Financial arrangements in an oral and maxillofacial surgery practice

March/April 2009

By Stanley L. Pollock, DMD, MS, PhD, JD

Professional Practice Planners, Inc.

This is the ﬁrst of a two-part series on ﬁnancial

arrangements in an OMS practice. Part I addresses

considerations and sharing arrangements during the

associateship and buy-in phases of a partnership.

Part II, which will publish with the May/June issue of

AAOMS Today, will focus on methods of compensation,

particularly in the buy-out phase.

ver the years, the number of multi-doctor and

percentage of group to solo practices in our

the specialty have increased considerably.

The latest data of the American Dental Association

report that 42.4% of oral and maxillofacial surgeons

are in some form of associateship in private practice.

Tangentially, many new practice management problems

have arisen while others have signiﬁcantly increased.

A major problem has been determining the ﬁnancial

arrangements of the doctors in the group. This Practice

Management Notes presents an overview of the myriad

ﬁnancial arrangements and income divisions involved

in an associateship, buy-in and departure in an active

oral and maxillofacial surgery practice by presenting a

case that progresses through the three-stage process of

associateship, ownership and departure.

Although most ﬁnancial arrangements fall into general

methodologies, they are unique and special to the OMSs

and practices involved. The descriptions, illustrations

and explanations contained herein are rather typical of

the arrangements. Their applications in real life practice

are, or will be, modiﬁcations of the examples. For them

to be workable at any stage, ﬁnancial arrangements must

be fair, reasonable and equitable for all parties. In this

article, the owner or owners of the practice are referred

to as doctor, senior doctor and doctors and the new

OMSs as associate, junior doctor and doctor(s). Together,

they are the “parties,” without feminine or masculine

references. The practice entity is termed “practice,”

regardless of the business form of solo practitioner, C or S

corporation, limited liability company, limited partnership

(also known as limited liability partnership in certain

states) or general partnership.

If a solo practitioner practice takes on an associate the

doctor will no longer be solo and it will become necessary

for the practice to become a more formal business entity,

more particularly a C or S corporation, limited liability

company or limited partnership. In corporations, the

doctors become shareholders and they own shares of

stock. In limited liability companies or partnerships,

they become members and they own units. For multiple

critical reasons, primarily asset protection and the extent

of the liability to which each partner subjects herself or

himself, a general partnership is not recommended. The

partnership is liable for any wrongful business act and

each partner is fully and solely responsible for all debts

and obligations of the partnership regardless of whether

the partners or the partnership incurred the debt or

obligation. In this type of arrangement, there is absolutely

no business lawsuit protection.

Associateship – the trial phase

The initial phase starts with recruitment. Planning the

associateship phase and recruitment includes having

a method of associate compensation in place and in

writing. Called a “Fact Pact” or “Term” or “Dream

Sheet,” this one- or two-page document lists the major

terms, compensation and beneﬁts—the “Package.”

Speciﬁcs of the Fact Pact will vary depending upon the

geographic location of the practice, cost of living in the

PRACTICE MANAGEMENT

NOTES

A Supplement to the AAOMS Today Newsletter March/April 2009

Financial arrangements in an oral and

maxillofacial surgery practice

March/April 2009

Occasionally, the parties are more comfortable in an

arrangement in which an associate’s compensation is

a percentage of the practice’s collections for services

the associate provides to patients of the practice, on

average around 35%, less refunds, discounts, courtesy,

write-offs, etc. Another common arrangement sets an

associate’s compensation as the greater of a base salary or

a percentage of the associate’s collections.

Incentive compensation: When base salaries are in the

high range, incentive compensation is not usually a factor.

Otherwise, it is usually based on one of three factors:

1. Pre-determined ﬁxed amount - $5,000 to $10,000

2. 15-20% of practice collections less refunds,

write-offs, etc. for services that the associate has

performed for patients of the practice over the

break-even point

3. 15-20% of practice collections less refunds, write-

offs, etc. over the previous 12 months’ collections

Beneﬁts:

1. Malpractice insurance

2. Health care – family

3. Continuing education, Board preparation, vacation,

sick and personal days

4. Dues, licenses, applications, DEA registration

5. Cell phone -- pager

6. Social security, Medicare

7. Federal and state unemployment – worker’s

compensation

The arrangement may also consider the following, which,

of course, will increase package costs and the break-even

point, and may not commence until the ownership phase:

8. Relocation expense

9. Signing bonus

10. Entertainment, promotion

11. Vehicle expense, especially in a multi-ofﬁce practice

12. Life and disability insurance

13. Increased personnel

14. Additional equipment

15. Ofﬁce refurbishing

16. Ofﬁce expansion

17. Eventual proﬁt sharing and retirement beneﬁts

18. Practice provides facility(s), staff, equipment,

supplies

AAOMS

PRACTICE MANAGEMENT NOTES

area, general and local economic conditions, employment

and unemployment factors, source of patients, types of

procedures done, how far in advance patients have to

be scheduled, health and ages of practitioners, general

objectives and goals of all doctors, how eager each OMS

is to enter or to exit practice and much more.

The following provisions are normally included in the

Fact Pact:

Status: Full-time employee of the practice. Many terms

and conditions of an employee surgeon and independent

contractor surgeon are similar. This article refers to

the OMS who is or will be a full-time employee of the

practice with anticipation of becoming an equal owner.

Term: Normally 12 months with automatic renewal at

the end of the year in case the term is extended. Includes

30- to 60-day termination clause by either party with

or without cause and without liability. Most states are

“At Will” states, which means that either party to the

agreement can be terminated or can leave immediately

without cause.

If the parties determine that the initial or trial term

should be 24 months, during the second year, the practice

increases the annual salary based upon the Consumer

Price Index, inﬂation rate or a reasonable percentage.

Restrictive covenants: For 24 to 36 months - no

solicitation of patients, staff, or referral sources; and b)

non-competitive activities within a reasonable geographic

area of practice location(s).

Compensation: Varies considerably depending upon the

above and other factors. Today, across the country, the

ranges of starting annual base salaries are:

Single degree OMS . . . . . . .$135,000 to $175,000

Double degree OMS . . . . .$175,000 to $200,000

Fellowship OMS . . . . . . . .$200,000 to $250,000

Retired military/faculty

member (boarded) . . . . . . .$200,000 to $250,000

March/April 2009

The agreement should stipulate that the associate is

entitled to her/his incentive compensation and certain

beneﬁts provided that she/he remains an active employee

of the practice at the end of each year.

The parties must consider the break-even point. It will

cost between $10,000 and $15,000 to bring a new

associate on board, and the compensation package

includes the base salary and/or incentive compensation

plus beneﬁts, which can easily run 20% or more of the

base salary. A simple determination of the break-even

point is:

THE PACKAGE = $190,910 = $360,208 = BREAK-EVEN POINT

OVERHEAD EXPENSE .53

If you wish to ﬁne-tune this method to determine the

break-even point, you, your accountant or advisor can

calculate and use the more detailed:

TOTAL FIXED COSTS = $180,000 = $360,000 = BREAK-EVEN POINT

1.0 –VARIABLE COSTS % 1-.50

Determining the break-even point clearly indicates that

the associate or practice must generate around $360,000

in additional revenues to pay for the increased costs

of paying the associate his initial, basic compensation

package.

It is wise that the practice clearly indicates and introduces

the associate to the hefty costs of running an oral and

maxillofacial surgery practice and how such costs affect

the bottom-line proﬁt and compensation of all doctors.

Equity Ownership: Operating under the assumption

that the employment arrangement will progress to equity

ownership, a comprehensive practice valuation and

proforma projections should be prepared. (Table 1).

The valuation becomes an important part of the practice.

Not only does the appraiser determine and provide a

written (hopefully certiﬁed) report of the current value

of the practice, but the appraisal also acts as a feasibility

study. Values are not static and the practice should be

valued annually and updated appropriately. A wise

COMPENSATION PRO-FORMA

CORPORATION

DR. JUNIOR

Year 1 2 3 4 5 6

REVENUES* $1,200,000 $1,272,000 $1,348,320 $1,429,219 $1,514,972 $1,605,871

(LESS) EXPENSES @ 50% -600,000 -636,000 -674,160 -714,610 -757,486 -802,935

NET DISTRIBUTABLE INCOME 600,000 636,000 674,160 714,610 757,486 802,935

COLLECTIONS @ 35,40,45,50,50% 210,000 254,400 303,372 357,305 378,743 401,468

(LESS) INCOME ADJUSTMENT -25,000 -35,000 -45,000 -55,000 -58,750

COMPENSATION 185,000 219,400 258,372 302,305 319,993 401,468

* Annual increase - 6%

Table 1

March/April 2009

investment, the valuation carries forward from year to

year and forms the basis for certain insurance coverage,

buy-ins and buy-outs and other ﬁnancial activities. The

documents that the parties require at this stage are the

comprehensive practice valuation, general plan for buy-in

and the associate’s employment agreement.

Advisors: Advisors are required from the beginning

and throughout the three phases of a professional

practice. Each OMS must have a team and work with

qualiﬁed, competent experienced advisors. Simply,

there are too many facets throughout their careers in

which the parties shall become involved. The facets

are personal, professional, legal, accounting, ﬁnancial

and risk managing in nature. Today, more than ever, a

career and practicing in an oral and maxillofacial surgery

environment is not a do-it-yourself proposition.

Ownership – the buy-in phase

Congratulations. The associateship went very well.

The arrangement has progressed from associateship to

ownership and the associate becomes doctor junior. In

this phase of practice, all doctors commence the process

in which doctor junior becomes an equity owner in the

practice, that is, doctor junior buys-in. At the same time

and in most cases, the doctors understand that doctor

junior must prepare, take and pass the examinations of

the American Board of Oral and Maxillofacial Surgery

in order to progress to equal ownership in the practice

and to obtain hospital appointments and advancements.

This is something else that makes equal ownership more

challenging and requires all parties’ consideration and

cooperation.

Prior to doctor junior’s entry into the practice, doctor

senior had the practice realistically and professionally

valued by a qualiﬁed appraiser who understands the

dynamics of an oral and maxillofacial surgery practice.

If not, they should at the very least have had a method

in place and in writing that determines the value of the

practice. An example of this method could be: “The

value of the practice for the purpose of associate’s buy-

in shall be: The fair market value of the tangible assets

(major and minor equipment, furniture, furnishings and

instruments), clinical and clerical supplies, accounts

receivable and payable, liabilities, etc.) plus intangible

asset value (goodwill, going concern, records, etc.) at

45% of the practice’s 12 month’s gross revenues less

refunds at the time of associate’s entry into the practice.

Excluded are cash, real estate or real property and

vehicles.” They should also have a general plan including

pro-formas in place for implementation of the overall

buy-in process. The doctors do not want to be surprised.

By way of example: the determined fair market value of

100% of the practice is $500,000 which is a reasonable

fair market value of a mature oral and maxillofacial

surgery practice today. Doctor senior holds the pre-

associateship value for the year. In cases of extended

terms, the doctors may want to have the value up-dated.

In our two-doctor practice, 50% of the value, then, is

$250,000. The term of this and most buy-ins shall be

ﬁve years, although increasing the term to six, eight or

10 years in larger practice situations may be required.

The parties, therefore, break out the value of the stock or

units (normally tied into the value of the tangible assets)

and intangible assets as follows:

Tangible assets (stock or units) $ 75,000

Intangible assets (goodwill, etc.) 175,000

Fair market value of 50% of practice $250,000

Today, oral and maxillofacial surgery practices are

no longer small businesses. Rather, they are large

private, multi-doctor enterprises that generate millions

of dollars annually. They have qualiﬁed managers

and administrators and dozens of trained personnel.

Their budgets, expenses, cash ﬂows and problems are

large and, in many instances, staggering. The latest

statistics (2007 data) of the National Society of Certiﬁed

Healthcare Consultants present the following revealing

information relative to average, mature oral and

maxillofacial surgery practices:

Gross revenues $1,107,028

Overhead – 586,725 53%

PROFIT $ 520,303 47%

Stock or Unit Sale and Purchase: The Internal

Revenue Service requires that doctor junior actually

purchase and pay for her/his stock or units for a realistic

price. Accordingly, doctor junior shall purchase and pay

for his stock or unit interest directly from doctor senior

at $15,000 annually or $1,250 per month for 60 months.

When doctor junior completes his annual payments,

doctor senior either separately holds the number of shares

of stock or units or places them in an escrow account at

the end of each 12 months for ﬁve years. Since doctor

junior purchases the stock or units monthly and annually,

in most cases, she/he may not be required to pay

March/April 2009

PRACTICE MANAGEMENT NOTES

interest on the annual purchases. Nevertheless, certain

accountants and senior doctors still insist upon adding

an interest charge. As a distressing matter of fact, certain

accountants and senior doctors require their doctors

junior to pay the entire buy-in price as a stock or unit

purchase with after-tax dollars and interest. As a result,

many favorable associateships and buy-ins break down

at this point. This is a major reason for pre-associateship

and employment practice valuation and planning. As

stated, most doctors do not like surprises.

Major points during the entire buy-in process are the

price allocations of the tangible and intangible assets and

the pre- and post-tax payments for the purchases and

sales. Normally, doctor junior should pay for the entire

purchase on a post-tax basis, which, today, is around

40% combined federal and state. At this 40% rate, the

purchase becomes very expensive. In this case the entire

buy-in purchase price would be $350,000 after-tax

($250,000 x 40% = $100,000  $350,000). Doctor

senior should pay taxes on the sale at her/his long-term

capital gain rate, which today is 15% on the “gain over

basis,” or the increase in value over her/his original cost

of the stock or units. In our example case, doctor junior

pays an additional after tax total amount of

$30,000 or $6,000 per year, which is affordable

($75,000 x 40% = $30,000). The doctors shall have a

stock purchase agreement in place that outlines the terms

of the stock transaction.

Included in the stock or unit sale and purchase is a

“senior doctor’s option,” which states that doctor junior’s

purchase of the shares of stock or units is subject to an

option (the “Option”). If doctor junior disassociates from

or terminates his relationship with the practice during the

term in which she/he is purchasing his shares or interest,

for whatever reason, doctor senior shall repurchase

doctor junior’s stock or units at ﬁfty percent (50%) of the

price and terms which doctor junior had paid and doctor

senior shall retain the practice, all tangible and intangible

assets, supplies, telephone numbers, patient records, logo

and any and everything else associated with the practice.

Doctor senior’s re-purchase of the shares shall be at the

same time frame which doctor junior used for her/his

buy-in and should include interest.

Intangible Asset Sale and Purchase. The doctors

agree that doctor junior shall pay for her/his intangible

asset portion on an income adjustment basis. Doctor

junior shall receive a certain amount LESS each month

and doctor senior shall receive the same amount MORE

each month. In our case, that amount would be $35,000

($175,000 ÷ 5 = $35,000). The doctors, however, are

concerned about the tax factors, that is, the current

ordinary rate of 40% versus long-term capital gain rate of

15%. Normally, doctor senior would pay for his sale at

his long-term rate of 15% over basis. Since the cost of the

intangible portion shall be adjusted or shifted between the

doctors, doctor senior would be required to pay taxes at

her/his ordinary tax rate of around 40%. The difference

between the two tax rates, of course, is 25% and the

difference shall be, similarly, adjusted or added to doctor

junior’s intangible asset purchase price. The annual

difference is $35,000 x 25% = $8,750  $43,750. Each

month doctor junior shall receive $3,646 less and doctor

senior shall receive $3,646 more in compensation. Since

doctor senior shall be providing management services

and helping doctor junior progress in the myriad aspects

of the practice, doctor senior shall have a management

agreement in addition to his employment agreement. The

management agreement outlines the terms of the income

shift transaction.

As stated, there are multiple methods for doctor junior to

purchase the intangible portion of her/his buy-in portion.

The above is considered the “Exact Method” in that the

doctors have a comprehensive valuation performed and

speciﬁc amounts allocated to the stock or units, which

include or consider accounts receivable and payable

and the intangible assets. In the “Inexact Method,” the

doctors do not require a comprehensive valuation. They

do require the fair market value of the tangible assets or

some other method to form the basis of the stock or unit

sale and purchase. In this method, in contrast to the exact

method, accounts receivable and payable are not included

and the doctors address and handle them as a separate

transaction. Generally, the senior doctor retains the

accounts receivable and payable.

Instead of allocating a speciﬁc value to the intangible

assets, doctor junior, generally, a) has a two-year

associateship term and, thereafter, b) receives a reduced

percentage of doctor senior’s annual compensation over

four years. By way of example, starting in year three,

doctor junior would receive 60% of doctor senior’s

annual compensation. For the following three years,

doctor junior would receive 70%-80%-90% of doctor

March/April 2009

This is number 109 in a series of articles on practice management and marketing for oral and maxillofacial surgeons

developed under the auspices of the Committee on Practice Management and Professional Allied staff and AAOMS staff.

Practice Management Notes, from 2002 to present, are available online at aaoms.org.

All articles in Practice Management Notes are published only with the consent of the authors, who have expressly

warranted that their works are original and do not violate copyright or trademark laws. AAOMS is not responsible for any

violations of copyright/trademark law on the part of these authors.

senior’s annual compensation. Thereafter, the doctors

would receive equal compensation or they work out a

mutually agreeable compensation plan. This method has

been and is popular in the medical profession. However,

few oral and maxillofacial surgeons are willing to simply

allocate a certain percentage of their income until doctor

junior actually produces her/his fair share of revenues.

Importantly, since doctor senior receives each year’s

percent differential as ordinary income, she/he will pay

taxes on the differential at ordinary income rates, which

would be considerable over four years.

At the end of the 60 months, provided that doctor junior

has paid for her/his stock or unit and intangible assets

purchases in full, doctor junior shall become an equal

Shareholder or Member in the practice. Doctor senior

shall issue doctor junior the appropriate stock or unit

certiﬁcates representing the equal number of shares or

units. In former years, most buy-ins were structured on

a 51%-49% ownership relationship so that the senior

doctor could maintain control. This is not so common

today because doctor senior can maintain control in

certain aspects by other means and agreements. For

instance, if doctor senior is concerned about his being

unjustly terminated or “locked out,” provided that he is

physically and mentally capable, he could have a “no-

cut” employment agreement or other agreements to

protect his position. The doctors can have other terms

and agreements in place that provide equal protection

and responsibility for all parties in the practice business

transactions.

1. 2005

Survey of Dental Practice, American Dental Association,

Chicago, IL