In the third episode of The Dental Amigos’ fifth season, “Assembling a Group Practice," Rob and Paul discuss the logistics of offering an associate equity in a DSO.

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The Amigos begin by explaining the reasons why DSOs frequently offer associates equity, such as to increase associate retention and to garner associate loyalty. Then, they discuss considerations that  associates should weigh prior to accepting an equity deal. Which type of equity is being offered? Is the compensation worth the restrictive covenant that accompanies it (which is likely more restrictive than the covenant in a non-equity deal)? In this episode, Rob and Paul offer important advice for practice owners to consider for their associate agreements and for associates to keep in mind prior to signing associate agreements.

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See the full transcription below:

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Bumper  0:00  

Welcome to the dental amigos podcast with Dr. Paul Goodman and attorney Rob Montgomery, taking you behind the scenes of the dental business world. All the things you didn't learn in dental school, but wish you had. Rob is not a dentist and Paul is not a lawyer. But since Rob is a lawyer, we need to tell you that this podcast is for informational purposes only and shouldn't be considered legal advice. listening to this podcast does not and will not create an attorney client relationship. As is always the case, you should formally consult with legal counsel before proceeding with any legal matter. Learn more about the dental amigos at WWW dot the dental amigos.com. And now here are the dental amigos

Rob Montgomery  0:39  

floor one. I'm Rob Montgomery. Welcome to another episode of the dental amigos podcast where I'm joined as always by the head nitrile himself. Dr. Paul Goodman, great

Paul Goodman  0:47  

to be chatting, Rob,

Rob Montgomery  0:48  

it's good to see you, Paul live in person in the studio. As always,

Paul Goodman  0:52  

I know nice, nice to be talking face to face. I

Rob Montgomery  0:54  

know it doesn't happen often enough, we have to stop meeting like this. Right. So here we are. I believe we're in season five, if I'm not mistaken. Still I'm looking at Jessica five and here's give me the nod right season five, assembling a group practice. And today, we're going to talk about associate dentist equity. And so as you try to grow your group, obviously you need dentists, how are you going to be able to attract those dentists and and retain them for that matter? And a tactic that I hate to say the tactic and that sounds strategy negative? Doesn't it strategy that a lot of larger DSOs use and DSOs of all sizes is to offer those people equity the

Paul Goodman  1:49  

proverbial you know, I'm a captain catchphrases. Rep and I don't really want to know where this one came from. But the proverbial skin in the game. Don't tell me where that came from. All these is the all these weird catchphrases, we don't want to know like there's multiple ways to skin a cat. I don't even want to know where that started. But yeah, I mean, it's a it's a someone who has multiple associates part of a group practice. I mean, the, the mission behind this is one that can be pretty noble, but the execution of it can cause confusion, as I say, with dentists, sometimes crying inside. And you know, it's this, it's this world of building group practice, which I admire, I do it myself, I role model it. Yeah, I think it's great when dentists can work under the same proverbial roof, even if all those roofs are not attached to each other. And as we've talked about through these seasons of being dental amigos that, you know, it's the it's not necessarily the opposite. It's just very different of being that surfer dentist running your own one dentist practice where you have to figure out how to get the get along factor.

Rob Montgomery  2:52  

Right, right. Now, that's, that's for sure. And obviously, retaining associates these days, you know, especially if you're looking at assembling a large group, and when I say large, let's just say it's something that you can't possibly work and provide dentistry and all those practices, right now you start to get to the point where you need other people. If you're gonna rely on those other people, you have to have, as we say, a strategy to attract them. And then a strategy to retain them. Yeah, we're gonna say strategy instead of tactic. I like that she likes better. Yeah. So first off, you know, when we talk about equity in the practice, there are a lot of different ways to skin the cat, right? Yeah, exactly. Sounds very vegan. Again, skin, the cat, you know, but it will put full we'll stick with that for now. But you, there's a lot of different ways to do it. You know. And so when you're talking about equity, it's equity in what? Right, right. So are we talking about giving them equity in the professional entity that owns the practice? Are we talking about giving them equity in a management company that the DSO that you have formed to manage all these practices? Or are we talking about equity and really, what is a hybrid, which is referred to oftentimes as JV equity, where they're going to have equity in a management company, like a mini DSO that only manages that one practice? Right? So this is one of the things I think that people that are sort of new to this world. So we're going to bring them in as a partner. Okay? How, right where, because if you have let's just say hypothetically five locations at this time, and you want to get this associate, you want to attract and retain that associate, and you want them to, to benefit from the the increase in value and revenue of that location where you want to incentivize them. While giving them a piece of these other offices that they have absolutely nothing to do with may not achieve that goal for sure. So one of the strategies with this is okay, let's let's have them buy in and own at that one place, they're going to work harder because they have a piece of that. And that's going to be our r&d Center for that. And then oftentimes, we'll see a combination of the JV and parent level that's usually at a larger DSO. But when you're talking about, typically, with a smaller group and a growing group, you're probably looking at a JV equity again, so the associates not owning a piece of the practice entity that's owned by the founder, and they're their dental partners, perhaps. So the the associate really only owns the interest in this management company whose sole purpose is to manage that one practice and we're going to get a little complicated and legal, and then that one practice DSO then subcontracts out all these management services to the big parent, DSM. Okay? So it's important if if your plan here is to incentivize associates at a particular location, you want their their their success to be derived in the profit and the value to be derived at what happens at that location. I

Paul Goodman  6:33  

think we can add in this you're really laying down a lot of good legal jargon. I follow the majority of it, but I know this is your day to day life with this. Robert, my day to day life in my office yesterday, is working with other dentists that don't own our practice, right? My brother, I own the practice, we have an associate general dentists, we have specialists. And I think maybe it's worth just adding in for our listeners that incentivizing an associate to stay with you doesn't always have to come with equity. So if you're going to add this, show them what the upside is for them, right? So sometimes, there's so many feelings in this where someone DMS me and says this, this XYZ DSO or this group wants me to own 15% of equity. I said, Well, what's the upside for you? Right? What is the upside for you? And ask them what the upside is for you. Because if you're offering someone something, in any relationship, you should be able to describe the upsides and the potential pitfalls of it. And I think I know what you just shared there is I think an associate if you're listening, you have to be ready to engage with an attorney so that they can make you this is like the supersize, you know, they're not allowed to do supersized anymore, right? Because I didn't they did that documentary and the guy ate at McDonald's for 30 straight days, years ago, I didn't so unhealthy a tournament like that. They weren't gonna figure Yeah, so yeah. So

Rob Montgomery  7:47  

what you could eat 30 days and be held you

Paul Goodman  7:52  

claim that there was so but this is this to call back previous things where you get an attorney to review your associate contract to make you aware of what's in it? Yeah, well, this is the supersize version. Yeah, because I have imagined Rob, you sit down with an associate and says, you know, if you agree to this, you might never be able to move from this state. Right? You know, when they say, Well, I want to maybe move across the country and be my wife wants to be a Somalia, my husband wants this. And so I think that, in a roundabout way, I'm just kind of pointing out that getting associates to stay with you long term, equity doesn't have to be the only way to do it. But it can be if you align personality wise, and I think this is a real personality fit wise, I don't know if you see this with your clients, that if we're talking about building a group practice and offering some type of equity to the associate, it's just as much if not more about their personality type than it is the profit sharing.

Rob Montgomery  8:46  

Yeah, personality and just also expectations. And I think you you really, you hit on a good, a good topic here, as usual. And this is this is one of the challenges with these sorts of arrangements is they're complicated. They're really complicated. And if you're talking about a larger DSO and a bigger practice, maybe, you know one of these 20% buy ins might be for 200 $250,000. So it's, it's not an insignificant amount of money. But it's also not an a ton of money to justify all the complexity and understanding and navigating the complexity in these legal documents. And where we find on the associate side where these things can often go wrong, is that people don't understand what they signed themselves up for. Now, you know, obviously, we're talking about this from the flip side today, you know, this is the employer looking to bring these people on. However, I think that it's important to really keep in mind that if you want to build a long standing Long term, mutually beneficial relationship, then sort of tricking, right for lack of a better word, the associate or pressuring them or setting them sup setting them up for something that they weren't really ready for, is not really a great strategy. Yeah, because

Paul Goodman  10:19  

they're also, I've seen this in a more, you know, we're talking about assembling a group practice, and you deal with larger deals with him. But I have a close friend who owned a giant practice, and then he's associated there wanted to partner with them. So they bought an entirely separate practice 5050. And that made sense for them. And then they've now bought another practice 5050. And I don't know, at this point, now, eight years later, if the original associate now has equity inside of the giant one that it started with, but that story makes sense, because the practice owners kind of said, Hey, let's buy this thing. 5050 and be in it together. 5050. And if I, Jeff and I have two practices, and we're kind of on break from trying to get in other locations, or sanity is stretched at this point. But if one of my associates said, Hey, I really want to get into practice ownership, and I want to be here, and there's a third practice that we could buy 5050, I could see how that's a really good way to test this relationship, in a way where we both are skin in the game is somewhat equal, right, as opposed to say, you can buy 12% of this parent company, and then how do you get it back out later?

Rob Montgomery  11:23  

Oh, that's that's an that's an issue too. You know, and that's some. And I think, again, if you don't, if you're not transparent with this stuff, I don't think it's a good a good strategy, to not be transparent. Because there's disruption, when you have an unhappy unsatisfied partner, it may trigger a buyout and may trigger litigation, litigation with partners is not a good thing when you're trying to raise money, trying to attract other people. I mean, the dental communities are somewhat small, right? Even in big cities, like people kind of know what's going on. And if if you were in litigation with one or more of your partners over something that even if they didn't understand it, any of what you're did was what it was provided for in the documents, it doesn't matter. You know, misunderstanding is just leads to disruption, disruption in this world leads to a hit on revenue,

Paul Goodman  12:17  

right? Yeah. And I also think I did something once a guy messaged me, he was a tough customer in my dental nachos group. He said, Paul, you're exactly right. I got to tell me more. I want to know more for data storage. He goes, I did exactly what you said. I said, Oh, great. What was that? And he said, I wrote an associate because I said, if you're a practice owner, and you want to hire an associate, create an agreement in it, that you would sign yourself. And he did that. And it was really actually good advice for me. He offered associate something that he would be okay signing, right. And that's in this this associate world. Well, now we go back to this building new practice. And I don't know, you know, who's, who's, whose side you're on most of the time. But sometimes I think that the practice owners, they're just offering something that they would never sign themselves, right. And it it comes out in the energy of the deal is that even though it's kind of a hokey, whatever, you know, I don't know New Agey way to put it, I think that comes out when you're presenting something to somebody that you just wouldn't feel good signing yourself. Totally.

Rob Montgomery  13:12  

Yeah, and I think some of this too, you know, previous seasons, we've talked about DSOs. And sort of the the differences between a DSO deal, and a doctor to doctor deal. And just issues too, with, with employment agreements in DSOs versus Doctor own practices. Because again, let's let's flashback to that there's a difference. If you are a dentist working in this practice alongside of this person, right, then if you are sitting in an office, in a high rise in another part of the country, right? It's easy to be to be dismissive, or to set things up in a way that aren't so great for the associate if you don't have to work with every day, right? So a lot of these concepts and models get borrowed from these traditional DSOs don't have to deal with it. But you know, the reality is, when you are a newly emerging girl growing group practice, you as the dentist are still very involved with all of the other associates and other dentists in the practice. And so you don't really have that luxury of setting up so one of these, you know, not so spectacular. And also, you

Paul Goodman  14:30  

know, it's a really good topic that we're talking about. And no one asked me a question before I say that in a second it is it's as the practice owner or the group owner, you're now inviting someone to have a as you would say, a seat at the decision table, right from what color uniforms people wear, to buying a CBCT. So as the parent owner of this, you also really should think carefully about and how you're your own team to help you understand you want to invite someone, whether they're a 12% owner or 38% owner, right they're going to be The decision but I want to ask the question, well,

Rob Montgomery  15:03  

you know, and the short answer, and I'm not sure if it was a question. But the short answer, if it were a question was, is that you just can't give them a say, I mean, 38%, that's different, you know, what we're typically talking about here are smaller minority interests in the ballpark of 15 to 20%. Of that one practice, that's a little more typical. But you can't allow that person to have a say, because if you're trying to build a brand, and you want there to be uniformity, among all these practices, which you need that I mean, managing the portfolio of eight to 10, different practices, which are completely different from each other in every way is that's that's not a good strategy, right. So there's going to have to be uniformity, which means that you're going to have to be a benevolent dictator with this stuff. And I think it's important to, again, to be transparent with that, but you, you can't have a situation where, where that minority equity owner has a stake in things and to that, and, you know, there's also when it comes time to sell, you don't want them to be able to block that sale. So one of the crucial provisions that need to be in the in the operative agreements here is a clause which is known as drag along rights, which means that if you want to sell the practice, you are able to drag along that minority owner and force them to sell as well, you know, so, you know, the example I would use is, let's say you own 20 80% of the practice, and I own 20%. And you've got a $15 million deal on the table to sell the portfolio. And it's somehow my consent is required. And I say, Well, you know, let's hold out for a few more hires, Paul, because I think we can get 20 million for this, and it's gonna make my interest worth $100,000 More, or like, Hey, Rob, I got a big deal on the line here, don't mess it up for me. You can't take that risk. So kind of the ways to deal with that, again, is the the associate does not own the practice level equity. And then also, you've got these these drags, it

Paul Goodman  17:21  

seems like there's, I know, these deals do happen, right? So it sounds like their associates signing these have to have a high level of trust in this person. Because they're basically saying, Hey, I'm going to be there. This was my good. My question Who funds these deals? Usually, when they want to buy 15%? Is it a traditional bank? Are they doing owner financing? Are they like, how are they paying for the 10%?

Rob Montgomery  17:44  

It all depends. So frequently, the financing would be with the same financing that the practice has, because there's no one a typically are going to want to lean on the practice, assets are first possession. So if they're already first on everything else, they would want to be first on this as well. And sometimes you will also see seller financing on this where there's a note,

Paul Goodman  18:07  

I also think, as you're saying this that, you know, you're 15%, owner of the practice, I guess, in a basic way, you're gonna get 15% of the profits now, right? You're not getting anything before, but I think sometimes associates are would be underwhelmed at how much profit there is leftover to split. Yeah, right. I think everybody feels this way. And I'm sure even I felt this way working for my own dad and his partner, I just was mismatched that, oh, I'm doing all this dinner show. So you making this person so much money, right? Even if I'm, you know, the associates were making great money, they are making $280,000 a year, and they think when I'm a partner of this place, there just is going to be a faucet of money coming out. Right. And I think they are signing up for something, sometimes it doesn't even have the upside that's really impactful for their lives.

Rob Montgomery  18:52  

Quite likely. I mean, I think, you know, frequently, these aren't good deals for the associates, you know, but they can be it depends with what the goal is, you know, there, especially now, you know, there's more people that are less interested in solo practice ownership, you know, and this gives,

Paul Goodman  19:11  

I think, in some ways, it's good for if you're listening to this, if you are going to be in an area, if you're going to work with this group, and this is your career, and you're going to be a dentist and you don't think you're gonna go out and take a loan to do what ideal practices does, or look around with a brand transitions broker and you say, Hey, I'm going to work for the next 15 years. Or there could be upside for you know, the case, you know, you're it's like that mutual fund of profit, right? There could be upside, you just have to be aware that things go sideways, and now the way you're handcuffed. I mean, I was just thinking before, is this an opportunity or an anchor for the associate?

Rob Montgomery  19:43  

Depends, right? It depends on what the associate may want to do that could be anchored, that they could be anchored from doing. And this goes back to I think it's important for them to have an understanding as to what is being offered and what is not. But yeah, I mean, it can be it. There's a reason why this is a good strategy from a retention standpoint, that it's a sticky situation. So

Paul Goodman  20:06  

I might be overly optimistic, Rob, cuz I know you were like, you're like the Philadelphia police officer of deals, right? You see a lot of stuff that goes wrong that other people don't see. So I'm gonna say this with the context of understanding a little bit of your world. But like, if this was me, even in my own little world of having eight past Gen Dental Associates, I wouldn't have offered this to all eight of them, right? So if I am offering this to one of them, it often is a compliment to them as a professional and a person, right? To say, Would you like to have equity inside of what we do? Because some would just not cut out for, but that's a

Rob Montgomery  20:40  

little different, too. I mean, so you're, you know, you're, you're looking at two practices, right? You're talking about your yard. And so you don't really need those people to have equity, you know, you you're you have the luxury, you can hire associates, you don't need to hire 20 Associates, you know, once you start getting into those higher numbers, and it's like, how are you going to attract these people, and a lot of people want equity, the retention component of this is real, I mean, this is, from an owner standpoint, who's looking to assemble a portfolio, if people are buying into the practice, they have borrowed money, or they've put their own cash into this. And there are, these are going to be provisions in here that do not allow them to get their money back if they want to leave, you know, and that's just the way it needs to be. There's nothing mean about that. Just the practical reality. I mean, this is not like, like a, like a stock exchange that you have, you know, associates coming and going and trading their equity and, you know, any given day somebody could sell and buy. So, I mean, it's not really realistic or to to expect have to have liquidity with this. So once these people plunk down the money, and they have a hefty noncompete, or I should say, a reasonably strong noncompete, which again, you need, it's hard for them to leave. And and that is the number one reason to do this. If you're saying Are they being anchored to the practice? I guess that's a matter of personal judgment, right? Do I feel like I am a partner? Or do I feel like I've got an anchor around my ankle. But there's no doubt that this is this is a retention strategy. And in this day and age where it's hard to retain associates, the relationships are not as sticky. This is a great way to do it.

Paul Goodman  22:34  

Yeah. I mean, it's, I was just on some zooms today and talk with some DSOs. There's just as there's a creative ownership opportunities that did not exist inside of dentistry, even 10 years ago. And I think it's great that we're talking about them for people, like you said, so they're aware and prepared, and hopefully a little bit scared of making decisions that are not easily done. Do, you know, I was talking to someone who, their associates ships and they make a lot of money there. So she has something going wrong, and you should feel really good. You didn't bind to this practice, because you your freedom and flexibility is 100% intact. But it sounds like as you know, once you sign on DocuSign no one signs any dotted lines anymore, right? But the padlock that come in with an Alexander Hamilton pennants, sign something. So, can you create a document or

Rob Montgomery  23:20  

something across the table? You got an old school

Paul Goodman  23:23  

note? Right, exactly. Yeah, I want to some old guy, Paul, but once you DocuSign on the line, or you know, you are committed? And yeah, yeah, it sounds like you really help people understand what you're committing to, right. And I'm assuming we also is just kind of a common theme and all seasons, people do this without the right advisors, or they get themselves stuck all the

Rob Montgomery  23:45  

time. And you know, and really, it goes both ways. So, you know, we've talked about this issue from the associate side and in a previous episode in a previous season, but we see this a lot too, from the practice center side where they have not structured this whole thing properly. And then we have to try to clean it up. And it's a bit of a mess, especially if equity has been sold. And this is it can be well can be it is from a legal documentation standpoint, a very tedious project. And this is a true, you know, connect the dots with different agreements that impact other things. And when you've changed something in one place, it has impact on other things. So these are these are fairly detailed and sophisticated documents that you have to be careful when you set them up. And we've had several clients come to us and in recent months who had these, these arrangements set up by large firms who just kind of did it on autopilot and they made mistakes. And somewhat, you know, they're things that the client could have caught, but they don't even understand what the what's been done for them. So, you know, it's hard to say got an error that the lawyer made, when you don't even know what the heck it is or understand this sir, like goes back to

Paul Goodman  25:07  

these things that we talked about these are once decisions. It is mean, I am a dentist Rob, I know that dentists think they will put more. First of all, they spend more money on their terrible golf swing than they will in their business and they still stink at golf, right, they will get golf lessons. And then on the other hand, even inside their business, they will spend more time researching and thinking about changing their dental lab, where both dental labs do good work, but then somehow they look over in their business world and go, I should just try to do this myself, or I should engage with people and not really know who I'm engaging with. And it's just mind boggling to me. Because it really can derail their what they built.

Rob Montgomery  25:46  

Yeah, yeah. Oh, for sure. And like I say, I mean, we see more and more of this. And I think it's with the proliferation of entrepreneurial dentistry, which is great, you know, we support it, obviously and wholeheartedly. But were there we're starting to see the people that tried to do this and didn't do it. Right. And, and it's not because they didn't spend a lot of money. So it's definitely something you have to be careful, you have to understand, just like anything else that you're buying, you know, if you if you are a consumer of legal services, and you are asking for this structure to be put in place, like you need to understand all the ins and outs of it. And if somebody can't explain it to you, then there's a problem, right? Yeah. Because I'm going to say every dentist, and they're probably people are going to smirk when they hear this, but every dentist is intelligent. Right? You know, that's, it's just a matter of how I mean, and so we're not talking about a group of people that can't understand things. I mean, they were talking about the, the cream of the crop academically through college that got into dental school. These are bright people. So you even though you're illegal layperson, listeners, if you're a dentist, that doesn't mean that you shouldn't be able to understand this stuff, right? And, and if it's not being explained to you in a way that you understand it, then that is a problem.

Paul Goodman  27:10  

I totally agree with you. And I think that's such an important point, especially as these things we say get more complex. And you know, as our listeners, you built this thing, it's important to you, make sure you pay attention to what you do next. And then also on the associated end, make sure you what you're signing up for something that you want to sign up for, because I actually see where you probably see it. And it's a little bit pointing to say, there's more regret there with these things a lot of times and there is the rewards.

Rob Montgomery  27:38  

Yeah. I think that's a good note to finish up here. Paul, thanks. As always great conversation. Folks. If you enjoyed the episode today, please go on Apple podcasts or wherever you're selling to the podcast and give us a good review and till the next time. Thank you. Awesome.

Bumper  27:57  

Thanks for listening to another great podcast with the dental amigos. And don't forget to tune in next time to have the dental business demystified. If you're looking for more information about today's podcast, you can find it on the dental amigos.com If you're looking for Paul, you can find Paul at Dr. Paul goodman.com. And if you're looking for Rob You can find him at your dental lawyer.com This podcast has been sponsored by Orange Line Media Group. Helping dentists and other professionals create content people love find out how we can help you take your business to the next level at WWW dot Orange Line mg.com. Till next time

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