Nick Hernandez, MBA, FACHE

Are you a solo physician practice contemplating bringing on a physician partner? Or perhaps you already have an employed physician and are looking into making that physician a partner? Maybe you have had a partner in the past and things didn’t work out, but you are thinking about giving it another shot with someone else. You may even be looking at acquiring another practice and as part of that transaction making the other practice’s physician a partner in your new entity.

If any of these scenarios fit your circumstance, then keep reading on.

Bringing in a physician partner has many advantages. A partner may help your practice grow and become more successful; allow you to share the workload and combine skills with another provider; and enrich your practice with a solid teammate. However, business partners can become your greatest asset or worst liability. Deciding whether or not to share your practice with someone else may be one of the most important business decisions you ever make. Deciding who you go into business with can be just as important.

There is no way to guarantee a potential partnership will work. Consequently, weighing the advantages and disadvantages of having a physician partner, and carefully analyzing the reasons for choosing a partner, can help ensure that you find the right person to entrust with your practice. Identify what you really need from a physician partner before you start looking for one. Once you have completed this essential first step, you can begin the process of choosing a partner.

For starters, a physician partner should bring something different to the table than you do. If you're creative, maybe you need a more detail-oriented partner; if you're introverted, you might need an extrovert to balance the social equation. If they're similar to you, it might be more comfortable, but it may not be what you need—you need someone who complements your skills and personality, not duplicates them.

Discuss your vision with your potential partner.

 Evaluating a potential partner can be like trading life stories to understand if your business principles, company goals, and personalities are compatible. Take as much time as you need to make a well-informed assessment of whether your business partner is actually a suitable one. You should share a sense of vision and values, but not have overlapping skills.

Assess the potential partner's expectations on the time involved.

 Partners don't have to spend the same amount of time, but it is important that they are on the same page as to each other's expected time commitments. How many hours a day does your partner expect to put into the practice, and do his expectations meet yours? Your partner's commitment has to equal yours. A partnership—especially one between friends—can start off with fun and excitement, but within a short time, the slog of the everyday routine catches up with you. If they're not as committed to the business as you, they may lose their enthusiasm and may actually be damaging the brand every time you open your doors.

Try to evaluate potential partners without regard to emotional ties or friendship.

 Draw up a set of criteria that you're looking for and simply judge how well a potential partner lives up to it. Your potential partner should also have questions for you and should want to know about your character, reliability, and expectations.

Of course you will want to weigh their standing in the referring physician community. A business partner who is adept at cultivating relationships with your referring physicians adds value to the practice. Also consider how they interact with employees and patients.

Seven Reasons to Create Physician Partnerships

Physician partnerships are often a great idea providing you give thought to how you will structure one and why you wish to create a partnership. Sometimes physician partnerships aren't so successful, so it is crucial to choose your partner well. This will somebody who you're going to spend a lot of time with and who, like your spouse and your family, will probably see all sides of you, in full Technicolor glory! This person is going to get into your head and there will be arguments and misunderstandings.

Here are seven reasons for creating a partnership:

1. Your partner has strengths that you lack, and vice versa.

 Great partners band together to compensate for each other's weaknesses, so that individually they can focus on using their strengths. Not only are you able to get more done, but tasks are done more efficiently because people have different skills and areas of expertise.

2. Partnerships promote greater creativity and can spur innovation.

 It's hard to brainstorm alone. Most people's creative juices flow more freely if they can bounce ideas off others. And things get really interesting when you have partners who bring their own ideas and perspectives to the party—that's often when the biggest leaps of innovation occur. A physician partner means more ideas coming from a different background.

3. A partner's perspective can help you break free of your old way of doing things.

 Sometimes it takes another physician's perspective to shake a successful practice out of complacency and see an old practice in a new way. A physician partner can help you narrow down the list by offering unique perspectives and opinions that you yourself may not have been able to think of. This is a good thing and can save you time and money later on.

4. Partners can help you take greater risks.

 A good partner can challenge you to take the kinds of risks that will help your practice grow. Partners also can encourage each other to be more daring simply because each partner figures the other will be there to pick up the pieces if the risk doesn't pan out. Great partners help you attempt big things and pull you out when things go wrong.

5. Partners also can serve as a restraint in keeping you from risking too much.

 A good partner will tell you when an idea is misguided and keep you from taking on too much risk.

6. Working together for a common goal is a lot more fun than working alone.

 The business side of practicing medicine is a lot more fun when you can share it with someone else. There's something exciting and exhilarating in facing challenges together, and if you're blessed with a partner with a sense of humor that meshes with yours, work becomes like play.

7. Try playing good cop/bad cop when it's just you.

 Managing employees and a practice is exhausting. On the days when you just need a break, your partner is there to pick up the slack. A physician partner provides motivation and support. Not only can you ask each other questions and bounce ideas, but you can encourage one another and pick each other up in difficult times. Also, by having a partner, you will most likely work harder because there is pressure to perform and to not let the other person down.

Don’t be afraid to ask for help. Speak with your physician colleagues or a transactional consultant with requisite experience in this area. And remember, even if you're not looking for leverage now, think about what a physician partner might do for you. A partner may shore up areas where you have a weakness, and a partner may open up a whole host of opportunities for your practice. Rugged individualism has its limits.

, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent. E-mail him

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To bring, or not to bring on a physician partner

When you are considering a merger of your practice or when you are considering acquiring another practice, you will eventually have to undertake the due diligence process. Due diligence allows you to feel more comfortable that your expectations regarding the transaction are correct. In mergers and acquisitions, purchasing a medical practice without doing due diligence substantially increases the risk to you.

As I have written about before, there are many facets of this process and while some are relatively standard, your particular transaction will certainly require customization. One area that is of particular importance is the review of contracts.

In this article, I will give an overview of what due diligence of contracts entails. To be clear, note that we look at all contracts during due diligence; this includes provider contracts, employee contracts, hospital-related contracts (e.g. medical directorship, joint ventures, etc.), commercial payor contracts and vendor contracts. This is a not a task that can be done quickly as there can be many nuances to look into and depending on the medical practice, the review can be quite daunting.

Due diligence gives you access to important and confidential information about a medical practice. For many medical practices, these existing contracts not only constitute intrinsic value, but they are also a source of significant operating obligations and even potential liability. Consequently, it is imperative that you have a proper understanding of the other practice’s contractual rights and obligations.

By gathering this information, you are better equipped to make an informed decision and close the deal with a sense of certainty. When soliciting the help of a transactional consultant and/or attorney, make sure you advise them of any particular areas that you want to address. As previously mentioned, this process should be tailored to determine what unique information you may be seeking to discover from the various contracts provided for review and whether any additional documents should be requested from the other practice.

Once the focus is properly tailored, a common approach to managing the information gathered from contracts is to create a table to summarize the contracts reviewed. We recommend the contracts are annotated when digitized to allow for cross-referencing within this master table. We have found this to be an ideal setup as the process moves forward and various professionals need to refer to a particular document.

Having said all that, it is important to note that not all due diligence investigations are the same, and surprises are to be expected. This can greatly impact the length of the due diligence process as well as the time invested by all parties. And, if due diligence drags on for too long, one or both parties can lose interest in the potential transaction at stake.

Provisions and clauses and restrictions, oh my!

One of the items to initially look for is a signature. If the document isn’t fully executed, then it isn’t a valid contract, and that becomes a follow-on exercise to obtain correct documentation. Next we look to see if the contract contains any provisions that would render the contract void or would require consent as a result of the proposed transaction. These provisions can take the form of change of control termination or acceleration rights, anti-assignment clauses, or other transfer restrictions. As a buyer in an asset acquisition, you are acquiring the assets of the other practice and therefore the seller will have to assign contracts to you so that you can take them over upon closing. In a merger or stock acquisition, the entity being acquired frequently survives the transaction, and therefore no change to the parties to the contract will be required. Again, there may be certain particulars to your transaction that you will want to discuss with your transactional consultant and attorney. For example, we may find that a contract defines a change in ownership as constituting a transfer, a restriction which is potentially applicable to a merger or stock acquisition, and thus consent may be required.

Due diligence before a transaction involves a rigorous examination and evaluation of a medical practice’s critical documentation. It must be conducted before a binding agreement is signed between parties. This ensures that all risks have been disclosed and all opportunities are on the table before the transaction proceeds. Depending on the context of the transaction, you may also be interested in duration, pricing, indemnification obligations, warranties, or any number of other provisions. In keeping with this, we often look into ongoing liabilities arising from the contracts that will survive the consummation of the transaction.

Additionally, we want to red flag any non-compete provisions in contracts as they may result in unintended restrictions being place on you after the transaction is completed. Contracts on physicians and any other employees may need to be redone and thus the buyer will often have sensitive discussions with the seller during due diligence as it relates to those. If you have any questions regarding the documents, now is the time for the other practice to address your concerns.

Disclosure of critical business information is fundamental when conducting due diligence. The whole point of the exercise is to be thorough, and your transactional consultant should be assisting you with building a comprehensive list of questions for the components of the due diligence process.

Contract due diligence is just one part of the due diligence process, a process that is conducted to confirm and verify information that was brought up during transaction discussions, and to identify potential flaws in the opportunity and thus avoid a bad business transaction. Due diligence helps you understand the nature of a transaction, the risks involved, and whether the deal fits with your current practice and strategic plans. Essentially, undergoing due diligence is like doing homework on another medical practice and it is a critical process in order for you to make informed decisions. When you are able to gather important on a medical practice, there is a lower risk of unexpected legal and financial problems as part of the transaction.

What you need to know to reduce your risks in a merger or acquisition.

The due diligence of contracts

If you are an accountant, you may not be a fan of the generalizations made in this article. The article is designed for physicians as an overview of the topic of goodwill. We are not trying to make physicians accountants here, but rather to give them a high-level overview of what goodwill is and how it factors (or doesn’t factor) into a medical practice sale.

Notice we aren’t suggesting what goodwill “is”, because there is much variability, as we will cover throughout this article. In short, the purpose of goodwill is to compensate the seller for the effort she put into building the medical practice.

Broadly speaking, the value of a medical practice goes far beyond a collection of assets (e.g. medical equipment, office furniture, etc.) and inventory (e.g. medical supplies, office supplies, etc.). A medical practice has intangible assets such as practice brand, the reputation of the practice and its providers, its patient base, its loyal referring physicians, etc. These intangible assets are what go into the determination of goodwill. For medical practices, goodwill is often the largest component of the sale price (unless of course there are large included assets that are new). As an aside, there may also be other applicable factors in the goodwill of the practice such as copyrights, trademarks, patents, trade secrets.

When physicians are looking at pricing their practice for a sale, they will most likely have discussions with their accountant about the dollar amount attributable to goodwill. The same holds true for physicians looking to purchase a practice. The difference is the perspective about how much money should be allocated to goodwill. Indeed, unlike with the pricing of assets, there is more variability in the calculation of goodwill and thus it is often referred to as a “blue sky” calculation.

If you would like to know more about the methods behind calculating goodwill, you can ask your accountant about these:

When it comes to negotiating goodwill, the interests of the buyer and seller are at odds with one another due to tax implications. The two parties must agree on the allocation of the components of the price of the practice and, in part, this will depend on the advice each party receives from their respective accountants.

It is extremely important for this step that you get with your accountants because they will look at any personal tax implications for you as well as (in the circumstance of a buyer acquiring an additional practice) the financial standing of your existing practice.

As a general rule of thumb, the buyer wants to maximize the allocation to tangible assets which are generally depreciated over a 5-7 year period, whereas the value of goodwill is amortized over 15 years. The seller, however, usually desires to minimize the allocation of the purchase price to tangible assets. From the standpoint of the seller, the dollar amount allocated to goodwill is generally classified as a capital gain with lower tax rates than ordinary income rates.

At the end of the day, however, the dollar amount attributable to goodwill is a negotiating point between buyer and seller, regardless of who did the calculation or what method was used. Valuing a medical practice for an acquisition involves finding a price that is mutually acceptable to both the buyer and the seller. Naturally, the seller will want to ask as much as possible and the buyer will want to pay as little as possible. This is especially true with the goodwill component. In my experience, the buyer tends to feel the goodwill amount is too high and the seller tends to feel it is too low. Successful negotiations of the medical practice transaction seek to strike a reasonable middle ground.

Goodwill assigned to a departing physician

As previously mentioned, there are many factors that can be attributed to goodwill in the price of a medical practice. One of those factors is the following that a physician brings to the practice—this is one of the sticky points that can cause heated negotiations.

Undoubtedly, patients may come to a practice to faithfully see ‘Dr. Jones’ for treatment and referring physicians may be loyal to sending patients to the practice to see him too. However, how do we handle goodwill in the case where the practice has just one physician (‘Dr. Jones’) and he is retiring upon the closing date of the sale? As just mentioned, patients come to see 

, so when he is gone, there is no guarantee that the following will remain for the buyer (‘Dr. Smith’). Consequently, why should ‘Dr. Smith’ allow for an allocation to goodwill for this specific factor?

It is worth repeating that there are many factors that contribute to goodwill and thus I’m not saying goodwill should be zero dollars just because the buyer is retiring. Even if there is just one physician, there may be other providers such as nurse practitioners and/or physician assistants who do indeed have their own contribution to goodwill. Additionally, there are many other factors that may increase the goodwill dollar amount; you just want to think twice about allocating significant dollar amounts in goodwill to the departing physician.

Goodwill can include almost any intangible quality of a medical practice that makes it more valuable than just its assets. These could include word-of-mouth name recognition due to years of advertising, a great reputation for patient care, or anything else that contributes to the practice’s net revenue that cannot be accounted for based solely on its assets. Because of all this, it is important to have a group of skillful advisors on your team. An accountant is invaluable (whether you are the buyer or the seller) as she can assist with valuations and look out for your specific interests as they pertain to tax implications. A transactional consultant is invaluable (whether you are the buyer or the seller) as in addition to helping facilitate the entire process, he can assist in the skillful art of negotiations between the two parties.

A high-level overview of what goodwill is and how it factors (or doesn’t factor) into a medical practice sale.

Goodwill: How it factors into a medical practice sale

When you think of a physician practice acquisition, what comes to mind? Physicians often think of medical practice acquisitions as being messy like when big corporate entities are involved in such transactions. Consequently, physicians are frequently unsure about how to proceed with the purchase or sale of a medical practice, and who can help them through the process. Even if you think these transactions are more of a “corporate issue”, it is actually something physician practices should prepare for as well. Tremendous opportunities may exist in your area for such a transaction, leading to growth and/or staving off a competitive threat. It may also be a means of an exit strategy or succession planning for yourself. As a result, you should be educated on mergers and acquisitions, even if selling or buying (or merging) isn’t on your near-term horizon.

So how do you begin to think about these transactions? Here are some preliminary basics.

Just as with hiring personnel, fit is key. If the two practices have goals that are incompatible, merging them can be counter-productive. A thorough analysis of the compatibility of financial structures, patient base, referring physician patterns, and culture is extremely important. Do not rush this part.


Just because culture is an intangible factor, it doesn’t mean this aspect is any less important. Medical practices are like any other business, in that they have internal dynamics that can either help or hinder an acquisition. This is why it is important to speak with the staff (not just the physician) at the other practice. While you may not be able to discuss a potential transaction with staff members, you can certainly gauge how open to change they are and how easy, in general, they are to work with.

You need to ensure to start with a proper perspective, no matter which side of the table you are sitting at. Oftentimes (but not always!) a 

 is done on the target practice and a lot goes into those valuations, as I have 

. Just remember that emotions are high on this subject: sellers always feel the price is too low and buyers always feel the price is too high; sellers want a high dollar amount attributed to goodwill and buyers want to limit that amount. These emotions and misaligned perspectives are actually why many transactions fall apart during the negotiations.

Of course, a seller and a buyer are looking to accomplish different goals and have their own set of agenda items. That being said, here are just a few questions to ponder depending on which side of the table you sit at:

Which type of sale (asset or stock) is most beneficial to me?

What price can I realistically get for my practice?

Is there any buy-out to my other partners that must be contemplated?

Are there any obligations I have to employed physicians regarding sale of the practice and/or partnership path?

Is the buyer seeking financing for the acquisition?

What professionals do I have/need to assist me with the transaction?

What is a realistic price to pay for the practice?

How do I get the current staff of the target practice to remain on board?

How do I minimize loss of patients and disruptions with physician referrals?

What does a new financial pro forma (of the newly combined entity) look like?

What contracts need to be renegotiated (vendor and staff)?

What all needs to be accomplished immediately post-transaction (also known as the 100-day plan)?

Do you run a practice all by yourself? Do you routinely do medical procedures without the assistance of any other clinical staff? Of course not. So why would you attempt to go through a business transaction without some cavalry on your side?

Whether it is a merger, acquisition, or joint venture, professional advice is key. Acquisitions are complex and risky and so it is important to seek out a transactional consultant from the first stages when you are beginning to strategize and “kick the tires”. Much later in the process, you will also need to engage an attorney and consult with your accountant. Just make sure that your consultant and attorney have experience with transactions; this is not the time to engage those that work in the field of practice management.

Measurable metrics to review medical practice staff

With the everchanging healthcare landscape and the increasing competitiveness among physician practices and hospitals, many physicians are looking at acquiring other practices and bringing them into the fold. Unfortunately, we have often seen physicians who would like to jump to valuations or due diligence of a medical practice without having first established their own strategy as it relates to potential acquisitions.

Medical practice acquisitions are complex and nuanced, and mergers are some of the most difficult maneuvers to accomplish. As a physician practice owner, it is imperative that you are meticulous with your contemplations about a potential transaction from the very start. These are very daunting tasks, which when pulled off correctly amount to great success, but done haphazardly or without diligent forethought and preparation can spell disaster.

Physician group acquisitions must take place for strategic reasons, such as to improve competitive capabilities, expand footprints, achieve economies of scale, increase patient base, test new geographies, and enhance brand equity, rather than superficial reasons like tax benefits or to save oneself from market risks. Physician owners must have a clear rationale for a transaction or truly understand a deal’s impact on their practice’s long-term financial future. The transaction must be considered as a means to fulfill far greater strategic outcomes rather than a mere end in themselves. The challenge is to stay true to your strategic direction, not allowing yourself to be distracted by acquisitions that don’t keep you on the intended path.

Nick Hernandez, MBA, FACHE

Founder & CEO at ABISA, LLC

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