Partnership Agreements

February 1, 2006

I am looking to hire an associate with a view to early partnership track. How do I best structure an agreement, including financial structure, management responsibilities, terms of buy-in, and so on?

Question: I am looking to hire an associate with a view to early partnership track. How do I best structure an agreement, including financial structure, management responsibilities, terms of buy-in, and so on?

Answer: The "best" agreement is one that makes both of you happy, so do what fits. But here are some things to consider:

1. Define exactly on what basis partnership will be offered. Most agreements include productivity measures, and many also mention involvement in management or community issues. For example, it will behoove you down the road to have a partner who understands the financial position of the practice so you might as well get this young physician involved. If he or she shows no interest in this side of things or you fundamentally disagree about the business objectives of the practice, it'll be a poor partnership. You similarly might define the call schedule and work hours, just so there is no bickering down the road.

2. Partnership timeline.Define when a decision will be made.Partnership in a medical practice generally takes about two years for general practitioners, and about five years for specialists.

3. Define the buy-in structure.If you insist on or need a buy-in structure your new physician doesn't feel he or she can afford, you might as well not even get started together. The actual cash outlay for new physician partners can range from zero to several hundred thousand dollars. If the employer pays a lower salary to the physician, and, as a result, makes money from the physician's period of employment, the employer can often afford a lower buy-in - or none at all, as, in essence, the employed physician has already bought in with the money he or she supplied the practice. If, however, the employer's net return from the physician's employment is relatively low, the buy-in price may be higher. If the physician negotiates a lower buy-in price, buy-out prices for retiring physicians may go down also. There is no set formula to determine whether a particular buy-in price is fair, but practice valuation typically takes three factors into account: tangible assets, intangible assets, and liabilities. Tangible assets are relatively simple to measure and include things like equipment and property. They may also include cash and accounts receivable. Accounts receivable may have to be broken down by payer, as some are more likely to be collected than others. Assessing liabilities is also pretty straightforward. It includes all debts, whether they are bank loans or paid vacation days still owed to employees. It's the intangible assets that cause problems. Also called goodwill, intangible assets include the practice's reputation, the loyalty of its patients, location, management systems - anything that will be passed onto a buyer but whose monetary value is hard to measure. This is actually being used less and less as a factor at all. Most often, practices use discounted cash analysis to put a price on all assets.

In essence, discounted cash analysis means the more cash a practice can bring in, the higher its value, but that value is discounted by the expected rate of return. Purchasers might also factor in the stability of the practice, whether the physicians associated with the practice will stay with it after its sale, competition, and the payer mix. Market comparison also can be used to set a price, but Gates, Moore and Co. has found that there is little accurate data around for comparables. There is a Goodwill Registry, but that information can be 10 years old and doesn't cover all states. The Healthcare Financial Management Association has other data, but it's usually not accurate enough to be the sole standard of measure. Both parties, therefore, should consult an attorney experienced in handling physicians' affairs or a practice consultant on this issue. A tax consultant should also be contacted because a taxable gain could result to the buyer depending on how the deal is structured.

4. Make it work now.You also should be prepared to do what it will take to get this physician up to speed and feeling like a partner. For example, if he or she is new to practice, you'll probably need to explain basic coding rules (or insist they take a course) and have them trail you for a few days to see how you maintain your productivity. It's also classic that a solo physician bringing in a new, potential partner isn't really ready to give up any authority, a recipe for disaster.

5. Business structure. Among the most common business structuring options for medical practices are the professional association (PA), professional corporation (PC), limited liability company (LLC), and limited liability partnership (LLP). According to the Bureau of National Affairs' Health Law & Business Series, "There is a growing consensus that the PC or LLC is superior to the partnership ... because it permits greater operational efficiency and affords its participants better protection from liability." For a good overview, see our Letters of the Law article.