Partner Pain

May 1, 2009

One partner wants to retire; the other two want to buy him out. The only problem: They can’t agree on the terms, and things are getting heated.

Q I am a partner in a very successful three-physician family practice. Legally, we are a partnership but would like to form an LLC.

I’m about 40, another partner is in his 50s, and the third is in his 60s. The most senior partner is looking to retire. We currently have no buyout agreement or really anything in writing about the partnership. As part of becoming an LLC, we need to have some sort of buyout or secession arrangements.

But we simply can’t agree on terms. It seems like no matter how the discussion goes, ill feelings and angst result.

The senior partner feels his practice is worth a lot of money, specifically a minimum of his annual take-home, plus a third of the receivables for three years, plus a third of the hard assets. My other partner and I feel it is only worth what can be generated from it or at most what an incoming partner would pay to buy in, about the first-year salary.

I just spent the last five years buying in and don’t want to spend another five years with buyout payments.

The problems seem insurmountable.

A Readers, this is why you should create legally binding succession agreements now. You absolutely need formal agreements in place concerning buyouts, reducing workload as physicians age, buy-ins, noncompetes, what happens if someone is fired, what happens if someone dies or quits before retirement, etc. It is much better to have this all worked out before it’s a real pocketbook issue for any one individual in the group.

But, as to a solution given the current circumstance: There is, as you intimate, a real connection between the buyout and the buy-in of another physician. In both cases, things ain’t what they used to be. The trend is toward a low, flat rate for both.

What is that rate?

In primary care, I’ve seen flat rates from $1,000 to $50,000.

Another method is to base the amount on the value of the practice’s hard assets and a share of estimated A/R. The structure correlates to compensation. Many practices now pay based on productivity, so that the new physician has to generate enough revenue to create a salary, with less risk to the other physicians. Others combine some base salary, basically pulled from the new associate’s salary in years one to three, with productivity-based compensation.

If you set buy-in too high, you will have trouble recruiting. As you know perfectly well, young physicians come into practice with an enormous debt load, and many join a practice just to get an income only to leave once they are more established. Revenue can be relatively low, too, so a big buy-in can effectively eliminate a physician’s salary. Why would they stay then?

Buyout fees might be the same as buy-in. You could decide to spread buyout payments over several years and state that, in any given year, it should not exceed a certain percentage of net income (say, 4 percent). That reduces your risk and burden.

It is, of course, not feasible for your departing physician to burden the practice so heavily that it fails. It is in the senior physician’s own best interest to make the terms something you can live with. Otherwise, you have to understand your limits. Would you be willing to leave the practice rather than accept the terms he sets out?

One note on his desired structure: Most hard assets in practices, apart from real estate, depreciate so quickly as to have very little real value. What does a used exam table go for? Not much. You can have a quick look on eBay to get a precise number, but, regardless, you shouldn’t pay the senior physician for the original full value.

Really, though, the possible combinations and ways to share the risk over time are endless. What’s important is that everyone agree that the goal has to be the continued survival and success of the practice. Otherwise, nobody gets paid. From there, it’s all negotiation.

An experienced consultant can help with the negotiation, a practice valuation, and bring fresh ideas to the debate. They also may be able to warn you about unexpected downsides of any agreement you might come up with.

Since you are talking about your income and retirement, this is one place it really does not pay to be pennywise and pound foolish. It’s worth paying for help.

Pamela L. Moore is director of content and strategy for Physicians Practice. Moore has been writing for physicians on practice management issues for 10 years, and she is a recognized speaker and commentator on healthcare management. She can be reached for solutions at pam.moore@cmpmedica.com.

This article originally appeared in the May 2009 issue of Physicians Practice.