Partnership agreements: Why it may be time for an overhaul

March 27, 2019

Nine areas that every partnership agreement should consider.

When was the last time you reviewed your partnership agreement? Even if you are not currently contemplating new shareholders or partners, if you haven’t looked at your agreement in the last three or more years, now may be the time. 

Market forces have changed significantly over the last several years, and the partnership agreement you signed in the past may not cover issues like reduced responsibilities to accommodate work-life balance, retiring partners, or how to manage to value- or performance-based contracting in which one partner’s performance can determine if any performance payments get paid to the group at all.

From the perspective of business operations, let’s break out some of the key questions that you should consider in every partnership agreement:

  • Addition of new partners: Does the current agreement outline how you will add new partners or shareholders? Is there a buy-in? If so, will that be in the form of financial or sweat equity? Will the buy-in amount or term change (e.g., if it is practice value)? Has a method been determined for assessing that value and has it been incorporated into the agreement?

  • Division of duties: Will all partners carry equal responsibility and be expected to dedicate equal time to administrative and clinical duties?  Or is there one 'managing partner,' or even a Board of Directors? If so, how are those partners compensated differently? 

  • Reduction in responsibility: How will you address one partner stepping back from their obligations for reasons such as health or family issues or upcoming retirement? Are there clear terms defined to accommodate that, either in the form of reduced compensation or even the ability to hold onto partnership status?

  • General compensation: How will profits be shared? Will they be distributed equally or will there be a productivity component involved? What model will you use to determine that? (e.g., relative value units, revenues brought in, etc.) How might that model change over time?

  • Performance-based compensation: More and more often, we see payer contracts that have ‘value- or performance-based’ components attached to compensation. How will these group-based payments be distributed? Are there penalties to individuals that fail to meet targets, which may put substantial sums at risk for the group as a whole?

  • Individual risk: Is each partner responsible for their coding and documentation? In the event of an insurance audit that results in ‘take backs,, is the group liable for an individual’s errors?

  • Dispute resolution: How will disputes be rectified? For example, if one partner wants to expand or invest but the other does not, how will that be resolved? What happens if you simply can’t get along with a partner anymore-do you have the right to force them out? If so, is there a premium allocation to be paid to that partner in the event of this situation?

  • Withdrawal from partnership: Does the agreement designate how far in advance a partner wishing to leave the group must notify the other members? For example, retirement notice should given be at least 18-36 months ahead of time, and it may be prudent to consider that shorter notification periods could result in forfeiture of part of the buy out.

  • Different classes of shares: Do the senior partners retain voting rights while more junior owners remain non-voting shareholders?

Addressing your agreements from these angles will not only help you cover your bases in the event of unforeseen circumstances, it also ensures that you are providing the best ongoing governance of your practice for many years to come