Adding an associate: when does it make sense?

Over the past several years, doctors have offered fewer associateships and partnerships due to low new-patient flow and sluggish patient demand. Yet, with the economy recovering, real estate prices trending upward, and the stock market gaining, practices are reporting increased busyness, which creates more opportunities for profitable associateships. Below are four situations where your practice can add an associate on a cost-effective basis.

The first situation is part of a practice transition arrangement. It is expected that there will be an increase in the number of doctors selling their practices over the next few years. Doctors' investment values have recovered, making more doctors financially ready to retire. Also, more practices are involuntarily on the market due to death and disability because doctors are practicing longer. Specialty and general practitioners with large practices can benefit from bringing a new doctor in as an associate for a one- to two-year period before the sale. This provides time to increase the associate doctor's productivity and practice management skills necessary for a successful transition. Moreover, it allows the selling doctor to transfer the referral basis as part of the sale, reducing transition risk while protecting the host doctor in the event of his or her death or disability.

Second, adding a full-time associate makes sense when the host doctor wants to exploit an entrepreneurial opportunity. This may involve expanding into a new location to serve an underserved population or purchasing another practice. In some cases, purchasing the practice can remove an existing competitor from the marketplace and prevent a new one from coming in.

Often, the doctors who are presented with this entrepreneurial opportunity have the clinical and management expertise to run the practice, but lack the time to do the clinical work. In situations like this, adding a full-time doctor allows the doctor to take advantage of the opportunity to grow the practice and significantly increase its profitability and value for future sale, without increasing his or her workload.

Third, doctors who want to significantly reduce their clinical work schedules and take more time off in advance of retirement can benefit from adding a full-time doctor. In this situation, the new doctor can usually maintain or increase practice production and preserve the value of the practice for future sale. While the host doctor's income may drop somewhat, this is usually an acceptable price to pay for the improved quality of life that's the result of more time off.

Finally, adding an associate makes sense when the doctor has an excessive patient load and is losing patients because they cannot be scheduled promptly. In order to evaluate this option, doctors should determine how long new patients must wait for a new patient appointment. They should also determine how long it will take to bring back the same new patient to start treatment once the patient has accepted the treatment. If these intervals are longer than two weeks, the practice may well be losing patients to competitors due to the excessive wait and may have growth potential that the doctor is not realizing.

Over the past few years, more dental schools have opened and many existing programs have expanded, increasing the number of new doctors graduating each year. Unfortunately, few new dentists have been able to achieve an ideal start in practice due to limited demand and busyness. With more doctors seeking fewer available positions, there has been downward pressure exerted on associate compensation over the past several years.

Given these factors, it's time to reexamine your practice transition opportunities. If you're in any of the four situations discussed here, you may be able to boost practice profits and increase value for future sale through adding an associate. While the cost and time involved in adding a new doctor to your practice are considerable, this move can bring substantial gains if planned and executed correctly.

Wade Coleman, JD, provides transition planning through Roger K. Hill & Company Inc. John McGill, jd, mba, CPA, provides tax and business planning exclusively for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc. Both are members of the McGill & Hill Group LLC, your one-stop resource for tax/business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit www.mcgillhillgroup.com.