Partner Pain

If you are a partner in a medical practice firm, you will want to read this article. A reader explained to Pamela Moore in the May 2009 issue of Physicians Practice that his group does not have a buyout agreement in place, but one member wants to retire. What questions should you be asking yourself and your partners today to ensure a smooth transition in your future?

The reader, a family-practice physician, is in a 3-person legal partnership that is enjoying great success. However, the most senior member wants to retire and has specific buyout terms in mind. Without an agreement in place, the other two partners are struggling to come to terms with the third.

How much should the practice be worth? The senior member is asking for his annual take-home pay plus one-third of receivables for 3 years and one-third of the hard assets. The two remaining doctors disagree and are asking for advice.

According to Moore, physician partnerships should have legally binding succession agreements in place from the beginning of the partnership. It is easiest to have this agreement created before the practice has become profitable or before a partner wishes to opt out. The agreement should cover buyouts, firings, noncompetes, reduced workloads, injuries precluding work, retirements and other potential situations.

Moore suggests to this reader that current practice has moved toward setting flat rates for buyout and buy-in. For primary care, she has seen rates between $1000 and $50,000.

When establishing buy-in, the author reminds readers that young physicians are terrifically debt-burdened and high buy-ins may hurt recruiting.

While there are many options for buyout structures, it is important to consider that an exiting physician should be compensated fairly for his/her contribution, yet the practice’s success should be protected. Often a buyout is based on hard assets with a share of estimated accounts receivable. In this case, remember hard assets depreciate rapidly and should be assessed at current value, not purchased price. Also consider spreading the buyout payments over several years, with any given year not exceeding a set percentage of net income, perhaps 4 percent.

With all that is at stake, paying for professional advice to establish and execute a partners agreement is well worth the investment.

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