Plan Ahead for a Retiring Medical Practice Partner

July 19, 2015

Do you have a plan if one of your partners in your medical group retires? If not, start devising one today.

Last year, our practice had a senior partner retire. This is the first retirement we've had since I have been with the practice for the past 22 years. We are part of a larger multi-specialty medical group, so our practice is a non-equity ownership. So while the remaining partners did not have to buy out our retired colleague, in fairness, we had to create some sort of retirement package.

Several years ago, we created a practice agreement that spelled out how the practice will deal with a retiring partner. This process was challenging for me because as I am likely the next partner to retire, I of course wanted to make sure I got a fair package. Since that will be years from now, I also have to ensure that the remaining partners and practice are not harmed from the financial impact of the payout.

Our plan is to give our retiring colleague a percentage payout of her final salary amount. This will be a flat amount paid annually over three years. The other option was a gradually reduced percentage per year for the three years. As part of the negotiations, we all agreed to a slightly larger percentage of her salary in lieu of sharing ongoing practice profits with the retiring partner.

Obviously, she will receive her accounts receivable (A/R) that she earned as well as her percentage share of A/R generated by non-owner providers. Deducted from that will be her portion of the liability. Finally, she will receive a payout for her share of practice hard assets (furniture, computers, etc.). The resulting amount will be paid over two years to ease the financial burden on the practice.

This is our solution. If your medical practice has not had a retiring partner, start talking now about how you will handle this situation well in advance of the actual event. I have a few suggestions:

1 . Each partner should contemplate their individual expectation with respect to retirement, including a time frame that they might be retiring. Have each partner write these down and then discuss as a group.

2 . Get an independent evaluation of practice worth, including hard assets as well as accounts receivable.

3 . Discuss various ways the retiring partner could be paid for their portion of the practice worth. Be mindful of ensuring the practice financial viability going forward.

4 . Will you be buying out the retiring partner or will you pay a percentage of their final salary. Will the practice pay this in a lump sum or with installments over time?

5 . If there is the possibility of more than one partner retiring within a short time frame, discuss ways to handle this situation for the benefit of the retirees as well as the practice.

6 . You don’t need to reinvent the wheel. Surely there are other practices in your area that have had partner retire. They would likely share the way they dealt with the circumstances.

7 . Consider getting professional advice from a financial planner with expertise in medical practices.

8 . Make sure that your practice participates in retirement savings such as 401(k).

9 . Have a celebration in honor of the retiring physician to remember his/her contributions to the growth of the practice, because each one of us hopes to retire someday.