Most dental partnerships are built on trust. Two dentists who trained together, complement each other clinically, and decided to build something. That trust is real, and it’s usually enough to run a thriving practice. What it isn’t enough for is the moment one of you dies, becomes too sick to practice, wants to retire, or decides to leave.
A buy-sell agreement converts that trust into an enforceable plan. Without one, a partner’s death creates a crisis that takes years and significant legal fees to untangle. With a well-drafted one, the practice keeps running and both partners stay protected. One boundary worth naming: if you own your practice alone, this isn’t your tool. Solo succession planning is a different conversation.
A Buy-Sell Agreement Is The Legal Backbone Of Every Dental Partnership
A buy-sell agreement is a binding contract between co-owners that dictates what happens to a partner’s ownership stake when a specified triggering event occurs. In a dental partnership, it functions as the practice’s succession playbook: who can buy whom out, at what price, under what conditions, and on what timeline.
Dental partnerships face a wrinkle other professional firms don’t: in most states, the dental practice act restricts practice ownership to licensed dentists. Not every state draws the line the same way, so your agreement needs to reflect your state’s rules. A partner’s spouse, estate, or outside investor can’t simply inherit or purchase the ownership stake. The agreement must create a clear path for the remaining licensed dentist to acquire the departing partner’s share. There are four core areas every buy-sell agreement needs to address, and each one requires its own specificity.
What Does A Buy-Sell Agreement Actually Cover In A Dental Practice?
A well-structured buy-sell agreement covers triggering events, valuation methodology, funding mechanism, and transition terms. Each needs enough specificity that the agreement can be executed without a partner’s active cooperation, because in the scenarios it’s written for, that cooperation may not be available.
Triggering events are the circumstances that activate the buy-sell provisions: death, permanent disability, retirement, voluntary departure, involuntary departure (such as loss of dental license), divorce, or bankruptcy. Valuation methodology is where most disputes concentrate: should the practice use a fixed formula based on collections, a periodic agreed value partners reset every year or two, or an independent appraisal? Funding mechanism determines how the buyout actually gets paid. A buyout obligation without a funding source is simply a contract for a financial crisis. There are three main triggering events, and each one demands a different funding response.
The Three Triggering Events Every Dental Partnership Buy-Sell Must Address
Death, disability, and departure are the three categories every dental partnership buy-sell must address, and each one demands a different response.
Death is the most urgent scenario because it creates an immediate ownership vacuum. With no agreement, a deceased partner’s interest passes to an estate controlled by whoever the probate court names. The surviving partner can suddenly find themselves co-owning a practice with a spouse or administrator who has no clinical role and whose financial interests may be directly opposed. Life insurance funded at the value of each partner’s interest is the standard solution: the policy pays out, the surviving partner buys the deceased partner’s share from the estate, and ownership consolidates.
Disability is often the more financially dangerous scenario because the partner isn’t gone; they’re still alive, still have financial needs, and may still hold ownership rights while the practice operates with reduced production. Disability buyout insurance, which is separate from personal income replacement insurance, funds the purchase of a disabled partner’s stake after a defined waiting period.
Departure (retirement or voluntary exit) requires the agreement to specify whether the departing partner must sell to the remaining partners, whether outside buyers are permitted, and what right-of-first-refusal provisions apply. Most dental buy-sell agreements restrict outside buyers given state licensing requirements, so the remaining partners need to be the built-in buyer with the financial structure to complete the purchase. The valuation methodology you choose determines what that purchase price actually is.
How Is A Dental Practice Valued In A Buy-Sell Buyout?
Dental practice valuation in a buy-sell context typically relies on one of three methodologies, and which one your agreement uses will significantly affect what a partner’s share is worth at buyout.
The most common formula approach is a multiple of annual collections. General dental practices have historically transacted in a range of roughly 60% to 80% of annual collections. That’s an industry rule of thumb, not a yardstick your practice either hits or fails. A collections formula also ignores profitability entirely: two practices collecting the same amount can have very different bottom lines. That’s why earnings-based provisions value the practice on recast EBITDA, or owner benefit (earnings with owner compensation, above-market related-party rent, and non-recurring items added back), the same lens a buyer or DSO applies. Whatever the formula, treat it as the starting point. The number that matters is the one built from your practice’s actual financials, revisited as practice size and market conditions shift.
The periodic agreed value approach has partners formally agree on a value every year or two and update the documentation, which is simple but only works if they follow through. Independent appraisal provisions bring in a certified dental practice appraiser at the triggering event, which is most accurate but slowest. Whatever methodology the agreement uses, the insurance coverage funding the buyout needs to match it, and there are two ways that funding is generally structured.
Funding The Buyout: Life Insurance And Disability Insurance Are The Standard Tools
A buy-sell agreement is only as strong as its funding mechanism. The two primary tools are life insurance for death buyouts and disability buyout insurance for disability-triggered buyouts, structured in one of two ways: cross-purchase or entity-purchase.
In a cross-purchase arrangement, each partner owns a life insurance policy on the other partner. When a partner dies, the surviving partner collects the proceeds and buys the deceased partner’s share directly from the estate. This structure becomes administratively complex with more partners: three partners require six policies, four require twelve. In an entity-purchase (or redemption) arrangement, the practice entity itself owns and pays premiums on policies covering each partner. When a partner dies or becomes disabled, the practice collects the proceeds and buys back that partner’s interest, which is simpler to administer as the practice grows. Entity-purchase arrangements also carry a tax wrinkle worth knowing: in Connelly v. United States (2024), the U.S. Supreme Court held that life insurance proceeds a company holds to redeem a deceased owner’s shares can increase the company’s value for estate tax purposes, with no offset for the redemption obligation. For many partnerships this only matters at higher estate values, but it’s a reason to have your tax and legal advisors choose the structure together rather than defaulting to whichever is simpler.
Disability buyout insurance funds a purchase after a defined elimination period, typically 12 to 24 months of continuous disability. Because these policies are underwritten individually, they’re best purchased when all partners are healthy. Coverage amounts should be reviewed each time the agreed practice value is updated. A practice that has grown significantly since the policies were issued may be substantially underinsured, which becomes apparent precisely when you need the agreement to work.
What Happens To A Dental Partnership Without A Buy-Sell Agreement?
Without a buy-sell agreement, a triggering event turns into a legal and financial emergency with no roadmap and no deadline.
Consider the death scenario: a dentist who owns 50% of a practice dies and leaves their estate to a spouse. The surviving dentist now co-owns the practice with a non-dentist spouse who has no legal obligation to sell and potentially very different views on value. State dental practice laws may ultimately force a divestiture, but that process can take years and generate significant legal fees, during which the practice operates under a cloud that affects staff retention, patient confidence, and the surviving partner’s ability to plan.
The departure scenario is subtler but similarly damaging. A partner who leaves with no agreed valuation method and no right-of-first-refusal can shop their interest to anyone, including a competitor, a DSO (Dental Service Organization), or a private equity buyer. The cost of drafting a well-structured buy-sell agreement is a fraction of the legal fees generated by resolving a partnership dispute without one.
How To Review And Update Your Dental Buy-Sell Agreement Over Time
A buy-sell agreement isn’t a one-time document. It’s a living contract that needs to reflect the current state of the practice, the current circumstances of the partners, and the current value of the business.
Most advisors recommend revisiting the agreement every two to three years, or sooner after a significant event: adding a partner, a major equipment investment, a meaningful collections increase, or a change in any partner’s personal circumstances. Each can affect either the agreed value or the adequacy of the insurance funding.
The review should involve the practice attorney who drafted the original agreement and the dental financial team coordinating valuation and insurance coverage together. An attorney who doesn’t know current practice production can’t verify whether the valuation formula still makes sense. A financial advisor who doesn’t know the agreement’s funding structure can’t confirm the insurance is adequate. Get a current picture of your practice’s value with our free dental practice valuation calculator before any buy-sell review conversation.
If your dental partnership doesn’t have a buy-sell agreement yet, or if it hasn’t been reviewed since the practice’s value changed meaningfully, that’s the place to start. The team at Core Advisors works with dental practice owners on the financial planning that makes buy-sell agreements executable, from practice valuation to insurance coordination to integrated wealth planning. Reach out to schedule a conversation about your partnership structure.
This article is for educational purposes only and does not constitute tax, legal, investment, or financial advice. Every practice and partnership is different. Consult your own tax, legal, or financial advisor before acting on anything here.
