Partnerships in dental, medical, veterinary, and optometry practices almost always start off with great enthusiasm. Unfortunately, disagreements between partners can derail even the most promising partnerships, sometimes almost immediately and, other times, years, or decades down the road.
Before you take on a partner, you should have a solid plan for how you will deal with disputes that could arise in the future. Failure to plan for potential conflicts can be a costly and emotionally draining mistake. In a worst-case scenario, you could bankrupt your practice and end up embroiled in extended litigation. A lawyer with experience in forming dental and medical partnerships can guide you in creating a solid partnership agreement that will help you avoid partner disputes and provide more constructive ways to resolve them if they do arise.
Before You Form a Partnership
Some things in life shouldn’t be rushed. It’s risky to start a dental or medical partnership without first thinking through whether you and your potential partner are compatible enough to create a thriving practice together. Do you have similar short- and long-term goals for the practice? When do you expect to achieve those goals? What are your financial expectations? Is your partner someone you would enjoy working with every day?
Put Your Partnership Agreement in Writing
The simplicity of a handshake agreement with your new partner may be tempting, but it’s not worth it. If you don’t have a written partnership agreement, you leave yourself wide open to misunderstandings and disputes in the future that could derail the partnership, endanger the practice itself, and lead to costly litigation.
A well-drafted partnership agreement will provide a clear understanding of:
- What each partner’s responsibilities and obligations are to the practice.
- How profits and income will be allocated and managed. And yes, profits and income are two different things!
- What is the best partnership structure for you and your partner? How can you minimize taxes and increase flexibility?
Use a Lawyer
You could create a do-it-yourself partnership agreement using forms you find online, but using a one-size-fits-all approach will leave you vulnerable to future disputes. A lawyer who has experience working with dental and medical partnerships can help you anticipate problems and plan for how to handle disagreements before they blow up into full-scale disasters.
Causes of Disputes
The most common disputes between partners in dental and medical practices include:
- Different expectations about how much time each partner will devote to the practice and about how the workload will be split.
- Disagreements about how resources will be allocated and distributed.
- Inability to agree on how the practice will be managed.
- Misunderstandings about the terms of the partnership agreement.
- Misconduct by one of the partners.
All of these potential problem areas should be addressed proactively in your written partnership agreement. A good partnership agreement provides a solid foundation for your practice and helps manage each partner’s expectations about how the partnership will operate and what their roles will be.
Items That Should Be Covered in a Partnership Agreement
These items should be included in your partnership agreement and related written documents.
- Who is contributing capital to the business and how much?
- What compensation and benefits will each partner receive?
- How will profits be distributed? By time worked? By output? By ownership percentage? Will the distribution method change over time?
- How are expenses allocated?
- If the practice loses money, how will the shortfall be made up?
- What are the duties of each partner?
- How are new patients allocated to each partner?
- When and how can new partners be added? Will that require a unanimous agreement of the existing partners?
- How will decisions be made? Does one partner have the authority to make day-to-day decisions? Will an office manager who is not a partner have that authority? Are there significant decisions that must be agreed to by all partners? If so, which decisions will require unanimous consent?
- How will the dissolution of the partnership be handled? Specify what will happen in the event that a partner:
- Dies. Can the practice or a partner buy the partnership interests of the deceased partner and, if so, how will the price be calculated? Or will the partnership interest be put in a trust to benefit the deceased partner’s family?
- Becomes disabled.
- Retires.
- Loses their license to practice or engages in illegal activity or other misconduct.
- Decides to dissolve the partnership because of incompatibility or personal reasons.
Include Buy-Out Provisions in Your Partnership Agreement
Putting the terms of the buy-out provisions into your partnership agreement or creating a separate buy-out agreement (also called a “buy-sell agreement”) at the outset will reduce conflict and prevent uncertainty in the event of a future buy-out. Your buy-out provisions should address these questions:
- What formula will you use for the buy-out price?
- Will the buy-out payment be in cash or in installments?
- How will you distribute assets, including the property and equipment? How will you allocate debts?
- Cross-purchase agreement: If you include this agreement, then each partner agrees to take out a life or disability insurance policy on the other partner(s). In the event of the death or disability of one partner, the other(s) will be paid by the insurance policies, and the deceased or disabled partner’s shares will go back to the practice and be distributed among the remaining partner(s).
- Entity-purchase agreement: If this is included, the practice, rather than the individual partners, purchases the life insurance. If a partner dies, the practice uses the insurance payment to buy the deceased partner’s shares from their estate.
- Restrictive covenants: If a partner leaves the practice, will they be subject to non-compete and non-solicitation agreements? You should always work with an attorney when drafting restrictive covenants. They need to be drafted properly for courts to enforce them. In general, courts will enforce restrictive covenants that they consider reasonable, which may include considerations of how long the agreements will be in force and what geographic areas they cover. Some states, including California, are more strict than others when evaluating whether non-compete agreements are enforceable.
Include Dispute-Resolution Provisions in Your Partnership Agreement
Alternative dispute resolution (ADR) methods, including mediation, arbitration, and negotiation, are usually less expensive, less time-consuming, and less stressful than litigation. These methods can help partners better understand each other’s positions and may lead to creative solutions. ADR may not only keep you out of court, but it may also be able to save a partnership by resolving disputes before they lead to dissolution.
By thinking about the methods you will use to resolve disputes before they arise and including dispute-resolution provisions in your written partnership agreement, you will have a ready-made plan you can turn to later in the heat of the moment when it may be harder to make decisions -- and prevent further disagreements, on top of the original dispute, about how you will proceed.
The ADR methods you can agree to use include:
- Arbitration, which can be binding or non-binding and uses an impartial third party to hold a hearing and issue a decision.
- Mediation, where a mediator helps the parties reach their own solution, which is usually non-binding.
How to Resolve Disputes
Thinking ahead now about how you will resolve disputes in the future will go a long way to helping you handle problems effectively and keep them from spiraling out of control.
- Try resolving disagreements informally. Sometimes talking directly and informally with your partner -- instead of trying to avoid or deny the problem -- will be enough to resolve a dispute.
- Follow the dispute-resolution provisions in your partnership agreement. When you have included in your written partnership agreement the process you will use to resolve disputes, you will have a ready-made plan that reduces uncertainty, encourages action, and eliminates conflict about the process itself.
- Don’t take the dispute personally. When you work as closely as you do with a partner in a dental or medical practice, it can be hard not to take disputes personally. Try to resist that temptation. Focus on what is best for your practice, keep an open mind about your partner’s point of view, and rely on the provisions in your partnership agreement to guide you through the steps you need to take to resolve the problems. The more you can approach disputes from a rational problem-solving perspective, the better your chances of reaching a satisfactory solution.
Takeaways
The medical and dental attorneys at Dental & Medical Counsel have extensive experience working with dental, medical, veterinary, and optometric partnerships. We can work with you to create a comprehensive written partnership agreement, tailored to the specific needs of you, your partners, and your practice, that will anticipate and help resolve disputes before they arise. We invite you to schedule a free consultation with attorney Ali Oromchian or contact us to learn more about how we can help you set up a partnership that will get you started on the right path.
