost savings are quite minimal and only applicable if the practices use the exact same supply brands).
- Provides potential for emergency patient coverage while one doctor is away.
POTENTIAL LIMITATIONS OF OFFICE SHARING
- Patient coverage in the absence of one doctor is a common misconception. The truth is that one doctor does not discontinue treatment of his or her own patients in order to treat the patients of the absent doctor. Emergency patients generally receive temporary treatment but this could be handled just as well by another doctor in the area.
- A office sharing arrangement does not promote sharing of patients or cross referrals for specialty treatment. Both doctors are still solo practitioners and are naturally hesitant to share their patients with any other doctor for fear of losing the patient permanently.
- Every office sharing arrangement needs a thorough and detailed termination agreement. We have discovered that only a very few office sharing arrangements (less than 1%) have any written agreement in place. Our advice is to get this agreement in place while you are still friends; don’t wait until the relationship becomes adversarial. History confirms that it is virtually a guarantee that an office sharing relationship will become adversarial at some point!
DEFINITE DISADVANTAGES OF OFFICE SHARING
- Personal liability exposure is a major issue. The public assumes a partnership between the dentists. Attorneys also make this same assumption. The courts also frequently determine that a partnership exists (“implied partnership” between the parties). One doctor can easily incur personal liability resulting from the adverse actions of the other doctor. The court records are loaded with where one partner is financially ruined due to the negligence of the other partner!
- Each doctor’s practice equity value is almost always severely compromised and, in some instances, can be totally diminished. Is a few hundred dollars a year in overhead savings really worth losing hundreds of thousands of dollars in practice equity?
- In a profession where virtually every doctor is seeking more quality patients, does it make sense that YOUR quality patients are walking through the front door of another doctor’s practice? Regardless of the relationship you have with your office sharing “partner”, you are still competitors. Relationships can (and do) easily and quickly get stressful and complicated.
- Both office sharing doctors remain “Solo Economically Dependent” in that the bulk of their personal income is directly tied to their own individual production. An office sharing arrangement is not a substitute for a true duo relationship such as a practice merger, practice consolidation or a pre-retirement sale arrangement… all of which are structured to provide the practice owner with significant passive income from their practice.
- Both office sharing doctors often continue to experience the same negative cash flow as they continue to pay their share of the fixed overhead expenses while away from the office. Again, an office sharing arrangement is NOT a viable substitute for a true duo relationship.
While there are a vast number of negatives, arguably the most critical is the potential loss of practice equity. An office sharing arrangement often ends up costing one or both doctors hundreds of thousands of dollars in practice equity. Why? In essence, the only logical buyer is the office sharing “partner.” But, the office sharing “partner” really has no reason (or desire) to purchase the practice. If the practice does not sell to a third-party (and quite often it does not), the “partner” will get the patients he or she wants for free!
Why is an office sharing practice difficult to sell? The office sharing practice is a very risky venture for a purchaser! The patients generally do not understand that the two practices are individual practices. Patients naturally assume the doctors are partners and thus share everything. To a purchaser, it is both logical and reasonable to assume that every patient has some existing relationship with the other doctor in the office. The purchaser’s fear is that many of the patients will migrate to the office sharing “partner” since the doctors have been practicing together for so long. Frankly, history proves this to be true regardless if the “partner” indicates that he or she already has enough patients. We see patients flow to the other doctor often. So, understandably, the majority of purchasers would much rather invest in a true solo practice environment so there no risk of significant patient loss!
As with most anything, there are a few exceptions. But, those very few purchasers who are willing to take a risk on the acquisition of an office sharing practice are certainly not willing to pay full market value. They demand a significant price reduction to offset the risk of patient loss. The result is virtually always that an office sharing practice will not command a price even close to the price if that practice were not in an office sharing situation.
Unfortunately, this significant negative impact on practice equity is not fully understood by office sharing doctors until one of the doctors puts his or her practice on the market. This is generally many years into the relationship. Also unfortunately, the longer the office sharing relationship continues, the more likely that practice equity will be severely impacted. The longer office sharing “partners” have been together, the greater the fear to any purchaser that patient retention will be a major issue.
In summary, dentists need to realize that an office sharing arrangement can easily cost each doctor a significant amount of practice equity and, in some situations, can end up costing one or even both of the doctors 100% of their practice equity.
While non-solo practices are becoming more and more popular (and profitable), an office sharing arrangement is not a valid entry plan into a non-solo practice environment. You have many more lucrative options to move from a solo to a duo practice relationship.
Protect your practice equity. You and your family deserve a better fate! It is a challenge, but there are some ways to counteract the negatives that exist to office sharing practices. Contact PARAGON to schedule your complimentary consultation. No obligation… just a very worthwhile education.