For a physician, an agreement to purchase a partner is an admission to practice ownership and management as well as a milestone in a medical career.
For a physician, an agreement to purchase a partner is an admission to practice ownership and management as well as a milestone in a medical career. The agreement determines many of the most important aspects of a physician’s career, including compensation, participation, management responsibilities, and the terms under which they may leave practice through retirement or resignation.
However, the agreements don’t always get the scrutiny they deserve, according to health lawyers who have represented practices and doctors in contract negotiations. “A partnership agreement is a critically important agreement that could be in place for 30 years or more and it should be approached that way,” says health care attorney Jeffrey Sansweet of Wayne, Pennsylvania.
What the buy-ins cover
Purchase agreements are different from the employment contracts that physicians sign when they join a practice as associates. However, employment contracts often stipulate the length of service and other conditions necessary for an associate to be considered or automatically offered a partnership.
Usually, the terms of the buyout agreement are negotiated separately, after a doctor has been in the practice for two to five years. This period allows the Associate and Partners to evaluate each other and the Partners to learn the Associate’s revenue generating capability. Of course, not all doctors wish to become associates, some preferring to remain salaried.
Negotiations are generally non-litigious, says Patrick Formato, a health care attorney in Lake Success, New York. “By the time they get to membership, associates know what the status is and what the membership is,” he says. “And if the practice really values the doctor and they want to get there, they will get there.”
However, there are exceptions. Sansweet says he’s watched negotiations drag on for years: “It can get heated when you’re dealing with ego, money and power.”
The amount of negotiation may depend on the practice and how often it adds partners. A larger practice that consistently performs chords will likely operate from a pattern that it’s unlikely to change significantly, Sansweet says. However, a practice that hasn’t added a partner in a long time or seen its circumstances change is usually more willing to start from scratch, he says.
Unsurprisingly, lawyers interviewed recommended that physicians wishing to become partners hire a healthcare attorney to negotiate on their behalf. “Don’t let the firm’s lawyer tell you what to do,” Sansweet says, adding that having lawyers negotiate can avoid tension between physician associates and the partners they hope to join.
Determination of value
Because prospective partners are buying a share of the practice, determining the value of the practice is key to a fair deal. There are three common ways to calculate it.
The first is the market method, which bases a practice value on recent sales of nearby comparable practices, such as how real estate agents value homes. Health business consultants typically collect practice transactions through annual surveys, broken down by specialty, location, and other practice characteristics.
The second is that the income method bases the value on the profitability of the practice. It is preferred by accountants and often used in conjunction with the market method.
The third method is based on the practice’s assets, such as equipment, real estate, valuable inventory, and any affiliated businesses, and calculates what it would cost to build the practice from scratch. Any debt owed by the firm is subtracted from the value.
The practice should open its books to a physician associate during negotiations, including all existing appraisals, additional companies owned by the practice, leases, income, tax returns, balance sheets, debt and buyout agreements for current partners, says Sansweet, adding, “It’s a red flag if they’re not ready to share everything.
Practice valuations often include goodwill, the value of a practice in addition to the value of its net tangible assets. Things like patient lists, convenient location, community reputation, and other factors can be included.
Buyouts are generally cheaper than before, Formato says, explaining that as more practices are acquired by hospitals and health care systems, those that remain have lost value. Typically, when a practice is acquired, the employment and purchase agreements are canceled and replaced with employment agreements with the new owners, he says.
The buy-in payment can be structured in several ways. A lump sum payment is relatively rare. More typical is payment by years of payroll deductions from the new partner or a mixture of both.
The importance of redemptions
Buyouts — the terms under which a partner leaves the firm through retirement, resignation, death, disability or other means — are part of most buyout agreements and are equally important, Formato says. Although these are usually negotiated as part of buyouts, many agreements include opportunities for renegotiation when a partner decides to leave or retire.
They typically include the notice period a partner must give the practice before leaving, which can be up to 180 days, Sansweet says. And the redemption of the new partner is not the only one that counts.
To really determine the value of the practice, prospective partners should also review current partners’ buyout agreements, particularly if they are approaching retirement age. These agreements detail the terms under which the firm will buy out the ownership shares of the outgoing partners. Depending on the cost, the financial impact can be severe.
Buyouts can sometimes be renegotiated to reduce the cost of the practice, Formato says, adding that in some cases a practice will try to break the deal to preserve its viability. Buyouts guaranteed by the partners themselves can be harder to change, while those guaranteed by practice can be easier to break, he says.
Other terms to consider
While purchase and buyout terms are the most important, purchase agreements also cover other key topics. One of them is the power in the management of the practice. A new partner buying an equal share of three current partners should get an equal vote with the other three, Sansweet says. However, it is not uncommon for larger firms to have multi-level partnerships with senior members who retain more influence.
Purchasing agreements can specify the administrative responsibilities of the new partner, working and on-call hours, holidays, etc. They can also provide job security by preventing partners from kicking someone out of their ranks without cause.
Takeovers may also include non-competition clauses that restrict a departing partner’s freedom to join another firm or establish a new one. However, Sansweet says, these are unenforceable in a growing number of states.