Priya Kotecha explains the finer details of purchasing a practice together.
Buying an orthodontic practice is stressful at the best of times and often for NHS practices, there is the added uncertainty of renewing PDS contracts. For this reason, many orthodontists decide to rope in a friend or colleague and buy jointly. This can lessen the financial burden. It can also be very comforting to know there is someone else in exactly the same situation as you. However, choose wisely – it is far better to go it alone than go into it with the wrong person!
Buying jointly is a little like a marriage. You must be sure the person you are buying with has similar work ethics and values as you. This goes expressly against a quote from one of my favourite books. ‘It is better to know as little as possible of the defects of the person with whom you are to pass your life’ – Charlotte Lucas, Pride and Prejudice.
You must also ensure that you have an adequate legal agreement drawn up. This applies whether you are buying with someone you don’t know that well (not recommended to go down that route though), a sibling or spouse, or a longstanding friend. Sometimes, relationships go sour, friendships break, marriages fail, and people die. An expense sharing agreement or a partnership agreement (depending on the type of entity you go for) just covers each of you in these. It also cover other eventualities and can save legal fees, grief and time later on.
An Expense Share Agreement offers a number of advantages. The largest of these is being able to share certain common expenses. This often benefits from economies of scale and reduced administration costs, whilst keeping your business and earnings separate. You are, in effect, sharing responsibilities and enjoying a level of cover should you be ill or away on holiday, all whilst each expense sharing party reflects their own efforts in their income.
A partnership is very different and is a single legal entity rather than being two businesses. You are more tied together as partners, and profit or losses are generally split based on a pre-agreed percentage. Although, it may be possible to vary this with use of partners’ salaries or payments as associates. This depends on the agreement in place and on circumstances.
So how does it work?
Well, the simple answer is that it greatly depends on the way you and the other orthodontist(s) in the arrangement work and what you want to achieve. Before setting anything out legally, you need to discuss your specific circumstances with your specialist dental accountant. You will also need a dental solicitor to formalise the agreement for you. The agreement may also cover details like how new patients are to be allocated, what happens in the event of incapacity, holidays, death and disputes etc.
Let’s have a look at a dental expense share agreement in its simplest form.
Dr Jekyll and Dr Hyde…
Dr Jekyll and Dr Hyde want to share and own in common the actual practice freehold (though it is perfectly possible to have an expense-sharing arrangement where the freehold is owned only by one of the parties) and equipment, and to share costs relating to the reception area and also two of their four surgeries, which are occupied by full-time associates. The other two surgeries are occupied by Dr Jekyll and Dr Hyde respectively. They will also share the income generated by the associates equally.
Both Dr Jekyll and Dr Hyde work five days a week. However, Dr Jekyll is very hard working and generally is much more productive. Dr Hyde is prone to mood swings and not that productive. To put all of their income therefore into a common pot and share it equally between them would be unfair. Nor would be sharing their costs equally since Dr Hyde’s wages costs are much higher.
This is as no nurse will work with him anymore on a permanent basis. He has to pay agency nurses. Therefore, they will keep their own income and dental supplies/lab costs separate. They will do the same for their own dental nurse and any other expenses directly linked to their own dental business. This means that the only shared income is that relating to the associates, where you also share expenses equally.
It is important to note that this does effectively represent two businesses operating from the same address so both Dr Jekyll and Dr Hyde will have personal liability for their own commercial risks and will also be responsible for their own taxation as self-employed dental practitioners. They will not, however, have responsibility for their expense sharing partners.
Obviously, in this case, if I were Dr Jekyll, I would have serious doubts about buying a business with Dr Hyde. He seems to have some personality issues as this is bound to create issues going forward. Issues such as staff complaints, patients’ complaints and who knows what else! Good luck!
This article first appeared in Orthodontic Practice magazine.
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