Installment Buy-in to a Dental Practice
By Matt Dickstein
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There are two basic elements to a buy-in: the amount of the buy-in price, and the time over which the price is paid. In this article, I discuss the latter element– buy-in to a dental practice in installments over time. I leave the first element, the amount of the buy-in price, to certified appraisers and the like.
The new dentist can pay the buy-in price all up-front, or in installments over time. Payment up-front is the easiest structure. Many practices have a low, nominal buy-in price, and paying it in one lump sum isn’t a problem. If the purchase price is high, the dentist usually can get financing. Most banks want to lend money to dentists to help them buy into a practice. For this reason, I prefer up-front payment of the buy-in price. Simple is good.
That said, most practices structure buy-ins over time, in installments. Usually the rationale is to make things easier for the dentist. Other times it’s to build in a probationary period during which the practice can easier buy-back the dentist’s shares if things don’t work out.
There are two ways to structure an installment buy-in. The first is a simple installment purchase, almost like buying sharers based on a vesting schedule. The second is for the dentist to buy all of the shares with a promissory note, but subject to a “reverse” vesting schedule if the dentist doesn’t pay on the note. I’ll discuss both below.
Here the new dentist purchases shares in installments over a term of years. The practice retains the right to take back the new dentist’s shares if she doesn’t complete the entire installment purchase. The buy-back purchase price likely will be the dentist’s original price paid plus market interest. Once the dentist completes the entire installment purchase, the practice’s Shareholders Agreement governs the buy-back of the dentist’s shares, and here the dentist is treated the same as all other dentist / shareholders, with the buy-back price likely being some variant on fair market value.
Most practices immediately put the doctor on the board of directors, even though it will take the doctor a few years to get to full ownership. Most practices do this to bring the new doctor into the team faster.
Consider the following example. The doctor purchases 25 shares each year, for 4 years, for a total of 100 shares at a total purchase price of $100,000. If the doctor fails to complete the total purchase of 100 shares for whatever reason, the practice takes back those shares that the doctor actually purchased by returning the purchase price plus interest, thereby rewinding the parties back to the beginning.
|Year||Payment||Shares Bought||Shares Owned||Buy-Back if New Dentist Fails to Pay an Installment|
|1||$25,000||25||25||After year 1, all 25 shares bought back|
|2||25,000||25||50||After year 2, all 50 shares bought back|
|3||25,000||25||75||After year 3, all 75 shares bought back|
|4||25,000||25||100||After year 4, all 100 shares bought back|
Purchase with Promissory Note
Here the doctor uses a promissory note to pay the purchase price for all shares. Because the doctor “pays” the entire purchase price up-front (by virtue of the note), the doctor gets ownership of all shares. But because the doctor actually pays cash for the shares over time under the note, the practice retains a buy-back right in case the doctor doesn’t complete payment. Again, for shares that the doctor actually bought under the promissory note, the buy-back purchase price can be the doctor’s paid-in price paid plus interest. Shares that the doctor didn’t buy under the note are washed out, that is, the practice returns the money actually paid, which is $0. Once the doctor has completely paid her note, the practice’s Shareholders Agreement governs, as I explain above.
Just like for installment purchases above, most practices immediately put the doctor on the board of directors.
If we use my same example above, it would look like this:
|Year||Payment||Shares Paid for thru Note||Shares Owned||Buy-Back if New Dentist Fails to Pay Note|
|1||$25,000||25||100||After year 1, all 100 shares bought back, but cash payment only made for 25 shares|
|2||25,000||50||100||After year 2, all 100 shares bought back, but cash payment only made for 50 shares|
|3||25,000||75||100||After year 3, all 100 shares bought back, but cash payment only made for 75 shares|
|4||25,000||100||100||After year 4, all 100 shares bought back and paid for in cash|
There are many variations on the above structures, but enough said already.