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Succession Planning 101 for Private Practices

Succession Planning 101 for Private Practices

While planning for retirement or contemplating a reduced role or ownership transition may seem like something that is years away, the reality is that positioning your practice to maximize value and minimize disruption can take a great deal of time and careful planning. As many physicians have discovered, failure to prepare adequately can be extraordinarily damaging. Not only can physicians subject themselves to unneeded financial and mental stress, but the practice itself can struggle.

Succession planning should be a priority for a majority of the physician community, with 54 percent of licensed physicians currently over age 50 and 31 percent over age 60 according to the Federation of State Medical Boards. Given what is at stake both personally and professionally, physicians in private practice should make a point to start planning early and educating themselves about key concerns and considerations in the succession planning process. Understanding the legal considerations and consequences is vitally important; and physicians should have a firm grasp of best practices for strategic succession planning and seamless ownership transitions that will maximize the value of their practice.

Be realistic

Unrealistic financial expectations are a common problem in succession planning. Many physicians have a number in mind that they feel reflects the value of their practice, perhaps a multiple of revenues or income or even a "formula" they heard at a presentation or cocktail party. More often than not, these ballpark estimates are very different from the actual fair market value. For a physician who may have been planning retirement around a specific (and unsupported) figure, it can be disheartening to discover fairly late in the game that their golden years may not be so "golden".

Overestimation of the value of a practice often comes from one of two places: (1) lack of awareness of marketplace realities, or (2) the diminishing role goodwill plays in practice valuations. The patient relationships and the community goodwill that have been built over time can be powerful, but also tenuous. As more medical services have become commoditized, competition continues to grow and patients have more convenient alternatives to turn to, goodwill is less impactful than in the past, which results in lower practice valuations.

With that in mind, it is critical to consult with a trusted and experienced advisor (such as an attorney, accountant or valuation expert) who is able to provide you with an accurate perspective regarding the value of your practice and your best options going forward.

Be thoughtful

Planning for and executing a smooth transition can maximize the value of a practice for both the seller as well as the buyer moving forward. A trusted physician suddenly retiring can be disruptive and upsetting to patients. Succession plans should prioritize continuity and patient retention. A gradual or staggered transition to a younger partner or new owner is one way to make this process smoother, one that will pay dividends for the new owner. In a group practice, it is imperative to consider the ages and professional priorities of your physicians. Is there a "next generation" within the group?  Will the group all be reaching retirement age at the same time? Working toward maintaining an "age-diverse" group makeup minimizes the chances of a mass retirement, which can lead to practice fire sales.

Be prepared

Think carefully about the structure of the transaction itself. If you are bringing in a younger partner, the transaction will be structured as a stock purchase. If you are selling a solo practice, a buyer will likely want to structure it as an asset purchase in order to avoid assuming any liabilities (debts, lawsuits, etc.) and ensuring that they start out with a clean slate.

Regardless of how the sale is structured, a priority for both parties should be to limit unwelcome surprises. For sellers, that means protecting themselves by requiring a collateral agreement in the event that the buyer defaults on the purchase.

Be compliant

An often-overlooked component of succession planning is compliance with applicable medical records laws. While patients are typically deemed to own their medical records, physicians are considered to have legal custody of those records. Consequently, any comprehensive succession plan needs to account for who will be the new custodian of those records and establish a chain of custody for these records. In Michigan, this includes the buyer and seller executing a medical records custodian agreement, sending out notices to patients, and filing a notice with the Department of Community Health. This process also gives the buyer and seller the opportunity to purge old medical records (so long as all relevant laws are followed).

Be aware

The bottom line is that a well thought out succession plan, crafted well in advance and in consultation with an expert advisor, helps avoid unnecessary legal and financial issues that can appear during periods of transition. A well-executed succession plan can maximize assets, protect the practice and its partners, preserve your legacy, and ensure that you are rewarded for a lifetime of hard work by retiring in financial and psychological comfort.

Christopher Mann is a member of Dawda, Mann, Mulcahy & Sadler, PLC, where he concentrates his legal practice in the areas of business law, health care, automotive, estate planning and tax. Contact Christopher at chrismann@dmms.com

 
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