A Successful Dental Partnership
When entering into a dental partnership, there are various legal, financial, and operational considerations to take into account. From profit sharing to insurance to responsibilities, a successful partnership model is a complex agreement that needs to be carefully analyzed and negotiated.
While there is a great deal of nuance when it comes to each partnership agreement, in this article we’ll focus on equity structures. In DSOs and dental practices, equity-based models are a strategic way to retain and motivate high-performing providers. Equity ownership incentivizes providers to remain engaged in the practice while also preparing the business for future exit opportunities.
Below, we’ll discuss various equity structures, their pros and cons, and how they work.
Eric Pastan, Director of Management Consulting at Skytale Group, collaborated on this article. Justin Marti and Eric Pastan presented this information in a recent workshop at AADGP 2025.
Equity Structures in a DSO or Dental Practice
Buy-In Model:
A buy-in model allows associates or other employees to purchase equity in the practice to gain partial ownership. In a phased buy-in, the associate purchases “tranches” (chunks) of equity over a set period of time.
There are many benefits to this equity model. For an associate, a buy-in offers a clear path to practice ownership over time. For owners, offering a buy-in opportunity to an associate encourages long-term commitment and also offers a clean succession strategy.
In scenarios where practice owners or DSOs own and operate multiple locations, an opportunity for an associate to buy in can be a win-win. The associate takes a treasured ownership stake in a particular practice location, and thus, now has a vested interest in its long-term success. Similarly, the DSO or practice owner can find comfort in knowing that the associate will ensure the practice location is closely managed (as the associate now is a part owner).
However, buy-in agreements can also be complex and difficult to navigate. Considerations include practice valuation, how payment will be made, and delegation of additional responsibilities. Getting aligned on the mechanics of the deal can prove difficult, particularly when you have an owner and associate who are working together in close quarters while simultaneously negotiating a high-stakes deal.
In addition, Corporate Practice of Medicine (CPOM) laws in various states may limit ownership stakes to licensed dentists only. Depending on the state, hygienists or unlicensed team members wouldn’t be allowed to buy in directly to the professional entity. In the case of unlicensed - or underlicensed - individuals desiring to obtain equity in CPOM states, the Management Services Organization (MSO) model would be a likely solution.
We discuss the process of associate buy-ins and more legal considerations at length in this article.
Gifted Equity Model:
Gifted or “granted” equity is awarded based on performance, tenure, or other benchmarks, without financial buy-in. It serves as a retention tool that encourages long-term engagement and also rewards high performance.
Unsurprisingly, gifted equity is very attractive to associates, as they do not have to pay any money out of pocket to begin earning equity. Conversely, this could be a high-risk avenue for the practice owner, as they forgo a cash infusion that would result from a buy-in structure. That cash infusion could be used to help facilitate expansion of the office or simply compensate the practice owner for selling a piece of a practice they worked so hard to build. The positive side for the owner or DSO is that, again, they have an associate who will begin behaving like an owner in the practice, as they now have a vested interest in its success.
Phantom Equity (Synthetic Equity):
Phantom equity, also known as synthetic equity or profits interest, is a profit-sharing mechanism tied to equity value without actual ownership. It is a common equity model, as it mimics ownership benefits without diluting shares. This allows owners to retain control while offering financial incentives to associates.
In many ways, an associate gets the upside of equity ownership without any of the risk. For example, having a profits interest means that the associate gets to participate if and when distributions are realized by the practice owners. When there are profits to distribute, the associate gets a piece of the action. This usually applies when there is a capitalization event as well. If the practice is sold, the associate holding a profits interest will generally realize a windfall equal to their interest.
However, unlike a true equityholder, they do not need to bring money to the table if there is a capital call. In other words, if the owners need to invest money into the business for a slow month or to make a large equipment purchase, providers with phantom equity would not have to contribute.
On the flip side, while associates should still be incentivized with profit-sharing opportunities, it is possible that their lack of true ownership could make them feel less engaged as opposed to colleagues who hold true equity in the organization.
Further Considerations for Equity Structures
What is equity vesting?
Equity vesting is how equity is awarded to associates, regardless of whether it is purchased or granted/gifted, over a set period of time. Typically, partner agreements will include a vesting schedule, which outlines the timeframe over which equity will be sold or granted. A common vesting schedule is a five-year vest with a one-year “cliff.” This means that over the course of five years, the associate’s equity will continue to accrue, until the end of the five-year period when they have reached the full ownership potential.
A cliff is a mechanism to ensure that the associate sticks around for some set period of time. This is a way for a practice owner or DSO to hedge their bet. Using the one-year cliff example, if an associate stays onboard for only six months, they will receive no equity, despite the vesting schedule having started. The cliff is a line in the sand where the associate must remain employed with the practice to actually realize any vested interest.
What happens if an associate leaves before their equity has vested?
Most practice owners do not want folks running around with equity when they no longer work for the business. Because of this, partner agreements typically include repurchase rights. A repurchase right is a trigger that practice owners or DSOs can pull if they want to buy the associate’s equity back.
Generally, the equity will be repurchased at fair market value or “FMV”, which is determined by the practice owner or DSO (hence, this a very subjective calculation, as private companies don’t have official stock prices traded on the open market). Some partner agreements will go even further in stating that, should an associate be terminated “for cause,” the practice has the right to buy back the equity at a discount (for example, 75% of FMV).
Drag-Along and Tag Along Provisions
As previously discussed, equityholders will often have an opportunity to participate in a capital event, such as a practice sale. As you can imagine, if there is no requirement that a minority partner sell when the majority owner decides to do so, things could get sticky. In an effort to prevent a gridlock scenario, most partner agreements include drag-along and tag-along provisions.
A drag-along provision is one that gives the majority shareholder the right to “drag” any minority shareholders along with them for a sale. If the agreement contains a drag-along, despite the minority equityholder’s views on selling, they are required to join the other partner(s) in consummating the transaction.
Conversely, a tag-along provision does just the opposite. It is very likely that, if a sale is to occur, any minority equityholders will want to participate in the payday. As such, the partner agreement will grant them a right to “tag” along in the sale. The majority equityholder thus cannot block the minority holders from joining in on the action.
How does your equity structure ensure long-term growth?
There are many financial and operational benefits to offering equity. For providers, as equity appreciates over time, it can significantly increase returns. It can also provide organization-wide alignment. When providers have a financial stake, they are more likely to be invested in the practice success. This, in turn, reduces the operational burden for owners. As providers take on greater responsibility, it reduces the need for centralized oversight.
Legal considerations for equity in partnerships with Marti Law Group
Of course, there are many legal considerations that need to be discussed and negotiated when it comes to partnerships and equity models. Your partnership agreement should set clear expectations for responsibilities. It should include roles in decision making, voting rights, compensation, selling shares, noncompetes, and more. If you’re considering a partnership or offering equity in your organization, work closely with an attorney to build out a proper structure. Reach out to our team to get started.
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