what to look out for in a medical partnership
J Oncol Pract. 2007 Jan; 3(1): 41–44.
Joining a Practice As a Shareholder
Then, you're expecting an offer of partnership later 2 years working at an oncology exercise. How volition you evaluate the offer, and what should you look for in the shareholder agreement?
First, let's clarify some terms. Technically, "partner" applies simply to legal partnerships, which are few and far between in medical practices these days. Well-nigh medical practices are structured as professional corporations or express liability corporations (LLCs), where owners are shareholders, not partners. Yet, it is common in colloquial voice communication to refer to "becoming a partner" and "being offered a partnership," fifty-fifty when speaking of entities that are not legal partnerships. In this article, we also will use "partner," "owner," and "shareholder" to refer to an equity owner of a medical do.
Offset Early and Use Advisors
Figure 1
Jeffrey B. Sansweet, JD, LLM
To oncologists anticipating signing a shareholder contract, Jeffrey B. Sansweet, JD, LLM, a partner in a wellness intendance constabulary firm in Wayne, Pennsylvania, offers this tip: "Start early, and bug the senior people to get you all of the documents and all of the financials as early as possible—months in advance of when it's supposed to take consequence. These things tend to get complicated and a lot of times finish upwardly being put into place retroactively."
Figure two
Alice G. Gosfield, JD
Retain advisors who tin help y'all. "It's worth having a lawyer who is familiar with the laws of that state," says Philadelphia health intendance attorney Alice Chiliad. Gosfield, JD. "In addition, information technology's worthwhile having an accountant. The personal tax implications to a physician can be significant."
Sansweet adds, "Make sure y'all don't use your blood brother-in-police force who'southward a divorce lawyer or a criminal lawyer to wait at the agreement; use someone who has experience in health care. [The lawyer] doesn't have to [specialize] in oncology agreements specifically (that tin be tough to find), only [look for] someone who has feel in wellness intendance and medical purchase-in transactions. It's not just the legal issues; information technology's knowing the type of business and knowing what is important."
In addition to attorneys and accountants, some other excellent resource for immature oncologists is a business mentor—a senior medico or business person in the community who tin provide breezy advice and serve equally the "voice of feel" on fiscal issues as well as career matters. Ideally, a mentor should be from some other practice and exist able to provide objective advice.
Do Valuation
The practise is a concern and has value. Each oncologist is part owner of the practice, so in a shareholder agreement the value of the unabridged practice volition be stated and can exist calculated using many different formulas. Make sure the valuation of assets is reasonable and explicit, and be sure you understand how it was adamant. For example, was the value calculated by book value (the total value of all assets minus the practice debt), appraised value (if then, appraised by whom?), market value, or replacement value?
The value of the accounts receivable may be another component of the valuation. Is the value of the accounts receivable set at full value, or is it discounted for collectability? Some practices bear millions of dollars of bad debt or "uncollectibles" on their books as receivables, and a newcomer shouldn't be expected to take to buy in to these inflated "assets." The value of accounts receivable is especially important in oncology considering of the large invoices for expensive drugs processed through the practice's cash flow. Finally, if the corporeality of accounts receivable is used as part of the total valuation, be sure your own contributions to the receivables (while you take been an employee) are non included. A skilful accountant will empathize these issues, just not all attorneys do, and so you lot should take an accountant and attorney who piece of work together, or an chaser with experience in this surface area.
Sansweet advises, "As a inferior doctor, y'all should engage a health care lawyer, an accountant, or a medical practice appraiser—somebody who is very knowledgeable and experienced in that area—to examine the proposed buy-in price to meet if it'south reasonable and makes sense." Yet, he adds, paying for a split up appraisal of the exercise is usually not worth the endeavour or money. If the practice'south appraisement and buy-in amount has been set for several new partners earlier you, it's unlikely that the practice will change it. "Only doctors because partnership should look at the proposal and see if it makes financial sense, doing projections about how much income they will earn compared to how much the purchase-in costs."
Gosfield puts information technology this way: "The real issue is how viable the business organisation is. Is it a good investment? This is an investment, similar ownership stock, except riskier, because the corporeality you are going to ain far exceeds annihilation y'all will ever own on a publicly traded exchange."
Construction Your Buy-In
Your buy-in price will exist a per centum of the total value, unremarkably divided as among all of the partners. Thus, if there are already four partners, you would be the fifth partner, and the total do value would be divided by 5 to determine your buy-in amount. Sansweet says, "I would say in probably ninety% of the medical practices I encounter, the ownership shares are equal."
Still, as Gosfield points out, group practices take dissimilar cultures that influence how the ownership is divided. "Some are very egalitarian, where everyone owns equal shares," she says. "Simply characteristics of practice cultures are quite variable."
The grouping might structure your purchase-in over several years. For example, if the purchase-in is structured over 3 years, in the start yr you pay ane third of your full buy-in cost. The next year, you would pay some other third, and in the third year yous would pay the final third and become an equal partner with the others in the group. By and large, buy-ins spanning several years are structured as deductions from your annual salary. Thus, if the buy-in payment is $100,000 for each year, instead of paying greenbacks, your salary would exist reduced by $100,000 that year.
"Most of the time, the medico buying in gets a total, equal vote right away, even if paying the buy-in corporeality over time," Sansweet explains. "Only when the junior doctor is buying shares in increments, such as 1 tenth of the full buying amount, his or her vote is ordinarily proportionate to his or her ownership percentage."
Some groups accommodate a new partner without any buy-in per se. "They might have the doctor work for 4 years at a relatively low salary with no bonus, and then he or she becomes a partner with no buy-in," Sansweet says.
This is considered a purchase-in using "sweat equity." "They've basically worked their tail off for four years and have built a kind of disinterestedness through sweat as opposed to paying coin," Sansweet explains.
The construction of the buy-in is a disquisitional office of the partnership organisation. These are fundamental points to clarify about the buy-in:
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Will your percentage of buying be the same as that of the other partners?
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Volition your ownership include a percentage of the facility, equipment, supplies, and accounts receivable?
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If accounts receivable are used as part of the buy-in calculation, do they reflect the normal and expected pattern of income?
If you are paying the corporeality of the purchase-in during a period of time, the agreement should specify the interest rate, frequency, and duration of your payments. Consult your auditor about the revenue enhancement implications of your payback arrangement.
Conclusion-Making Dominance
Exist sure yous understand what kind of dominance you lot volition accept in do decisions. The governance structure and decision-making say-so is usually spelled out in the shareholders' agreement, but specifics could be covered in the corporation bylaws or the operating agreement of an LLC. Make sure you read and understand each of these documents.
"Control and decision making can exist a large issue," Sansweet comments. "It could involve big decisions, such as opening upward a new office, merging with another exercise, or hiring a new associate, or smaller decisions near function policies. Some decisions might require a unanimous vote of the shareholders or some sort of super majority, such equally 75%, while others may require a elementary bulk."
Be sure y'all are comfortable with your part in how decisions affecting the exercise will be made. A big practise may take an established governance structure, with officers or committees with authorization over matters such as office policies and fees, staffing, hiring and firing physicians, and participation in managed care contracts. In smaller groups, such decisions may be voted on by all partners.
Examine the Management of the Practice
Almost likely, you take been working as an employee with this grouping for 1 or 2 years, and you've had the take a chance to run into how things run. At present is the time to scrutinize such issues every bit an owner, not every bit an employee.
Ownership of existent estate tin become a divisive outcome. For case, sometimes the senior partners own the building beingness used past the practice and lease space to the practice. Be certain you obtain copies of relevant lease agreements. If the senior partners are charging excessive hire, the junior partners are likely to experience they are beingness treated unfairly. At present is the time to put such bug on the table for discussion.
Another issue that troubles numerous attorneys, practice direction consultants, and oncologists is the use of family unit members as exercise employees. As i experienced oncologist noted, nepotism tin create issues that tin far surpass money concerns. If the spouse is on the payroll, be sure the spouse'south salary is reasonable and that the patients are non beingness inappropriately directed to the spouse'due south mate. One attorney reported a example in which the wife of a senior doctor "came in i day a week and was paid a bacon of $50,000 a twelvemonth."
Income Distribution
Groups use different methods for distributing income amongst partners. Some do so equally, others use productivity measurements, and some use a formula that combines productivity and other factors. "The income distribution formula is some other cultural difference between groups," Gosfield notes.
Productivity tin can be calculated using numerous measures, such as how much revenue y'all generate, how many hours you work, or how many patients you lot see.
Sometimes the group gives weight to other factors in determining remuneration, assigning value to such variables as seniority, special training, research or teaching activities, and authoritative duties. A potential pitfall is inequality of ownership, Sansweet cautions. "Exist concerned about whatever sort of special rights that a senior medico may take that terminal a long flow of time or never cease," he says. "Ane instance is a direction fee that the senior partner gets for running the practise—over and in a higher place the regular income sectionalisation." Such actress income should be reasonable and correlated with additional effort and responsibilities.
Expense Allocation
How the practice allocates expenses to each partner is another important element of income that should be addressed at the fourth dimension yous sign a shareholder agreement. "The profit-sharing formula volition turn to some degree on expenses," Gosfield points out.
Listed below are accounting methods that might exist used for allocation of expenses. Sometimes combinations of these methods are used.
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Equal assessment. The net income (gross revenue minus expenses) is distributed equally to all shareholders. This works best when all physicians have approximately equal schedules and responsibilities—that is, when everyone makes most the same contribution to the practice.
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Direct price allocation. The expenses incurred by each partner are calculated separately and deducted from his or her share of the gross revenue. This arroyo tin can exist helpful when sure equipment or staff are not used by all of the oncologists.
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Indirect cost allotment. Fixed overhead costs, such as those for rent and utilities, are charged to each doctor, usually equally a per-square-pes charge.
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Allotment based on time worked. This method tin be used to accommodate physicians who work office time.
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Allotment as a per centum of productivity. The percentage of expenses charged to each physician equals the percentage of revenue generated. Thus, an oncologist who generates xxx% of the income will exist charged 30% of the expenses.
Sansweet explains that the details of the income distribution formula and allocation of expenses may non be in the shareholder agreement itself. "Those issues demand to exist dealt with, but it varies as to what form it is in," he says. "Information technology could be an attachment to the employment agreement or a separate bounty understanding. Sometimes it's just a printout from the office manager or practice accountant, and not even formally incorporated into an agreement."
Partnership Termination and Buy-Out
Although your focus now is joining the group as an possessor, you don't know what the future holds. Voluntary or involuntary termination, death, disability, retirement, and bankruptcy are all circumstances that would end your partnership interest.
The agreement should brand clear how the amount of your buy-out (your equity) would exist calculated on termination, how long it would be before yous are paid in full, and how much interest yous would receive on the balance due until it is completely paid off. In addition, the contract should accost how shared assets, including equipment and real manor, would be handled.
Recollect, every bit an equity shareholder you will besides be responsible for buying out the share of whatsoever partner leaving the group. "The buy-out is a huge issue," Sansweet remarks, "especially if somebody is joining a exercise or buying in to a practice where some of the other physicians are close to retirement. The buy-out construction is very of import. Typically, there is what'southward called a force buy-sell. If someone leaves for whatever reason—retirement, death, moving to another state—the remaining shareholders take the obligation to buy that doctor out. The purchase-out is typically paid over time and, for tax purposes, usually part of it is structured as payment of stock, and part is structured as deferred compensation."
Nigh of the fourth dimension a contractual restrictive covenant, or noncompete clause, is part of the employment agreement.i But aspects of the restrictive covenant are likely to use to the shareholder agreement. For example, the restrictive covenant prohibiting a competing practice may no longer utilise to full shareholders (those who have completed their purchase-in), but the buy-out may be reduced or eliminated birthday if the partner leaves and competes.
Utilise Your Judgment
"It's similar a marriage." Both Sansweet and Gosfield chose these words to describe becoming an equity shareholder in an oncology practice.
"Doctors shouldn't be buying in if they think information technology'southward a bad investment," Sansweet concludes. "If it's non the correct feel, don't do information technology. Become somewhere else, even if y'all experience like yous may be starting over."
Gosfield emphasizes that the people are more important than the legal contract. "The nearly important affair, really, is how comfortable you feel with the people y'all're working with. Many bad contracts actually don't ever present problems, because the people you're working with are decent human beings. In other instances, yous can accept a brilliantly drafted contract that the parties you lot're dealing with will ignore anyway, and always have. All this folderol about contracts is important, but in the concluding analysis, a contract is merely every bit good as the volition of the parties involved to follow information technology."
In the final assay, Gosfield stresses, "This is about people; this is about people yous are casting your fate with."
Reference
Articles from Journal of Oncology Do are provided here courtesy of American Lodge of Clinical Oncology
Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2793729/
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