Ownership Agreements and Their Importance
Bruce Bryen, CPA
Posted on October 6, 2014
It is surprising what this author sees when advising experienced dentists during the litigation process that takes place when there are disputes over ownership. This unfortunate occurrence is almost always the product of the lack of an executed ownership agreement.
Executed ownership agreements are effective for all types of ownership such as LLCs, PCs, PLLCs, and any type of hybrid ownership when there are two or more dentists involved. It is an enigma to see dentists who have terrific clinical reputations but do not have this basic administrative tool that any business advisor will request to review when first being retained to assist the dental practice. The concept of simply “trusting” your partner/shareholder is great—but only when things are going well.
What is an executed ownership agreement?
The basic theory behind an executed agreement is that it protects against points that are debated that can only be resolved when an agreement is available, unless of course the parties file a complaint for a trial and a court is asked to decide. When the partnership/shareholder agreement is prepared prior to any dispute, thousands of dollars in litigation expenses are saved because money was spent on the agreement in advance of the argument. Hours of lost production are not needed to assist in settling the dispute or in preparation for trial. The old “handshake” agreement is not worth the paper that it is written upon, as the embattled dentists will find out once they have an irreconcilable difference and there is no executed agreement to rely upon for clarity.
Why should I have one?
There is a television commercial with the tagline, “Pay me now or pay me later.” This is an important consideration for the experienced dentist who does not have an executed ownership agreement to consider. The “pay me now” approach (getting an executed ownership agreement), while seeming to be expensive, is much cheaper than the “pay me later,” approach for an attorney and expert needed for defense. With a claim against the partner/shareholder, dentists are at the mercy of the attorney and court to settle their differences.
Ownership conflict occurs often when a loyal associate buys into a practice and has trusted the more mature dentist for whom he or she has worked. The need to spend money for the preparation of an agreement does not seem necessary because of that relationship. Any dentist who has been in litigation and has even settled and not gone to trial knows that the money paid now is more efficient and less expensive than if an attorney starts billing later.
In some cases, a younger dentist who may have a short-term experience working and is interested in acquiring a practice other than the one in which he or she currently works will probably hire a consultant or practice broker to assist with the acquisition. This dentist will have the experience of working with someone who insists on having paperwork to protect the dentist, since two diverse parties are attempting to secure a transition. Once an acquisition of a practice has taken place, the buyer will probably be used to the need for administrative work for protective purposes. Even though it seems as if the experienced dentist is the one who would more clearly understand the need to spend money for guidance, it is more likely that the experienced dentist is the one who will wind up in court.
How do I get an executed ownership agreement?
Retaining an attorney who comprehends dentistry is a must. Meeting with a dental CPA can be just as important, since the dental CPA may be able to assist the attorney who has not had experience working with dentists. An agreement that is prepared and then maintained on an annual basis will save thousands of dollars and hours of time and lost patient revenue. After spending the time and money for the initial agreement, keep it current and make sure there is a witness to each owner’s signature. A tip for witnessing an agreement is to have a spouse be that witness. If that occurs, it is difficult for the witness to say that there is no knowledge of what the value, terms and conditions of payment, or result in the event of death or disability may be in a divorce. The spouse should sign off that the agreement has been reviewed.
Remember that it is safer, cheaper, and much easier for the sake of negotiating a fair agreement when everyone is working together than when one of the parties to the ownership issue is unhappy. The old adage “pay me now or pay me later” is certainly true with dental practice ownership positions while working with attorneys.
About the Author
Bruce Bryen is a certified public accountant with more than 40 years of experience. He is the managing partner of the accounting firm Bryen & Bryen, LLP, which is based in southern New Jersey. Mr. Bryen specializes in retirement planning design, income and estate tax planning, determination of the proper organizational business structure, asset protection, and structuring loan packages for presentation to financial institutions. He can be contacted by calling 856-985-8550, ext. 112, emailing firstname.lastname@example.org, or visiting www.Bryen-BryenLLP.com.