PRACTICE MANAGEMENTNOTESA Supplement to the AAOMS Today Newsletter March/April 2009

Financial arrangements in an oral andmaxillofacial surgery practice
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 theassociateship 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.

Over the years, the number of multi-doctor andpercentage of group to solo practices in our
the specialty have increased considerably.
The latest data of the American Dental Association1
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 PracticeManagement Notes presents an overview of the myriad
financial arrangements and income divisions involvedin an associateship, buy-in and departure in an active
oral and maxillofacial surgery practice by presenting acase 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 mustbe fair, reasonable and equitable for all parties. In thisarticle, 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 thedoctor 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, thedoctors become shareholders and they own shares ofstock. 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 orhimself, a general partnership is not recommended. The
partnership is liable for any wrongful business act andeach 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 theassociateship phase and recruitment includes having
a method of associate compensation in place and inwriting. Called a “Fact Pact” or “Term” or “Dream
Sheet,” this one- or two-page document lists the majorterms, compensation and benefits—the “Package.”Specifics of the Fact Pact will vary depending upon thegeographic location of the practice, cost of living in the
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PRACTICE MANAGEMENT NOTES

area, general and local economic conditions, employment
and unemployment factors, source of patients, types ofprocedures done, how far in advance patients have tobe scheduled, health and ages of practitioners, generalobjectives 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 theFact Pact:

Occasionally, the parties are more comfortable in an
arrangement in which an associate’s compensation isa 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 anassociate’s compensation as the greater of a base salary ora percentage of the associate’s collections.

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 thepractice with anticipation of becoming an equal owner.

Incentive compensation: When base salaries are in thehigh range, incentive compensation is not usually a factor.
Otherwise, it is usually based on one of three factors:

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 withor without cause and without liability. Most states are“At Will” states, which means that either party to theagreement can be terminated or can leave immediately
without cause.

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, writeoffs, etc. over the previous 12 months’ collections

Restrictive covenants: For 24 to 36 months - nosolicitation of patients, staff, or referral sources; and b)
non-competitive activities within a reasonable geographic
area of practice location(s).

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

Compensation: Varies considerably depending upon theabove and other factors. Today, across the country, theranges of starting annual base salaries are:

The arrangement may also consider the following, which,of course, will increase package costs and the break-evenpoint, and may not commence until the ownership phase:

If the parties determine that the initial or trial term
should be 24 months, during the second year, the practiceincreases the annual salary based upon the Consumer
Price Index, inflation rate or a reasonable percentage.

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

8. Relocation expense

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

9. Signing bonus

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

10. Entertainment, promotion

Retired military/faculty
member (boarded). . . . . . . $200,000 to $250,000

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

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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 employeeof the practice at the end of each year.

Determining the break-even point clearly indicates thatthe associate or practice must generate around $360,000
in additional revenues to pay for the increased costsof paying the associate his initial, basic compensation
package.

The parties must consider the break-even point. It will
cost between $10,000 and $15,000 to bring a newassociate on board, and the compensation package
includes the base salary and/or incentive compensation
plus benefits, which can easily run 20% or more of thebase salary. A simple determination of the break-evenpoint is:

It is wise that the practice clearly indicates and introduces
the associate to the hefty costs of running an oral andmaxillofacial surgery practice and how such costs affectthe bottom-line profit and compensation of all doctors.

Equity Ownership: Operating under the assumptionthat the employment arrangement will progress to equity
ownership, a comprehensive practice valuation andproforma projections should be prepared. (Table 1).

THE PACKAGE = $190,910 = $360,208 = BREAK-EVEN POINT
OVERHEAD EXPENSE.53
If you wish to fine-tune this method to determine thebreak-even point, you, your accountant or advisor cancalculate and use the more detailed:
TOTAL FIXED COSTS = $180,000 = $360,000 = BREAK-EVEN POINT
1.0 –VARIABLE COSTS % 1-.50

The valuation becomes an important part of the practice.
Not only does the appraiser determine and provide awritten (hopefully certified) report of the current valueof the practice, but the appraisal also acts as a feasibility
study. Values are not static and the practice should bevalued annually and updated appropriately. A wise

Table 1COMPENSATION PRO-FORMACORPORATION
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		

-25,000-35,000-45,000-55,000-58,750COMPENSATION		

185,000

219,400

258,372

302,305

319,993

401,468* Annual increase - 6%

© Professional Practice Planners, Inc.
all Rights Reserved 2009

March/April 20093

investment, the valuation carries forward from year toyear 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 thecomprehensive practice valuation, general plan for buy-in
and the associate’s employment agreement.

Advisors: Advisors are required from the beginningand throughout the three phases of a professional
practice. Each OMS must have a team and work withqualified, competent experienced advisors. Simply,
there are too many facets throughout their careers inwhich the parties shall become involved. The facets
are personal, professional, legal, accounting, financial
and risk managing in nature. Today, more than ever, acareer 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 toownership 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 thepractice, that is, doctor junior buys-in. At the same timeand 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 practiceand to obtain hospital appointments and advancements.
This is something else that makes equal ownership morechallenging and requires all parties’ consideration andcooperation.
Prior to doctor junior’s entry into the practice, doctor
senior had the practice realistically and professionallyvalued 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 thepractice. An example of this method could be: “Thevalue of the practice for the purpose of associate’s buyin shall be: The fair market value of the tangible assets(major and minor equipment, furniture, furnishings andinstruments), 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 lessrefunds at the time of associate’s entry into the practice.
Excluded are cash, real estate or real property andvehicles.” 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 preassociateship 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$250,000. The term of this and most buy-ins shall befive years, although increasing the term to six, eight or
10 years in larger practice situations may be required.
The parties, therefore, break out the value of the stock orunits (normally tied into the value of the tangible assets)
and intangible assets as follows:
Tangible assets (stock or units)
Intangible assets (goodwill, etc.)$ 75,000
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 millionsof dollars annually. They have qualified managers
and administrators and dozens of trained personnel.
Their budgets, expenses, cash flows and problems arelarge and, in many instances, staggering. The latest
statistics (2007 data) of the National Society of CertifiedHealthcare Consultants present the following revealing
information relative to average, mature oral andmaxillofacial surgery practices:
Gross revenues
Overhead 		$1,107,028– 586,725

53%

PROFIT$ 520,303

47%

Stock or Unit Sale and Purchase: The Internal
Revenue Service requires that doctor junior actuallypurchase 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 sharesof 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

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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 downat this point. This is a major reason for pre-associateshipand employment practice valuation and planning. As
stated, most doctors do not like surprises.
Major points during the entire buy-in process are theprice allocations of the tangible and intangible assets andthe pre- and post-tax payments for the purchases andsales. 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, thepurchase 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 overbasis,” or the increase in value over her/his original costof the stock or units. In our example case, doctor juniorpays 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 astock purchase agreement in place that outlines the termsof the stock transaction.
Included in the stock or unit sale and purchase is a“senior doctor’s option,” which states that doctor junior’spurchase of the shares of stock or units is subject to an
option (the “Option”). If doctor junior disassociates fromor terminates his relationship with the practice during theterm in which she/he is purchasing his shares or interest,
for whatever reason, doctor senior shall repurchasedoctor junior’s stock or units at fifty percent (50%) of theprice 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 thesame time frame which doctor junior used for her/his
buy-in and should include interest.

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March/April 2009

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 monthand 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, areconcerned 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 theintangible 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 thedifference 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. Eachmonth doctor junior shall receive $3,646 less and doctor
senior shall receive $3,646 more in compensation. Sincedoctor senior shall be providing management services
and helping doctor junior progress in the myriad aspectsof the practice, doctor senior shall have a managementagreement 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 topurchase the intangible portion of her/his buy-in portion.
The above is considered the “Exact Method” in that thedoctors have a comprehensive valuation performed andspecific amounts allocated to the stock or units, which
include or consider accounts receivable and payable
and the intangible assets. In the “Inexact Method,” thedoctors do not require a comprehensive valuation. They
do require the fair market value of the tangible assets orsome 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 separatetransaction. Generally, the senior doctor retains theaccounts 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 overfour 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

senior’s annual compensation. Thereafter, the doctors
would receive equal compensation or they work out amutually 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 seniorshall issue doctor junior the appropriate stock or unit
certificates representing the equal number of shares orunits. In former years, most buy-ins were structured on
a 51%-49% ownership relationship so that the seniordoctor could maintain control. This is not so common
today because doctor senior can maintain control incertain aspects by other means and agreements. For
instance, if doctor senior is concerned about his being
unjustly terminated or “locked out,” provided that he isphysically and mentally capable, he could have a “nocut” employment agreement or other agreements toprotect 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

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

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March/April 2009