The Options and Legalities of Dental Practice Partnerships: What You Need to Know

In today’s evolving dental landscape, partnerships have become an increasingly popular way for dentists to grow and sustain their practices. However, navigating these opportunities requires a deep understanding of both the various types of dental practice partnerships available and the legal complexities that accompany them. This article explores the different types of dental partnerships, highlights the importance of well-structured agreements, and provides insights into potential challenges and solutions.

To make informed decisions about partnerships, it’s important to first address some fundamental questions about how they function and what factors can impact their success:

What is a dental practice partnership?

A dental practice partnership traditionally involves two or more dentists sharing ownership, responsibilities, and profits. However, practices can also explore partnerships with dental service organizations (DSOs) and other entities, which offer various deal structures and operational support.

How do professional partnerships work?

In professional partnerships, ownership, responsibilities, and profits are shared, with decisions made collaboratively and finances managed together. Partnerships with DSOs offer enhanced operational support and efficiency, providing comprehensive management services and opportunities for financial growth through equity and recapitalization.

What is a partnership practice?

A partnership practice is owned and operated by multiple dentists under a formal agreement. It offers shared resources and responsibilities, allowing for greater operational efficiency and enhanced patient care. Partnerships with DSOs or other entities can also provide additional resources and management support, enhancing the practice’s growth and operational capabilities.

Why do dental partnerships fail?

Common reasons for failure include misaligned visions, unequal contributions, poor financial management and unclear agreements. These challenges are particularly pronounced in doctor-to-doctor partnerships, where differing goals and commitment levels can lead to friction and conflict.

While private partnerships face specific challenges, partnerships with organizations like DSOs may fail if expectations about support and autonomy are not clearly defined. Missteps in affiliating with DSOs can lead to issues like misunderstandings about operational control and financial expectations, as highlighted in Dental Economics. (1)

Additionally, some partnerships fail due to unattainable earn-up targets — performance-based compensation goals tied to metrics like revenue or profitability (2). These targets can be set so high that practice owners find it nearly impossible to reach them, especially when not given enough operational support. 

Invisible Dental Service Organizations (IDSOs) are a subset of DSOs that operate in a more “hands-off” manner. They may leave the practice’s branding and clinical operations largely unchanged but still expect significant growth. This approach can create a challenging dynamic for practice owners, however, a knowledgeable broker can help you navigate these complexities, advising on what is truly achievable and protecting you from agreements designed to benefit the organization at your expense.

Decoding DSOs, DPOs and IDSOs

Navigating the legal aspects of dental partnerships starts with understanding the types of organizations you might partner with. Private equity-backed groups have developed various strategic branding terms to position themselves as the ideal partners for dental practices. Terms like dental service organizations (DSOs), dental partnership organizations (DPOs) and invisible DSOs (IDSOs) are often used interchangeably, creating confusion among dental entrepreneurs. It’s helpful to understand these terms when considering partnership opportunities.

• DSOs: Dental service organizations provide comprehensive management services like HR, billing and marketing, centralizing business functions to boost efficiency and profitability. They also offer opportunities for financial growth through equity and recapitalization
• IDSOs: Invisible DSOs claim to offer minimal interference and maintain the practice’s brand identity. However, this “invisibility” is often just a marketing tactic. IDSOs may set ambitious growth targets without providing sufficient support, making it challenging for practices to meet these goals
• DPOs: Dental partnership organizations emphasize equity sharing but often function similarly to DSOs in their operations and financial opportunities

When considering these options, look beyond branding to understand what each group truly offers. Whether prioritizing clinical control, brand autonomy or maximizing practice value, understanding the real implications of partnering with a DSO, DPO, or IDSO will guide you in making the best decision for your practice.

Types of dental practice partnerships

Dentists should have a grasp of the various models available to them, each with its unique structure and implications. The landscape of dental practice partnerships is diverse, offering various models to suit different goals:

External investment and expertise models

• Joint venture model: In this collaborative setup, a dental practice partners with a DSO or private equity firm to share ownership and operations. This model combines external expertise with retained operational control
• Equity roll: Dentists sell a portion of their practice in exchange for equity in a larger organization, benefiting from the resources and growth potential of a more extensive network
• Sub-DSO: A practice forms its own DSO, partnering with a larger DSO or private equity group, allowing for brand autonomy while leveraging external support
• Direct investment with private equity: Private equity firms directly invest in a practice, providing capital and business acumen to drive growth and expansion

Structuring a partnership agreement

The foundation of any successful dental practice partnership is a well-structured agreement. This legal document outlines the terms of the partnership, including the roles and responsibilities of each partner, profit-sharing arrangements, and the process for resolving disputes. Key elements to consider when drafting a partnership agreement include:

• Clear roles and responsibilities: Define each partner’s role within the practice, including clinical duties, administrative tasks, and decision-making authority
• Profit and loss sharing: Outline how profits and losses will be distributed among the partners. This could be based on ownership percentages, contributions to the practice or other agreed-upon factors
• Decision-making processes: Establish clear procedures for making major decisions, such as expanding the practice, taking on debt or selling the business
• Dispute resolution mechanisms: Include provisions for resolving disputes between partners, such as mediation or arbitration, to avoid costly legal battles
• Exit strategy: Specify terms for a partner’s exit, valuation of their stake and buyout conditions

Financial planning and management

Effective financial planning is essential for the success of any dental practice partnership. This involves budgeting, forecasting and managing cash flow to ensure that the practice remains profitable. Key areas to focus on include:

• Budgeting: Develop a detailed budget that includes all expected expenses and revenues. Regularly review and adjust the budget as needed
• Cash flow management: Monitor cash flow closely to ensure that the practice has enough liquidity to meet its obligations
• Investment planning: Consider how the partnership will fund future growth, such as expanding the practice, acquiring new equipment, or hiring additional staff

Compliance with state and federal laws

Ensure your practice complies with licensing, labor laws and tax obligations. Stay informed about legal requirements to avoid penalties and legal issues.

Partnership agreements for multiple locations

Expanding to multiple locations requires additional considerations in your agreement, such as resource management, profit distribution, and adding new partners.

Choosing the right partner

Selecting the right partner involves matching your transition goals with the partner’s characteristics, including their professional background, business acumen and alignment with your vision, as emphasized by PTS Consultant Kim McCleskey in DrBicuspid.com (3).

When evaluating potential partners, consider the following:

• Professional background: Ensure that the partner has a solid track record and expertise relevant to your practice’s needs
• Vision alignment: Your partner’s goals and values should align with yours to prevent conflicts and ensure a harmonious working relationship
• Business acumen: Look for partners with proven success in managing and growing dental practices, as their expertise will be invaluable in achieving your transition goals
  

Effective partnerships are built on shared goals and a mutual understanding of each other’s expectations. It is not just about finding a partner but about finding one whose approach complements and enhances your practice’s vision and operations.

Exiting a partnership smoothly

Breaking up a dental practice partnership can be challenging, but with proper preparation, the process can be smoother. As discussed earlier, creating a well-documented partnership agreement in the early stages is key — it clarifies roles, simplifies valuation and ensures a fair appraisal of the practice, helping partners focus on their end goals rather than getting bogged down in details.

• Timing: Align the exit with financial and operational milestones to minimize disruption.
• Valuation: A well-documented partnership agreement simplifies the valuation process. It clarifies each partner’s contributions and stake, facilitating an accurate appraisal of the practice. This helps in setting a fair purchase price and deciding on the next steps.
• Options: Once the valuation is determined, partners can choose to sell to an associate, buy out the partnership, or sell to a DSO. Each option has implications, such as potential success rates or managerial responsibilities, which should be considered based on the retiring partner’s and remaining partner’s goals.
• Communication: Clearly inform all stakeholders, including staff and patients, to manage expectations and maintain trust.
• Legal and Financial: Ensure the partnership agreement is updated to address exit terms and comply with legal requirements. 

A well-planned exit strategy ensures a smooth transition and protects the interests of all parties.

Bottom Line

Dental practice partnerships offer numerous benefits but come with legal and financial complexities. Understanding partnership types, structuring agreements carefully, and planning for potential issues can protect your interests and set your practice up for long-term success.

For help navigating the complexities of dental practice partnerships, contact the experts at Professional Transition Strategies for personalized guidance and support.

References

1. Dental Economics. 5 mistakes dentists make when affiliating with a DSO, https://www.dentaleconomics.com/money/article/14304885/5-mistakes-dentists-make-when-affiliating-with-a-dso
2. Dental Review News. Kyle Francis on DSO, DPO, and IDSO, https://www.dentalreview.news/practice-management/53-dental-practice-business/11191-kyle-francis-dso-dpo-idso
3. DrBicuspid. Choosing the right DSO: Matching your transition goals with the ideal partner, https://www.drbicuspid.com/dental-business/dso/article/15669414/choosing-the-right-dso-matching-your-transition-goals-with-the-ideal-partner