Adding a Medical Practice Partner: 8 Considerations (Part I)

Expanding the partnership ranks at a medical practice is a lot like getting married. Plenty have had cold feet before taking the plunge. Some jump into it quickly and are then disappointed when their partners aren't everything they had hoped for. The successful ones take their time, look for the right fit, are committed to the practice for the long haul, and are willing to work through any differences encountered along the way.

The following eight key issues should be considered by both the partner in the established medical practice, as well as the associate ready to make the jump to partner.

Issue 1: Culture Fit/Philosophy

Ideally, partnerships are long term. When the arrangement is good, life is good. When partnerships go bad, they can feel like never-ending prostate exams. Before anything else, associates need to think deeply about whether they share the same professional and business philosophies as the existing senior doctor. It's important to be like-minded about important issues such as how and when to invest in the practice. The practice's culture - and whether the associate feels comfortable with it - should also be considered. Practice ownership is not for everyone. Some associates have no desire to subject themselves and their families to the financial risk and the management responsibilities that come with practice ownership.

Issue 2: Due Diligence

Before buying into a practice, thoroughly review the documents provided by the senior doctor. Don't be shy about asking questions concerning all aspects of the practice: financial statements and patient records, personnel records, financial records, tax returns, bank statements, accounting functions, marketing programs, supply vendor records, leases, important contracts, etc. Understand the practice's expenses during your due diligence, and raise concerns if there are issues. Beware of existing partners who are dangerously free with a dollar. They might run an outstanding practice, but they have a tendency to run cash-poor because the owner has to have every new gadget and diagnostic tool, regardless of whether that equipment generates the revenue to justify it.

With the help of a CPA, analyze the practice's tax returns, financial statements, and bank statements. Perform a trend analysis, not only of revenues, but of the patient count as well. Carefully review the equipment list. Is the equipment up to date or will funds need to be earmarked for newer equipment? Is the equipment connected to a lease obligation? The bottom line: If you are considering buying into the senior doctor's practice, you need to thoroughly analyze the inner workings of the practice.

Issue 3: The Purchase Price

Establishing and agreeing upon the value of the practice when buying in is a major hurdle. It is essential to get a fair market independent appraisal of the practice at the outset to avoid frustration and disappointment with the outcome. It is common for buyers and sellers to get emotionally involved in the negotiations. However, both would do well to remember that open communication is essential. After all, both parties will be working side-by-side for many years, and a positive introduction of a new partner can make all the difference between the success or failure of the partnership and, thus, the practice itself in the long term. Any lingering animosity on either side over contentious negotiation or a less-than-fair deal can negate the benefits of a flourishing partnership.

Important factors that are generally considered in valuing a practice are: its location; the ability to effectively transfer goodwill to a future buyer; years in existence, and the stability of the practice; demand for the practice's services; the quality of the staff; and the practice's revenue growth.

Issue 4: Structuring the Buy-In and Financing Options

Structuring the buy-in, including how it will be financed, is one of the most important parts of the partnership arrangement. How the buy-in is financed is a key determinant of the new partner's long-term cash flow and, ultimately, his/her success. In most cases, the incoming partner will pay a portion of the initial purchase price - typically 10 percent to 20 percent - upfront and pay the remainder over time pursuant to the terms of a promissory note. Another option for the parties to consider is a "sweat equity" structured buy-in. Sweat equity refers to the junior doctor's contribution to the practice in the form of effort. In most instances, the junior doctor will be given an initial ownership interest at the closing (10 percent, for example), with the opportunity to receive additional ownership interests over a period of time (such as five years).

There is more than one way to structure and effect a successful buy-in. Much of it depends on the special circumstances of each buy-in. Obviously, the purchase price and the payment structure will have tax consequences for both parties that will need to be considered and addressed.

Next week, Barrett concludes his eight considerations which include agreements and restrictive covenants.

William Barrett is a partner at law firm Mandelbaum Salsburg and leads its medical/dental practice. He is recognized nationally as an authority in dental and medical practice law, with unique expertise in practice transactions, practice sales and purchases, associate buy-ins, financing options and workouts. E-mail him here.