Episode 636: Behind the Legal Curtain of DSOs

Rob Montgomery, dental lawyer extraordinaire, spends a lot of his time counseling dentists and practices. In this episode, he talks to Kiera all about the DSO world and what not to do from a legal standpoint. He provides answers and insights on the following topics:

• How to be ready for potential litigation

• Hiring associates as W2 or 1099 employees

• What you’re really getting when you sign with DSOs

• And more

Episode resources:

Connect with Your Dental Lawyer

Email Rob directly: [email protected] 

Reach out to Kiera

Subscribe to the Dental A-Team podcast 

Become Dental A-Team Platinum!

Review the podcast on iTunes

Transcript:

0:00:05.6 Kiera Dent: Hey everyone, welcome to the Dental A Team podcast. I'm your host, Kiera Dent. And I had this crazy idea that maybe I could combine a doctor and a team member's perspective, because let's face it, dentistry can be a challenging profession with those two perspectives. I've been a dental assistant, treatment coordinator, scheduler, filler, office manager, regional manager, practice owner, and I have a team of traveling consultants, where we have traveled over 165 different offices, coaching teams. Yep, we don't just understand you, we are you. Our mission is to positively impact the world of dental, and I believe that this podcast is the greatest way I can help elevate teams, grow VIP experiences, reduce stress and create A teams. Welcome to the Dental A Team podcast. Hello, Dental A Team listeners. This is Kiera, and you guys, today is a legendary day, I've heard about this legend for so long, I've seen him at other events, we briefly met, but he finally is making it on to our podcast. You guys know I love lawyers, especially on the podcast because I can ask all the questions and they're not charging me by the minute, but Rob's awesome, so I'm super excited to bring to the show Rob Montgomery.

0:01:15.6 KD: He has an incredible legal firm, they are a boutique law firm where they focus on counseling, Dentists and dental services to full range of businesses and legal matters impacting our dental practices. So he's been serving the needs of many dentists, dental practices for over 30 years, and I'm super excited, 'cause he's gonna come on and he might say some things that are different than other lawyers, and that's what I freakin love. So he is part of the dental Amigos, and I was so excited to welcome Rob to the podcast. Rob, how are you today?

0:01:44.4 Rob Montgomery: I'm great Kiera. Thanks for having the show, I'm excited to be here.

0:01:47.0 KD: Oh my gosh, yes. Like I said, I remember my first experience with a lawyer, I was real junior, Rob, real junior, and I didn't know how this worked. I remember they'd get on the phone, I'm like, "Hey, Kiera? How's your family?" And I thought they genuinely were trying to get to know me, and then I got a bill and I was like, "Cut that talk, I don't wanna... You don't even need to know me, just tell me what I need to do." [laughter] It's always been real fun, but I kinda gave you an intro, a bio, I'm super excited 'cause I just love to learn more about the legalities, especially with DSO's and Associates, and what do we even do with this? You guys, you have a license in 19 different states, you would work all across the US, so that's kind of my bio, but anything else you wanna add in, Rob, just to let the listeners to know who you are, what you do specifically, and then I'm excited to get into the juicy, like a DSO associate world and all the things to not do.

0:02:39.8 RM: Yeah, absolutely, I think you characterized it pretty well in the intro there, Kiera. We basically do all of the corporate transactional Real Estate employment stuff that comes up in the context of a dental practice. I started out my career as a litigator, we do zero litigation in the office now, I'm having a report.

0:03:02.2 KD: I was gonna say, we'll talk about that maybe off air, maybe on air, we'll see, 'cause I am fascinated by litigation, I watched a Law and Order and I'm like, "I don't even know if this is really real."

0:03:08.1 RM: Yeah. No, it's not like that, unfortunately.

[laughter]

0:03:13.6 RM: Or maybe not. So I think, but as over my career, I started to get more involved with transactional things and become more of a business lawyer, and once you get a taste of that, you look at litigation in a very different way, and that it's just become such a time and money resource drain that if you're wired to try to help people navigate through transactions and help them with their businesses, it's really hard to wrap your brain around the benefits of litigation, and we tell people, litigation is a last resort. When your back is against the wall and you have to do it to save your practice or do things to save, further your well-being, and it's the absolute literals last resort, then you do it. But we get involved sometimes with counseling people that are kind of pre-dispute or try to avoid litigation, but I don't go into court rooms anymore, it's probably been over a decade since the last time I did, but... Yeah, we represent dentists in most major markets, really, at the exception of California, my assistant told me she thinks I might have the Guinness Book of World Records for number of admissions being licensed in 19 states, and number 20 is pending.

0:04:31.4 RM: One of my colleagues Margaret Boole is licensed in five. And so, between all of us, I think we're licensed in 30 states, which I'm fairly certain is a record for an eight-person law firm, but it's fun for us too. And you see it too with the National Business, it's need to see differences around the country, how people do things, personalities, and we kind of embrace that. And sort of like the New York deal is different than the Idaho deal is different than the Texas deal and the Florida deal and the Boston deal and the Phoenix deal. It's fun to have that exposure and just be involved with people all of the country. And it's what Electronic Media and Communication has allowed us to get beyond our initial footprint in our backyard, and to really get out there and help people in a larger platform. And I think the other thing about our practice, trying to tag on it, you're saying the outside, most of our clients are hiring a lawyer for the first time, and so that's... In my legal world, I tell my lawyer buddies and they're either in disbelief that if we have the volume of clients who have never hired somebody before, and so a lot of what we do is really helping people and guiding people through the process and helping them understand how to work with lawyers and how to interact and control and handle deals, and this is not...

0:06:00.6 RM: A lot of times too, and this is gonna maybe be a segue into what we end up talking about today. When you're working in a transaction where you have somebody who maybe has never gone through a deal, like a big DSO sale, and then you have basically a part of the cast of Shark Tank on the other side, it's a challenge. And we try to help bridge that gap and really help them and guide them through those transactions.

0:06:24.4 KD: Which I think is really helpful because honestly, Rob, like I mentioned at the beginning, I literally did not know what the heck I was doing when I first started out as a business. Like you hear about needing a lawyer, but I just thought that was if I was getting sued. Thankfully that's not got a massive wood. I try to be a likeable person. Guys, that's my best tip. That's what most of my lawyers tell me, just be a nice person, maybe you usually don't get sued. But I didn't realize that you should have a legal team look over your employee handbooks to make sure you're not getting employee suing you because you didn't have those state laws. So there were so many different things that I didn't even realize. So I agree. When I start with new practices and they're just starting out, I'm like, "Alright, we gotta build up your board of experts, and you need to have a darn good lawyer," but there's also... It's not just like a one lawyer fits all, you need to have transactional lawyers, you need to have employee lawyers, that was something that I really didn't know. So I love that you guys did it.

0:07:20.0 KD: I do have to go back to litigation. Is it true that if anything would ever happen, 'cause on Law and Order and all these other ones, they tell you, "Don't say anything to the cops, always ask for your lawyer" Is this a true thing? I'm always thinking about, should you always say like, "I need to speak to my lawyer." How does this work? I just have to go down this rabbit hole for just a second, and then we'll really talk to DSO.

0:07:42.0 RM: I think so. And I can tell you, I have never done any criminal law work as a lawyer, the last exposure I had to criminal law was in law school, but I guess my answer might be, it depends. There's some times that I think you have to deal with the police and answer questions, maybe in the DUI context, me, I'm not sure. But generally speaking, yeah, you wanna have a lawyer present before you give any kind of statement. And that's the same thing in a criminal matter, Kiera, also in a civil matter, sometimes you might think that you're doing the right thing when you are trying to resolve a dispute with an employee who is basically what we would perceive as in a pre-litigation stage where that employee might be lawyered up already and there are asking questions or making requests for accommodations, or they say they may have a disability or they need time off for certain reasons, and a lot of the laws in that regard are not intuitive, and here you are thinking like, "I'm gonna provide what I think is the right thing and the right practical solution. I'm gonna try to be a good person," and you end up saying things that may be entirely counter to the law, and then you find out after the fact like, "Well, did you say that?" "Well, yeah, I did, but I didn't understand," but now... I mean that doesn't matter, so.

0:09:08.5 KD: You regret it.

0:09:09.2 RM: Yeah, you gotta be careful because once you say something or do something, it sticks and it's hard as we like to say, "to put the genie back in the bottle" especially when you've made statements like that, to either in emails or texts, there are so many ways that we casually communicate that basically end up in the permanent electronic record that when they get called out in front of you, and shown to you, you would regret saying. So, when we did litigate, and I've litigated for dentists during my career for two decades, and when I've had clients that were accused of discriminatory conduct, and the other lawyer pulls out the personnel file where there are statements in there that they wish they had not made, and that's really... And if some of that just is just like a business owner maturity, realizing that, "Hey, this is something... It's time to call the lawyer. Better Call Saul, right? It's time to call the lawyer and get them involved so that I don't do something that I later regret or say something that I might later regret."

0:10:23.6 KD: Sure. So, on that same note, I promise guys, we're getting to DSO and Associates. I just love to hear the other side of the legal side, what would you say coming from litigation, representing a lot of dentist, what are maybe one, two or three things that you feel in the litigation world, and then we're gonna go to DSO and Associates, 'cause that's more business chat. What do you find that if you were... You represented so many, you went into litigation, like you got to the court cases, what are things that dentists or practices could do to prevent getting there from your perspective? I know you mentioned business maturity, but are there any other things that you saw consistently that you're like, "If I could coach them or if I could give them guidance, this is what I'd say," to new practices or existing practices to avoid litigation in the future?

0:11:09.9 RM: Yeah, one of the main things is in the HR context, as you said, the importance of having a good handbook and that following that handbook, I think a lot of people fall into the trap of, my payroll company gave me an employee handbook and it's 70 pages long. Did you read it? No, who wants to read that? It's boring, it's not relevant to my business. Really, which is often times the case, they don't say that last part, but I know that's the case.

[laughter]

0:11:36.5 RM: And then you find out that there are things in that handbook that are completely 108 degrees different from what the actual practice is. So for example, if you have an employee handbook that's prepared by someone that just gives you this template document and there's no participation from you in the drafting of that, I may say that before you fire somebody, you have to give them some sort of peer review opportunity to do... To explain themselves, well, nobody's doing that in the dental practice context, and then when you go ahead and you terminate somebody and he then follow that, and then the lawyer holds out the handbook and say, "Well, here on page 20, policy 17, says that this is the way you handle these types of disputes." "Did you do that?" "No." "Why not?" "It just doesn't come off well," so that's one major thing. The other thing is, I'll stick with the HR side, 'cause a lot of the litigation that came up that we help people with over the years was HR-driven, is that you really need to document things.

0:12:41.5 RM: So if you have an employee who's not performing properly, they're showing up late, they've been reprimanded, you need to have your documentation of that. And because if you go and say, after you've been sued, "Well, this was a lousy employee," and the lawyer for the plaintiff gets the personnel file, and they start flipping through that at the deposition of the principal, and they say, "Well, if they are such a lousy employee, why is there no record of you ever telling them they are lousy employee?" "Well, I told them one day." "What day?" "I can't remember." "What did you tell them?" "I don't exactly remember. It was there, I forget." "Did you write it down?" "No."

0:13:18.3 RM: Alright, now all of a sudden, the person who is being deposed to suit the practice owner looks like a liar who's violated the law. And I think that a lot of people don't realize, and this might be maybe the best takeaway when it comes to all this litigation stuff. They think that if they are a good person and they're not doing something intentionally to violate certain laws, then how could they possibly be liable. And that doesn't really matter in the legal world because it's the perception of wrong doing that gets you in trouble, whether you're talking about soliciting patients and violating those types of non-solicitation provisions or terminating people for discriminatory reasons, just because you are not a discriminatory person, doesn't mean that you can't do things that somebody can then portray as discriminatory conduct, and so people seem to get caught up and like "Hey, I'm good, I didn't do it for the wrong reasons." Yeah, but it sure looks like it, and whatever was in your head doesn't matter, 'cause ultimately a jury is going to hear it and they're gonna decide based on that evidence what they think was in your head, and that could be very different from what actually was. So just because you are good and on the up and up, that is not a pass or a defense, and anything that is up in court.

0:14:48.8 KD: Interesting, that is so fascinating. So when you do document, this is something I've always been curious on. When I'm documenting about an employee, do I need to have that employee sign off on it? Can I just have a running log? Like have a conversation with this person at this time, and then I have them sign forms, I've always wondered, 'cause I could go back as an office manager and write up about all the different things that this person did, but I'm guessing it would probably be helpful if litigation were to ever come about, that there is documented where they know what we talked about, they signed off on it, is there anything that you know on that? I know we like... I probably do wanna talk about... So I'm just fascinated, but you went to litigation. I feel like that's so fun to hear about. I hope I'm never there, but how does that documentation work out? Do you normally get assigned or can you just have a running log?

0:15:33.8 RM: It all depends. It depends on the severity of it. It's important to be consistent with this stuff. If you have one employee that you don't like, and they're the only ones you ever document stuff, that doesn't look good. If you have one employee on you like, and they're the only ones that ever sign off on something, that doesn't look good. Yeah, look, but ultimately, when you talk about resolving HR issues, the goal here ultimately, for a business owner is to try to get that person on the right track. You know the time and the investment in getting people trained is enormous. As a business owner, you want that person to succeed. So these discussions are... And then sometimes this might be, cause the problem. You're not necessarily creating the paper trail for the basis for the termination. Ultimately, you want this person to improve, they've been with you for three years, you've spent X thousands of dollars and time trying to get them to be a good member of your team, you want them to come around. You just don't want them to walk out the door to leave you to go try to find a replacement, train that replacement and go through that whole learning curve. So ultimately, sometimes people need that wake-up call like, "Hey, I'm not doing the right thing, I'm not showing up, right. I'm not documenting things properly, I'm not following office protocol."

0:16:56.7 RM: And guess what? It was serious enough that the Practice Center told me I had to sign this thing, so maybe I need to get my act together, instead of, "Hey, I let it go." And I think a lot of people fall in this category, nobody wants to have that difficult conversation, and then you get to the point where you've told somebody 20 times and now you become the volcano where you just erupt and say, get out. Is that really, and from a legal standpoint, that's not good, but from a business standpoint, is that really the best way to manage your team to try to empower somebody to improve and change, to become a contributor and to help better and raise the whole quality of what's going on in the office, it's like, no, that doesn't work. So I think that there's a compelling business reason to do it too, and again, some things might require that are more sensitive and more serious to sign off, and other things like, "Hey, guess what? You were late. We document the fact that you were late." That's not something, if it happens every now and then, that needs to sign off. But you need to have a temporary record that you can say, "This is how we do this, this is how we document it. When it happens, I put this file in the note in the file. And we do that consistently. And on this date, it happened, I wrote it up on the date, which means I know what happened on that day. And these people that witnessed," and this is what was so.

0:18:21.8 KD: That's super helpful. And guys, for me, these are always the conversation I love to have, 'cause even though it's not so fun and it's annoying to have to do, I'd rather know this information now than having to try and figure it out later when I'm in hot water. So, on that same vain, let's talk about associates and DSOs, 'cause I know that's more your specially than litigation now. Okay, this is gonna be... I'm gonna go dicey with you, Rob, 'cause I just feel like why not. There is a hot debate that I'm hearing of associates, and do you hire them as a W-2 or a 1099? And it's hot, and I feel like there might be a lot of other things around this whole, like, What do I need to do when I hire an associate? But I know this is something I'm still hearing, and I've heard some whispering of what's going on. You're the legal side. You're the legal expert, so talk to us a little bit about associates for sure. I wanna know W-2 versus 1099 from your perspective, and then anything else we should consider when we're hiring these associates, because I feel they're a little bit bigger about a higher than per se. Just a team member. So what are some of things you see to consider when we're hiring these associates?

0:19:25.8 RM: Okay, sounds good. A topic, both these topics are things that the Dental Amigos like to talk about. My co-host, podcasting co-host, Dr. Nacho, Paul Goodman, he's very invested in the associate space and mentoring associates, and also practice owners that are hiring associates. So it's something that he and I... And I'm not just saying this, we talk about this stuff, we used to talk about it before we had the podcast, that's why we had the podcast so that the conversations that, the nerdy conversations or we're geeking out on this stuff, we can share with an audience.

0:20:00.4 KD: Yes.

0:20:01.4 RM: We would talk about this stuff, even if we didn't have the mics on. And that's...

0:20:04.3 KD: [chuckle] Why not hit record, give a little extra light to the world.

0:20:07.0 RM: So yeah, we're sort of like dental legal management geeks who are buddies and share that, so we do talk about this stuff a lot. First thing, W-2 versus 1099. The 1099 characterization or classification is almost never appropriate in a dental practice.

0:20:25.9 KD: Can you say that again? Because so many associates are pushing for this 1099, and I'm like, "I don't understand how you can think that you're a 1099 when you show up to a job at a set time and work with their employees and the patients are there." To me, that's not a 1099, especially where Uber and Lyft are getting sued for their 1099s, and I feel like that is the definition of a 1099.

0:20:46.4 RM: Yeah. Right. Well, I'll tell you who the 1099 is, the IT guy. When there's a computer problem, the IT guy comes and fixes it, it has nothing to do with the core business, it's an ancillary service for the business, they set their own hours. You don't tell the IT guy how to fix something that is an independent contractor. A general dentist working part-time in a general dentistry practice or several, is not an independent contractor. They are a part-time employee. As you said, you set the hours, they're core to the business, you provide the supplies, tell them who they're gonna treat, they are in every sense an employee. Now, when you look at what does that mean? What we're talking about is risk with mis-classification, and so that comes up in a few different main ways. One is, how does the government, the tax authority, the IRS look at this. And obviously, the government has FICA and social security and Medicare withholding for a reason, so they wanna make sure they get their money, and you can't just say, "Guess what government? I decided to call this person a 1099 instead of a W-2. No money for you." It doesn't work that way. So there's a risk with that. And I can tell you that the cost of dealing with fines for failure to withhold payroll taxes can be really extreme. We had a client many years ago who was the victim of payroll fraud, where their payroll is a Mom and Pop payroll company, basically stole all the money instead of paying it to the IRS.

0:22:33.2 KD: Oh no.

0:22:33.6 RM: So they took it out of my client's account and it didn't make it to the government. That was like a $300,000 or so debt, the principal. Within two and a half years, that became like $700,000, so between interest and penalties and fines and everything, those numbers go, go, go fast. So the responsible party there is the practice owner. So if there's liability, it falls on the practice owner. The other potential problem is unemployment compensation, so what happens when you as a practice owner terminate your 1099 and they go to collect unemployment and the unemployment people say, Who are you? We don't have you in the system. You work where? And then, so again, that comes back to the practice owner, and then the last main thing is workers comp. What happens if this 1099 gets injured on the job and they're not part of your workers comp insurance? Again, massive penalties, varies state to state, but not a good scenario. So generally speaking, legally, the risk of the liability risk is on the practice, unless there's a contract, the associate agreement says that the associate agrees to indemnify the practice for any liability arising out of this mis-classification, in which case indemnification is somewhat like an insurance term. Your malpractice insurance indemnifies you, your homeowners indemnifies you, your car insurance indemnifies you.

0:24:07.8 RM: So that means that you now are agreeing to basically ensure the practice for somebody coming after them for this misclassification, which could be a complete game changer. So they're the reasons, the liability of reasons. The practical problems from an associate standpoint though, is what happens when you're not withholding money, or having money withheld from your paycheck, you definitely have to do a lot of tax planning. Because you don't want... If you're making, whatever, 200,000 a year, and then all of a sudden April rolls around and between state, federal or local taxes, you go, well, $80,000, that money has gotta be some place. So you've got the BMW lease, the trip to Saint Bard, the trip to Vail, and maybe no money to pay the taxes. And so we've seen young dentists who've had tax liens going to look to buy practices or do startups, and they can't get finance. They're like, "Well, how does somebody who's in their early 30s end up with these IRS liens?" That's because they didn't manage that process properly.

0:25:16.8 KD: Damn.

0:25:17.7 RM: So that's something that's negative. And then the other thing is that while a 1099 may allow you to expand certain business expenses, they still have to be reasonable. And so it doesn't mean that you can put your home cable bill through your business and write that off, though I might guess that some people try to do that, so it doesn't give you this carte blanche to just charge everything to the business and pay less taxes on that, but there's also something called the self-employment tax. So as a 1099, you are responsible for both sides of FICA, so Social Security and Medicare that the employee contribution, as well as the employer. So if you're an employee, you may have 7.5% deducted from your check. As a 1099, you might be responsible for 15.

0:26:15.4 KD: Hello, Dental A Team listeners. This is Kiera. And you guys, how was your 2022? I want you to look back and tell me, was it the year of years or was it a really hard year? Did you crush it? Or did it crush you? This is the time, guys, for end of year, Dental A Team Platinum is welcoming you, where we will physically fly to your practice, we will come and we will elevate your dreams and make them into a reality. And guys, space is limited and prices are going up. This is not a sales pitch, this is not something where I'm trying to scare you into it, I'm just facing the reality of inflation is here, flights are expensive, and I want to see as many people as we possibly can and serve as many as we can. So if you wanna be part of our elite group of people, there are limited spaces, 'cause our consultants can only see as many. We are taking on 10 new Platinum offices by the end of the year, and that's it, that's all we have space for. So if you wanna be one of the elite 10, come join us, be a part of our top notch elite doctor community, be a part of our office manager and hygiene and front office communities, get your operations manual done and live the life that you've only been dreaming of today.

0:27:29.0 KD: Email me [email protected] and make 2023 truly a year that's unforgettable. We are a complete tax write-off, and like I said, we are only taking 10 offices, so don't get left behind, be one of those 10, and I cannot wait to give you the biggest warmest welcome to completely and utterly changing your life for good. Welcome to the Dental A Team. I can't wait for you to join us, [email protected]. Cheers to 2023 and making you your best self yet. Right. And I don't think people realize that Rob so often. I think that they are 100% not realizing it, not seeing that, not seeing that there's a lot more, 'cause I know as a 1099, I didn't realize how much was actually coming out with taxes, I didn't realize how much was being paid, and I remember my first tax bill as a 1099, and I wanted to cry my eyes out, I wanted to have all these different things figured out, and so that was something that was very terrifying for me that I don't think a lot of people see. I know most of the allure, from what I understand, is you get paid "the full amount" you get paid a higher amount, but you forget that most humans aren't responsible with their money, and when that tax bill does come up, it's much higher.

0:28:49.5 KD: So all those different pieces, I didn't realize that self-employment tax, I didn't realize any of that either. So I'm super glad that you talked about the 1099 path. I had not realized that you could do that indemnification, I think is what you said, where... And honestly, that would be so terrifying as an associate, don't say yes to that, that's a bad deal for you. But as practices, if they really do have that associate who's super gung-ho on wanting to be a 1099. That is a solution for it. So I think that that's great. I am curious when it comes to equity, 'cause that's another big conversation that I feel happens all the time with business owners and practice owners, and they hire these associates and they want to have equity. And I've heard a lot of different ways to do this, you can do phantom equity, you can have these bank accounts where they put money in it and they only get it after they have vested for two years. I've seen other ways where you scale up, I've heard from some people that you have to do 50-50 if it's ever going to work out, I've heard from others that it should be like 10% in the mothership practice and then maybe 50-50 in another one. Equity feels stressful for me.

0:29:56.4 KD: So Rob, what have you seen on this equity path that people should consider, especially 'cause if all these associates come in wanting equity, but I don't even know if they can... I don't think associates even know what this equity means or why they're doing it, so I don't know if you can shed some light on this whole equity conversation, because I know, like I said, so many associates really, truly are wanting equity, but as a business owner myself, I'm just realizing, I don't know, Rob, I have built this whole business up and I don't necessarily wanna give away equity, but I also want people to turn over on me, and I feel that that's this tug of war people are having, so I'm excited to hear your thoughts around this equity.

0:30:40.6 RM: So you're probably talking about my favorite topic these days, Kiera, associate equity, and it comes up in a couple of different ways. I think it's really important for the practice owner, whether we're talking about associate equity or hiring an associate too, to really have a realistic understanding as to what that means from a cash flow standpoint. And really, it's the same thing from the associate standpoint, you really have to do your homework with any kind of major business decision, and the homework, main homework being, "What is this gonna cost me? What's it gonna cost me to hire an associate, to bring on a partner, to drop that bad PPL?" You can have financial plan for all this stuff, and what we're talking about is working with a good consultant, CPA who can look at this and quantify the impact of that decision. And I think a lot of times people think, "Well, I'd like to have a partner." Great. Do you want to share all the profit with them? Yeah, it sounds great, and... But you realize that there's only so much profit in that pie, and when they become the partner, they get half of it perhaps.

0:31:54.5 RM: And so the people that get into trouble with this stuff, or the people that don't take that step of due diligence, and I like to tell clients that if you don't take that step in any of these things, you're really just choosing what's behind door number two. And when do you find out what's behind door number two? Well, a quarter after the associates started, when it comes time to file your taxes for the first year of your partnership, or you've done this practice buy-in and you've borrowed all this money from the bank and realize that now, guess what? I bring home $10,000 less a month as a result of this. And you're like, Wow, I thought that all business transactions were constructive and beneficial, not necessarily. So with any of this stuff, the decision really should be driven by at least a part and understanding and a recognition of what the cash flow looks like. Because otherwise, you're gonna be surprised and surprises are bad in a lot of the context, surprises are bad in the owner associate model, 'cause then you've hired somebody that you don't have enough production to be able to pay them what they need, and then you spend all this time training them, and now there's not enough patient load for them, and now you've taken time away from your practice to train somebody to do work, but there's no work to be done. Bad, that's a bad thing. Same thing with the partnership.

0:33:27.6 RM: If there's an expectation that both of you are gonna benefit from this financial transaction, and there turns out to be that there's really essentially, a winner and a loser. Well, very few relationships are built upon that sort of unhealthy foundation that somebody benefits at the expense of the other, not tenable, not sustainable. So with all of this, it's really important, I think, to understand what the economic impact is, just like it used to be back in the dark ages of baseball. They would say "The manager, he's a good colleague, mine is just by the... His gut feeling as to who to put up in that situation," that doesn't happen anymore, it's sort of like, Let's look at the statistics and here are the numbers, and this is the percentage and the probability of this person succeeding in this particular role, guess what, they get the bat and they go up because they've been able to quantify the likelihood of success there, it's really... It's the same thing with dental business decisions. What we're really seeing now, and this is something that's passionate for me these days, I think with the proliferation of DSOs who obviously need dentists to work for them, the bigger the DSO, they need associates too.

0:34:52.1 RM: And if it's a DSO deal where the practice has been sold and the sellers are no longer there because enough time has passed and they've moved on, these associates are obviously important for the DSOs, what better way to ensure that you will have an associate then to have them buy into the practice, right?

0:35:12.2 KD: For sure.

0:35:13.0 RM: Now it's like that is the ultimate stickiness. And with that, a lot of times associates are just buying themselves jobs, but what they don't realize are all the strings that come with this. And so when you're looking at those types of buy-ins, especially at the cost of what you can expect to make after you service your debt, what are you really getting is really an important thing. And so, a lot of them come with really bad restrictive covenants and non-competes. And again, if you have to pay $300,000 for a 25% interest of this practice, that's one location where you practice, and you still owe the bank money on that loan over 10 years and you're not really making more money, what happens when you wanna change jobs? You can't just assume that you're gonna be able to transition into something else that's more beneficial. From an owner's standpoint, having somebody as a partner can be a really good thing, because if you need that associate, you have enough production, you now know that you've got somebody else with skin in the game, but again, if the numbers work. And then from the associate standpoint, the numbers still have to work, but you also have to make sure that what you're really paying for, that you're getting something for that.

0:36:31.3 KD: Which I actually love this conversation, and I love that you have it driven by numbers rather than by anything else. Are there any other ways, Rob, that you've seen? 'Cause I feel like most practice owners don't necessarily want to do equity, but they're doing it because they don't want to lose an associate. Have you seen any other ways to retain associates without having to give up this equity swap? Because I feel like so many practice owners are beholden to this. I'm so thankful you talked about that 'cause I've got a doctor partnership trying to navigate, and I had to bluntly say have you just considered how much money you're not going to take home next year when you have this associate buy-in? In theory, yes. They're getting this big buy-in, so they're getting that money upfront, but I feel most individuals are used to their paychecks, and when that paycheck drops in half, even though you got a big chunk of money, you still feel that hurt. So are there any other things you've seen besides his equity swap to encourage associates to stay longer, from your perspective?

0:37:30.9 RM: Yeah. There really aren't a lot of things that are practically workable. I think that it's a good thing just to pay people well, and ultimately, that's what people are interested in. I think that for better or for worse, there is a younger generation of dentists that don't have an expectation of owning practices, and which is at a certain level, a shame, and there certainly are plenty that still do. But I think that if you can provide other things, a good working environment and a place where people like to work where they can make a lot of money, I... Here we were talking to somebody today that as an associate position, that they're making $375,000 a year. And I forget, they work three and a half days a week, and they like where they work. Not so bad. Right?

0:38:26.0 KD: Well, and especially with the newer generation who, I mean, they're looking at homes not selling because the new generation wants to be more mobile, they wanna be more transient, they don't wanna have their roots, they're not looking at these 401k retirements. So I think that's interesting. But I hadn't thought about, well, I mean, you're gonna sell, so you're gonna lose money that way, why not just increase their pay to something where they're probably not gonna get offered that anywhere else. Have an amazing workplace. That could be a viable option. And of course, if someone wants to own and they wanna build equity and things like that, maybe not as ideal, but I am gonna pivot 'cause I wanna ask one more question. I know our time is coming up, but shoot, if I can have a lawyer on the podcast, I'm gonna just ask all my questions, Rob.

0:39:05.2 RM: Go ahead.

0:39:06.2 KD: Okay. We talked about associates, we've talked about HR, this one is coming of. I feel a lot of dentists are getting unsolicited offers from DSOs, where these DSOs are just hungry, and then what happens are my dentists sit there and they're like, "So Kiera, I got this offer from a DSO.", what are the pitfalls associated with these unsolicited offers with the DSO with practices, what have you seen as some potential pitfalls as we wrap up today?

0:39:33.4 RM: Yeah, I think one is that, if you don't have somebody that's representing you in those negotiations, you don't even know what to ask for. Sp they're not infrequently, the people come to us and say, "I've signed this letter of intent with the DSO. Can you represent me?" It's like, "Sure, but I really wish you had talked to us before." And representation, it can be with a lawyer, with a good broker that really understands the process, who's bringing in multiple parties, dental practices are tricky to value, and if you are working with somebody that brings in depending on where you are in those country, where there might be a lot of DSO demand, there may be 10 or 15 groups that may be possible suitors here, the only way that you know that you've gotten the best deal, is if you fielded offers from that. And all of these DSOs, just because we talk about DSOs, they're not all the same, the different ones offer different things, different deal structure, and so when they approach these dentists with these unsolicited offers, they don't... The dentist, again, don't know what they should be asking for and what to look for, but inevitably it's like the top line of the LOI is "We're gonna buy your practice for $4.1 million." "Holy smokes. That sounds great."

0:40:50.8 RM: I don't think they even continue to read, the rest of the document that says, "Well, 40% of it is gonna be in cash, 60% of it is going to be an equity in this parent DSO that we say it's worth this." Well, it's not like it's stock in Google that there's a market, you can say parent DSO is worth that, it's just like the board of directors decided that that's what it's worth. And that we're gonna hold back a portion of that purchase price to ensure that the identification obligations are met or to adjust the accounts payable that are due after closing. And then you start to read down and the more you get it, it's like you just keep giving up and giving back things. And then I think one of the big ahas with that is that people don't realize, especially practices of certain sizes, if somebody's gonna pay you, let's do easy math, Kiera $2 million for your practice, and then require you to work there for five years. And let's say that as an associate, after you've sold, you're gonna make $200,000 less during that five-year period, well, guess what?

0:42:09.1 KD: It's a bad deal.

0:42:09.2 RM: Even though they're paying you two million, it just cost you a million to do that, they're using your money to buy your practice. Now, sometimes these deals work okay, sometimes they don't for that reason alone. So that when you start to look at that, and then you look at the fact that some of it's in equity in their business, some is in cash, that number becomes even worse because you never walked away with the cash in the first place, so it's not like you even got the $2 million, you may have only gotten, let's say, $1.2 million, right? And then over a five-year period, it cost you a million, so over a five-year period with the sale of this practice you're plus 200 grand and you own some ambiguous interest in this business that has no market that nobody even knows what it's worth that you hope that when they sell some day it means cash to you, which frequently it doesn't, you just get stuck in the next one that you're in the same boat. It never ends. Are there stories where the stuff works out? Yeah, sometimes, but more often than not, it doesn't.

0:43:10.6 RM: So it's really understanding the deal. Again, doing the cash flow analysis, what is the economic impact, what is the cost of doing this deal, being an associate versus a practice owner, what types of things are you giving up? What is the risk? And understanding that. And again if big DSO knocks on the door and throws this big offer at you, and you don't understand all this, you don't know how to negotiate that, you need more cash upfront, you need provisions that they're required to buy your equity back. All these things you don't even know what to ask for. And then once you get into that LOI, and you've got this exclusive deal with them, you may not be able to talk to somebody else for the next six months or 12 months even, and so those... Generally too, those unsolicited offers are not the best deal out there.

0:44:03.3 KD: Sure.

0:44:05.1 RM: And just like anything, the DSO's not coming, if they don't have competition, they're not offering you something that is a competitive offer, and so inevitably, if you are engaged with those people, or that unsolicited offer, you're leaving money on the table, but they also like to kind of play, and I say they obviously, these are generalizations, but I've seen it enough times, where the doctor is having these conversations, "Well, it's all very casual. Don't worry. It's an LOI, it's non-binding, you don't have to follow through," but it just, the farther you go along, the more they get committed and the harder it is to turn back for a variety of reasons. And frankly, they're very tricky transactions, it's... We do practice transitions from the buyer side, the seller side, we help people that are working with DSOs. We help doctor to doctor deals, but even though a sale of a dental practice to a DSO and there's a sale of a dental practice to a dentist, it's the same thing you're selling a dental practice, but from a legal technical standpoint care, those two deals couldn't be more different, you're gonna sell your dental practice to a dentist, there's gonna be an asset purchase agreement, there's going to be possibly an employment agreement and maybe a lease if you own the real estate, and that's not being sold.

0:45:26.6 RM: If you're gonna sell to a DSO, you may have 20 different documents with the sub DPO equity agreement, you've got the rollover agreement, the operating agreement, and it's all this stuff. And frankly, in a dentist to dentist deal, that's a transition where you've got a buyer and a seller who are trying to work together to have a good outcome, and a DSO deal, they've got lawyers, and these are people that are the shark tank of the dental world, that there are all sorts of little traps in the documents that are purposely put there that require you to go through this stuff carefully and you have to watch them like clocks, because if you don't, they will try to rip you off.

0:46:08.7 KD: Rob, I think that you made a great case for why everybody should have a lawyer and a legal team, I'm like, "Guys just don't make these decisions because... " like Rob, you are obsessed with reading contracts and finding out what we're really agreeing to, and I'm like, "Yeah, yeah, yeah, that seems pretty good.", but that yeah, yeah, yeah, I feel has cost a lot of dentist, millions of dollars a lot of time. And like you said, the two million and you're getting paid 200,000, do that math. I can't tell you how much this podcast I hope is resonating, I'm like, "Do the math, the numbers don't lie, and have a really, really good legal team on your side." So Rob, if people are interested, I know you guys do associates. You do associate contracts, you do DSOs, I know you're just a great resource in the dental world, you guys do a lot. I know Dr. Nacho, he's all about his associate. I feel like it's like his matchmaking, I used to do it and I'm so thankful he does it now, 'cause I gave that business up. But if people wanna get in contact with you, Rob, what's the best way to connect with you? Just to find out, of course, guys tell him Dental A Team sent you. I know Rob takes care of our Dental A Team family real well. But how can they connect with you?

0:47:13.3 RM: Best way is go to our website, yourdentallawyer.com. You can post questions in there. And if you've got a matter you want help with, put a little information in there and then somebody from my team will back to you with that. My email is on there too on the website, people tell you not to do that for spam reasons, but it's there. And so if you got questions, you can also email me directly and we can see if there's something that we can help you with.

0:47:39.0 KD: Awesome. Rob, it was real fun today. I appreciate you answering all my naive questions, guys. You learned what to do in Law and Order, always ask for a lawyer. You've learned some HR things. We learned about equity and Associates, the W-2 versus 1099, and then these DSO offers, I feel... Guys don't get sucked up by shiny object syndrome, make sure you really do have a strong legal team on your side. I can't tell you how much more confident as a business owner, I am having great legal representation of people I trust that I know are, like they're sharks in the industry for me, for my behalf, they're going to bat for me, and then they also talk me off a ledge so I don't make dumb decisions. So Rob, thank you for your time today. It was so fun. I appreciate you so much.

0:48:19.8 RM: Thank you, Kiera. It's great to be on your show. We covered a lot of ground, more than I expected, so it was fun. I enjoyed chatting with you as always.

0:48:25.2 KD: It's just my brain. I just wanna know it all, Rob, so thank you for indulging. Guys, please reach out to him. Always reach out to us if we can help you as well. Email as Hello at the dentalateam.com. We'll get you guys connected to Rob. But head on over to their website. And as always, thanks for listening and we'll catch you next time on the Dental A Team podcast. And that wraps it up for another episode of The Dental A Team podcast. Thank you so much for listening and we'll talk to you next time.

[music]