I share a building with another dentist and his associate. We have discussed merging our practices. My concern is that I have much more practice debt than he does. Some of the debt is equipment/ operatory related and should not be an issue. But I have significant other debt related to start up and cash flow issues in the past.
Are your practices similar with respect to revenue?
How can this issue be reconciled should we elect to merge?
It depends on how you decide to “merge”. You could simply decide to maintain your separate practice entities and form a third entity to be the main operating entity for revenue and shared expenses. You could elect at this time to keep your assets and debts in your separate entity until such time as the debt is no longer an issue. Similar to a space sharing arrangement, I would think. Any new asset acquisitions would go through the new entity.
We have a great location and if we combined and marketed the practice as a whole it could be very profitable I believe but I am just not sure how the difference in debt can be overcome.
I’m not sure it needs to be “overcome” at this point, you have yours, they have theirs. You form the new entity and decide how net profits will be split after operating expenses. You’ll receive your share and use it to pay back your debt andor any of your personal professional expenses and they’ll do the same.
It doesn’t have to be that complicated. It just needs careful planning and a lot of due diligence. The other benefit of keeping your assets and debts separate initially is that IF the merger fails, it should be easier to know which assets go where and the only assets you’ll have to worry about are those that were purchased after the merger.
The point that I was trying to make was the logistics of the deal. All three doctors will have to form a new corporation and their compensations will have to reflect what debt each of them has.
I think you mean they’ll have to form a new entity and I agree (corp, LLC, etc.).
However, I’m not sure why their respective debt would HAVE to determine their compensation. I think their compensation can be driven by their production, as is the case with most “partnerships” and in this case, how they “contribute” to the new entity and “what” they contribute will most likely impact their respective “ownership” interests in the new entity moreso their compensation.
Our friend, Jason Patrick Wood, the Dental Attorney adds:
Why do you keep saying “three”? The original post is owner and associate. I don’t let associates into my business without paying, I don’t think this doctor would either which leads me to the conclusion there will be 2 owners, not 3.
I also agree with Tim. Debt shouldn’t even be a consideration when entering into a compensation formula, unless the debt is at a level which may materially interfere with the value of the asset being transferred into the partnership.
Another question I have however is, where is the cost savings? What are you going to do with your respective practices? What is the short/long term goal after the merger? If you are just going to tear down a wall and merge your practices, great. However, you still will most likely be overstaffed which should be another fun discussion. All of these issues IMO need to be worked out before you even start contemplating an actual agreement. Partnerships, when formed correctly, take time and openness to create a model that will work for you.
Yes, I meant that all three of them will form a new entity. And once their compensation agreement is set up, the doc with debt could use his salary as pre-tax dollars to pay off that debt. What’re your thoughts?
Each partner (who could still maintain their existing entities to form a new one) could use their respective profits from the “partnership” to pay their respective debts and professional expenses. The expenses would naturally be tax deductible, debt would not.