In the following discussion, we’ll examine the opportunities and risks involved with associate versus ownership options, interactions and transitions. We’ll look at things from the selling/hiring doctors’ and the buyer/associates’ perspectives, and add insights from financial and transition experts, John McGill and Roger Hill.
As Roger points out, with the exception of academia and the military as career options, there are four (4) basic options. Each new doctor will ultimately select and implement one of these career paths:
- Start a Practice. This is likely the highest-risk option, particularly in today’s economic environment. Nonetheless, some doctors will implement this option.
- Purchase a Practice. This is an excellent choice, but at the moment, opportunities are scarce.
- Purchase a Fractional Interest. This is likely the best choice in terms of decreased risk and increased earnings, but it is not without its own unique set of risks and complications.
- Remain an Associate. This option can be the lowest stress choice, coupled with a significant compensation / benefits package, and though it may seem counter-intuitive, this is not a risk-free choice.
Each of these alternatives carries with it its own unique set of benefits, costs and risks. Selection is critical, but with a sufficient amount of planning, open dialogue and thoughtful consideration, the right choice will become clear.
There is a trend of more young doctors opting for well-paying, long-term associateships. If it continues and gains momentum, the earnings of the doctors willing to accept the risk and responsibilities that come with ownership will increase. In short, a more significant difference in earnings for non-owners and owners will define itself. Over time, this change will become significant.
This difference will become significant in two ways. First, the additional earnings that accrue to the benefit of owners (only) will make it more lucrative for those willing to accept the responsibilities and risk of ownership. This fundamental principle of business has always been there. It will simply become more obvious.
Secondly, for those entrepreneurially minded owners, particularly for those who own multiple-location practices through strategic alliances, there exists a substantial upside potential of a sale to a regional and/or national group with the realization of both return of equity (i.e., the sale proceeds) as well as long-term benefits gained by joining forces with the acquiring strategic partner in terms of (a) continued employment and (b) potential appreciation on the acquiring entities’ value, depending on the terms of the deal.
So, for those on both sides of the associate relationship, the big question is “How much should an associate make”? It’s an interesting question with a nonlinear answer. Times have changed. Many residents, however, still think they will get $250k their first year, that the practice will be appraised on day one, that they will pay pennies to buy the selling doctor out and that the selling doctor will finance the deal for them. Luckily, most tend become more realistic as they get closer to graduation. Currently, $125- $200k, plus liability insurance, a few grand for approved CE and maybe a moving expense allowance is a good “average” from what we’ve seen. Availability of jobs (or lack thereof), cost of living, saturation levels and demographics account for the wide variations. Obviously there are outliers – corporate models paying more to attract orthodontists as well as some orthodontists who are working for ridiculously low salaries or doing hygiene to live where they want to live. Some senior doctors now offer health insurance for associates since many of them join the practice as employees, and they provide insurance to all full time people already. Many have gotten away from associates being independent contractors as they’ve heard that the IRS is getting ugly about the associate who only works for one corporation being an independent contractor. However, financial expert John McGill mentioned at the Orthodontist as CEO meeting that he thinks associates should form their own corporation and Dr. Sr.’s corporation should hire Dr. Jr.’s corporation as an independent contractor. This is definitely something to consider.
The new docs just out of school actually can get $250k right off the bat if a) they work for some of the corporate outfits or larger practices that have a less than savory reputation, b) they go to a less desirable area, or c) they do both. We have seen several who recruit aggressively using multiple headhunters and paying that kind of salary plus a 10k signing bonus and a 10k referral fee. Despite the big bucks being thrown around, many still have a hard time finding and keeping associates. We suspect that’s the reason they are willing to pay so much. It will be interesting to see how long the stigma of “corporate orthodontics” or Medicaid practices lasts. Right now most of the residents we talk to in various programs want traditional practices and what they have to offer. They are willing to make less to be a part of their ideal practice scenario in their ideal location. But we sense the tide may be changing.
Let’s talk about ownership. Almost every resident and recent graduate will tell you that they want ownership. We’ll venture to say that many don’t know what ownership means at this stage of the game. Residents have been told for years that ownership is what they should strive for but they don’t understand that ownership is not just showing up, treating some cases, telling Dr. Senior what he’s doing wrong, cashing a check and going home. Many residents and new orthodontists are VERY averse to the rigors of small business ownership when you get down to brass tacks and start talking duties, hours, commitment and responsibilities. We’ve heard it said that “this generation of new orthodontists is lazy and disrespectful, and should know their place and pay their dues.”, although we at Pro Ortho don’t necessarily agree with that stance. We will say that there has been a shift in recent years in mindset and expectations when it comes to the majority of graduates, however. For good or bad (and we’re not judging here) what most grads actually want is a high paying job with their name on the door, lots of status, short hours, lots of vacation and a big paycheck. They also want to live where they want to live come hell or high water (the coasts, AZ, MI, UT, NV), with no regard for saturation or competition. Again, many say they want ownership but just don’t understand what that means – just like none of the current Dr. Seniors knew what it meant until you had the guts to become an entrepreneur and learn things the hard way- by doing it. We labor on this point only because we believe that the seeds for failure in many transitions are actually the result two key things:
- a lack of communication. Owners and associates speak different languages and it takes an expert to translate properly and to clearly define “wants” and expectations on the front end.
- The other big transition killer, and probably the most common cause of failure, is CONTROL: who has it, who’s sharing or not sharing it, what the staff sees and thinks- are we peers?, how is the partnership/transition presented to the patients, what words do we use to describe the doctors (old/new, Senior/Junior…) Basically, who’s in charge and how is it portrayed? Again, this is only our opinion based on our observations!
When it comes to the multiple location, multiple doctor practice (and this model is becoming ubiquitous) it seems that there are basically two schools of thought on to how to handle practice ownership. One is to only hire associates and never give ownership (pay a salary and bonus on performance). The other school suggests finding the “right person” and planning on making him or her a partner so the owner don’t have to babysit and the new fractional owners don’t leave and they work hard because they are owners. We’ve seen both systems work and both fail and can argue for either but we are beginning to think that the choice of system is dependent on the person you hire and the situation and it may be smart to have both systems as an option simultaneously so that one has a larger pool of potential associates if you have a multiple location setup or want to.
We also point out that it’s foolish to bring in an associate that is just like the senior doctor unless the senior is leaving or you have more patients waiting for treatment than you can treat. The reason is that if two people who are just alike are in the same practice, we are essentially dividing the patients and revenue in half with no prospects of attracting a different demographic to make up for the additional mouth to feed! Consider someone markedly different to appeal to untapped patient pools.
It seems to us that there is not one answer when it comes to ownership and associates. There’s no one size fits all approach. It invariably has a lot to do with the size of the practice, location, personalities involved and a myriad of other variables.
To again quote Roger Hill:
“For any of these transitions to be successful, an enormous amount of communication needs to take place at the financial, operational and legal levels. Comprehensive financial modeling includes after-tax cash flow projections for both doctors, illustrating the bottom-line financial benefits and risks in which (among other considerations) the structure of the buy-in and profit allocation are determined.
Operational communication means making certain that both doctors understand how the shift of control will be sequenced, as well as the responsibilities that come with the sharing of control. With control comes an increase in responsibility; these are inseparably linked. Both doctors need a clear and open line of communication in this area so that questions can be addressed in an open venue with the best interest of the doctors and the practice in mind.
Legal considerations should be laid out in advance in great detail so that both doctors clearly understand their rights, obligations and commitments. This is the common sense path to avoiding misunderstandings.
In short, the expectations of both doctors regarding financial outcomes, operational protocol / control, and legal matters need to be addressed beforehand, and not as they go along.”
We don’t have all the answers but attempted to make a few observations that might help sellers and buyers start a conversation. Communication is the key. Good luck.
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