By: Dr. Morven McCauley
Explore 10 critical questions every dentist needs to ask before buying into a practice. Whether you’re an associate looking to take the next step, or an owner seeking to secure your practice’s future, this guide is for you.
Warren Buffett advises to “invest in what you know,” so why aren’t we, as dentists, investing more in ourselves? As a woman in my 30s and a mother of two, equity partnerships have been a way to invest in myself. After being offered the chance to become an equity partner, I eventually co-invested in several practices. If you're thinking about your exit strategy, selling equity to your associate is a valuable option to consider.
I recently conducted a survey to dive deeper into this topic. In this article, I'll share my findings, along with my personal experience with equity partnerships. Remarkably, 85% of the associates surveyed said they would consider an equity partnership if their current practice owner made the offer. But do you know the right questions to ask before offering equity to your associate?
By the way, if you're not doing everything you can to attract women as investors, you're already missing out on 50% of your candidate pool. Being known as someone who provides opportunities for women in business isn’t just smart; it’s good math.
10 Crucial Questions:
1. Do they have borrowing capacity?
One of the first things to consider is whether your associate has the financial means to buy into the practice. For most, this will involve securing a business loan. Their borrowing capacity will be influenced by several factors, including their self-employed status and often less predictable cash flow. This can make securing financing more challenging compared to a salaried employee with a steady paycheck.
For women, particularly those working part-time or with flexible hours due to caregiving responsibilities, the barriers can be even higher. Personally, I faced these challenges as a woman in dentistry. The added hurdle of gender bias in lending can also come into play. For example, a study by the International Women’s Business Organization found that 98% of bank personnel showed gender bias in lending, with women—especially minority women—facing higher interest rates, smaller loan amounts, and lower approval rates.
2. Are they a sophisticated investor?
As the practice owner, you have a legal obligation to determine whether your associate qualifies as a sophisticated investor. The risk here is that if your associate later decides to pull out of the partnership, they might claim, "I didn’t fully understand the risks," which could lead to complications. This is why it’s important to have open conversations early on about what an equity partnership really entails.
You can’t ask too many personal financial questions, but you can certainly educate them about the financial aspects of ownership. Encourage your associate to get their finances in order now, so they’re better prepared when the opportunity to buy in comes.
3. Is lack of liquidity an issue?
Owning equity in a practice is an illiquid investment—meaning it’s not something that can easily be turned into cash. Associates need to be prepared for this reality. If they’re used to spending freely or aren't financially secure, they might not be ideal candidates for a partnership.
From a female associate’s perspective, this illiquidity can also be a positive thing. For me, it opened the door to diversifying my income sources through dividends, which provided flexibility in my clinical hours, especially during maternity leave. It’s important to think about how an equity investment can support long-term goals like work-life balance, something that is often overlooked in traditional practice structures.
4. How diverse is your investment portfolio?
Some people argue that investing and working in the same practice might not provide enough financial diversification. What happens if the associate—your new partner—engages in misconduct or the practice faces challenges? Suddenly, all their eggs are in one basket.
That said, many of the dentists I surveyed (75%) admitted that their investment portfolios lack diversity, with most of their income still coming from clinical work. Offering equity in the practice could be a way for both the owner and associate to follow Buffett’s advice—"invest in what you know"—while also seeking ways to diversify income through future practice acquisitions or partnerships.
For female associates, diversifying income becomes even more critical, especially since over 50% of women I surveyed had taken a career break of six months or more. Owning equity provides a buffer, reducing the risk of relying solely on clinical income and offering more stability over the long term.
5. What are the minority shareholder rights?
Associates want to know what rights they will have as minority shareholders. This typically boils down to two key questions: drag-along rights and tag-along rights.
Drag-along rights allow the majority shareholder to sell the entire practice, forcing minority shareholders to sell their equity as well. This benefits the owner because it makes the sale process smoother—buyers prefer not to deal with dissenting minority shareholders. However, from the associate’s perspective, this could lead to a forced sale at a time that doesn’t suit them, with terms they may not agree with.
Tag-along rights, on the other hand, allow minority shareholders to participate in a sale if the majority owner sells their shares. This means the associate could sell their equity under the same terms and conditions as the owner. While this offers the associate more control, it can complicate negotiations for the owner.
6. Is there a right of first refusal (ROFR)?
Another important consideration is whether the associate will have the right of first refusal (ROFR) if the owner decides to sell. This gives the associate the opportunity to buy the practice under the same terms before it’s offered to an outside buyer. While ROFR can protect associates from undesirable buyers, it can also slow down the sale process, making it less attractive to potential buyers.
7. Do you have golden handcuffs?
Golden handcuffs are a powerful tool for retaining top associates by offering them equity in exchange for long-term commitment. For owners, this provides stability and improves practice performance. For associates, it’s a way to access investment opportunities they may not have otherwise.
However, owners need to be careful not to overextend themselves. If all your associates are looking for equity and there’s only so much to go around, you risk diluting your partnership and diminishing the value for those involved.
8. What is the exit strategy?
An established exit strategy is essential for both the owner and the associate. Without one, the owner may feel free to sell to a DSO at any time, while the associate is left in the dark. By aligning financial and personal goals with a transparent exit strategy, both parties can make informed decisions about their future.
Having an exit plan also makes the practice more attractive to potential buyers, allowing you to maximize your sale and minimize tax liabilities through careful planning.
9. What if the managing partner never sells?
Associates are often concerned about the possibility that the managing partner will never sell, despite promises of an eventual exit strategy. My survey revealed that associates value transparency, strategic planning, and ethical leadership in their practice owners. Lack of transparency or feeling excluded from major decisions were the biggest turn-offs for associates when considering a buy-in.
Female associates, in particular, want to know that the managing partner recognizes the additional challenges they face, such as balancing work and family life.
10. Are we supporting women in ownership?
Only 34% of the women I surveyed are involved in practice ownership, and 73% believe there is insufficient representation of women in ownership roles. Many feel that limited access to mentorship and networking in business is holding women back. By increasing female representation and supporting women in ownership, we can create stronger networks and provide the mentorship that’s currently lacking.
In the end, associates must ask themselves one final question: Am I better off investing in myself? For me, the answer was yes—but not in the way I originally thought. This opportunity ultimately helped me create balance in my life as a clinician, businesswoman, and mother. It’s not just about investing in your practice—it’s about investing in your future.
