06 Jun Ownership Redemption Options
An Ownership Redemption occurs when one of two or more practice owners wishes to sell his or her ownership interest in a non-solo owned practice. The sale of the ownership interest could be so the selling co-owner (the “Redeeming Owner”) can retire. However, it is not unusual for the selling co-owner to sell so he or she can invest the practice equity to take advantage of compound interest during the final years leading up to his or her retirement. In these situations, the selling co-owner is not ready to retire quite yet so the transaction is structured to allow the selling co-owner to remain with the practice as an associate for a pre-determined time.
Typically, a non-solo ownership practice is operating as either a corporation or as a limited liability company (due to the personal liability considerations of the co-owners). So, an ownership redemption transaction is typically structured as either a sale of the Redeeming Owner’s corporate stock or a sale of the Redeeming Owner’s membership interest in the LLC.
There are two different ways PARAGON implements the sale and acquisition of an ownership interest in a non-solo owned dental practice. However, it is extremely important to understand that neither way can be successfully implemented if the owner of the practice who is not selling (the “Remaining Owner”) is not both cooperative as well as supportive of the transaction. So, before we get into the two ways that an ownership redemption can be structured, we first need to explore the issues the Remaining Owner may have with the transaction and how the Remaining Owner’s issues could make it impossible to finalize an ownership redemption transaction!
The Remaining Owner Must Be Cooperative
Often there are some rather strong emotions that come into play when a Redeeming Owner announces that he or she is planning to sell out. Fortunately, these emotional obstacles generally stem from simple jealousy and are rather easy to overcome. The Remaining Owner is often just jealous that his or her “partner” is able to get out from under the day-to-day management grind of practice ownership while the Remaining Owner is being left behind to manage the practice all alone. However, once the Remaining Owner fully understands the valuable options that the ownership redemption opens up for the Remaining Owner, these emotional roadblocks quickly fade away and an ownership redemption transaction can be structured that is mutually beneficial to both the Redeeming Owner and the Remaining Owner.
However, deep rooted feelings that are the result of a long and rocky relationship between the Redeeming Owner and the Remaining Owner are not so easy to overcome. In fact, relationship issues (and in some cases a genuine dislike for each other) often create obstacles that can not be overcome and end up being deal breakers. This is obviously quite counter-productive since these doctors will be forced to continue to work together in a relationship that is even more stressed!
Therefore, before PARAGON can agree to handle any practice ownership redemption transaction, we must first meet with the Redeeming Owner and the Remaining Owner to find out what obstacles may be standing in the way of a successful transaction. Often this requires a series of meetings with the doctors; together and independently. In addition to finding out about the potential obstacles, we also need to be able to fully explain the two transactions methods (we will explain those to you in just a moment) to the Remaining Owner so the most opportune decision can be made for the Remaining Owner and the practice. Honestly, the transaction structure really does not matter at all to the Redeeming Owner since he or she is selling for the same price either way. But, the transaction structure can certainly have a major impact on the Remaining Owner and the practice going forward.
So, the Remaining Owner is actually the key to any ownership redemption transaction. If the Remaining Owner can get past the emotions (and in some cases a great deal of anger), an ownership redemption transaction can be completed that greatly benefits both the Redeeming Owner and the Remaining Owner. However, if the Remaining Owner is not cooperative and determined to block the ability of the Redeeming Owner to sell out, a transaction is next to impossible to close. Frankly, we simply can not put a new doctor into such a volatile practice environment with an angry and uncooperative Remaining Owner regardless if those negative actions are justified or not!
Option #1: Sale Back to the Practice
The first option is a true ownership redemption structure. The transaction is structured for the practice entity (the corporation or limited liability company) to redeem (re-acquire) the ownership interest back from the Redeeming Owner. The end result is the Remaining Owner ends up with 100% ownership. The timing of the acquisition can be before a replacement doctor is located or it can be contingent on finding a suitable replacement who has contractually agreed to join the practice. The financial terms may involve all seller financing; all third party financing; or a combination of seller and third party financing.
We will use a corporate practice entity to explain how Option #1 works. If the Redeeming Owner sells his or her 50% of the corporate stock back to the corporation, then the stock held by the Remaining Owner ends up being the only outstanding corporate stock remaining. This means the Remaining Owner then owns 100% of the outstanding stock in the corporation, thus owns 100% of the practice. In most cases, the corporation borrows a down payment from their local bank and the remainder of the acquisition price is financed by the Redeeming Owner. Unless the Remaining Owner will absorb the Redeeming Owner’s production, the timing is typically contingent on locating a replacement doctor.
Utilizing Option #1, the Remaining Owner has numerous valuable options available going forward. For example, the Remaining Owner could absorb the production of the Redeeming Owner (assuming the Redeeming Owner is retiring immediately) and dramatically increase his or her take home income. Or, the Remaining Owner could bring an associate into the practice and structure a progressive ownership plan in which the associate would become the Remaining Owner’s new “partner” over time. Or, the Remaining Owner could implement an immediate co-ownership transaction that would allow a new doctor to become the Remaining Owner’s new “partner” in the practice. The Remaining Owner could also implement a combination plan (for example, absorb a portion of the Redeeming Owner’s production as well as bring in an associate to absorb the rest). The bottom line is that by allowing the practice entity to redeem the Redeeming Owner’s ownership interest, the Remaining Owner, as the sole owner of the practice, ends up with numerous favorable options and will always be selecting his or her next “partner” on his or her time table!
Option #2: Sale Directly to the Replacement Doctor
The second option is to structure the sale of the ownership interest from the Redeeming Owner directly to a buyer other than the practice or the Remaining Owner. This allows the Remaining Owner to remain outside the transaction and not incur any practice debt; however, it also means that the Redeeming Owner is selecting the Remaining Owner’s new “partner.”
From the Remaining Owner’s perspective, the lack of control as well as lost opportunity of Option #2 really does not make much sense in the big picture. But oddly enough, many Remaining Owners decide they would rather not have to incur the practice debt that is required in Option #1, so they opt for Option #2 even though Option #2 is far less advantageous for the Remaining Owner. As you can probably guess, PARAGON feels that Option #2 results in significant lost opportunity for the Remaining Owner. We also feel that most Remaining Owners opt for Option #2 simply because they do not truly understand the valuable opportunities that Option #1 provides to them.
In summary, the structure of an ownership redemption transaction does not make much difference to anyone except the Remaining Owner. It certainly does not matter to PARAGON, other than we don’t like to see a Remaining Owner miss out on some valuable, one-time opportunities that Option #1 makes possible. The key is that whichever structure is decided upon, the Remaining Owner MUST be cooperative and supportive or a transaction is virtually impossible to finalize. It is also critical to understand that an ownership redemption is quite possibly the most difficult of all practice transitions and should not be taken lightly. The least little hiccup can easily cause the transaction to implode and negative feelings will become a major issue going forward. Contact PARAGON to schedule your complimentary consultation. No obligation… just a very worthwhile education!
