The Achilles’ Heel of Dental Partnerships

Dental partnerships, where two or more doctors own equal or minority/majority interests, are very complicated entities.  The legal documentation for a dental partnership routinely runs over 100 pages, and unfortunately the value of these partnerships is often only as secure as the legal language describing them. Over the years, I have witnessed a lot of unhappy professional partnerships. My observations have reinforced the dictum that “one marriage is difficult enough!” There are, of course, exceptions to every rule, and I have many clients who are successful with this model . But in general, I am not a big fan of dental partnerships and I believe there are better options.

One of the biggest challenges is how to fairly compensate a partner who becomes disabled and can no longer perform clinical procedures. Death, as they say, is easy. Life insurance policies will pay out the appropriate valuation to the estate of the deceased partner. The surviving partner does not take one dime out of his/her pocket. In the case of disability, however, usually there is the requirement for the healthy partner to buy out the interest of the disabled partner and become the 100% owner of the practice. In order to do this, the healthy doctor does in fact now have to go to the bank and get a loan to cover the buyout. This new debt service will put major stress on a business that is already revenue compromised.

I recently became aware of a great insurance product called Disability Buyout Insurance (DBO). A DBO policy is designed to fund a disability buy/sell agreement. It helps ensure that a professional practice can continue after the total disability of one of the owners or partners. It does this by requiring the disabled partner to sell his or her interest to the remaining owner for an agreed upon price and according to terms defined in the agreement.

I believe that the cost to purchase this type of insurance policy is relatively low considering the massive benefit. A $500,000 DBA policy for a healthy 45 year old costs about $4100/year.  Considering that one out of three dentists will be disabled at some point in their career, it provides great peace of mind.

There are many guidelines and specifics for this type of policy, and not all situations will apply.

• The two doctors cannot be more than 15 years apart in age.

• The older partner cannot be more than age 51.

• The partners cannot be husband and wife or father/mother/child.

• The policy will cover siblings.

• The maximum limit of the policy is $2,000,000 with a valuation of no more than 1 X  gross collections.

For obvious reasons, this very valuable insurance product does not apply to everyone. But if you think that you might fit into this narrow niche, you should call Tyler DeStefano at 978-907-6002 and get some advice from a real expert.