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

In part one of this blog, attorney William Barrett outlined four key considerations for medical practice partnerships: culture, due diligence, the purchase price, and structuring the buy-in and financing options. Here, he shares the final four considerations for both those considering partnerships and a medical practice considering expanding its partnership base.

Issue 5: The Purchase Agreement

The purchase agreement will need to address: 1.) liabilities arising from the acts of other doctors in the practice that occurred prior to the actual buy-in (the closing date); and 2.) general liabilities of the practice (such as debt, real property, and equipment leases). In addition, the purchase agreement must also address whether the junior doctor, who is buying in, will be required to guarantee any existing loans or leases.

The purchase agreement will also likely include the following terms: percentage of ownership interest; purchase price; loan contingencies; due diligence; and representations of the senior doctor (concerning pending litigation, power and authority of the seller, taxes, compliance with laws and regulations, etc.).

Issue 6: The "Partnership" Agreement

The terms of the partnership agreement address how the practice will be managed and who will be responsible for the practice's day-to-day operation. In most cases, the senior doctor will want to retain responsibility for the day-to-day management. However, the partnership agreement can call for the new partner's input on "major decisions" that are identified in the agreement. The agreement should also address exit strategy issues that are set forth in the "buy-sell" section of the agreement. The parties need to establish under what circumstances a co-owner (or his or her estate, if deceased) would be forced to sell ownership interest, and on what terms. As part of the process, the partnership agreement must identify a formula to value the ownership interest and provide for payment terms that will either require the owners to buy insurance to fund a purchase (such as life insurance or lump sum buy-out disability insurance) or will specify the length of time for payment (for example, 60 months) and the rate at which the unpaid balance will accrue interest.

Issue 7: Employment Agreements

Each of the doctors should have written employment agreements, describing how each will be compensated and what benefits they are to receive. A practice's compensation structure is the most important part of its culture and one of the hardest things to get right and keep right. The employment agreements will set forth how each doctor can be terminated for "cause" (such as a conviction of any felony, suspension or termination of the doctor's professional license, etc.). The agreements will also set forth the restrictive covenants (non-competition, non-solicitation, and confidentiality) that each doctor must comply with for an agreed upon period of time (such as three to five years) in the event their employment with the practice is terminated.

Issue 8: Restrictive Covenants

One issue to be addressed at some point in the negotiation process is whether a new owner should be subject to a non-competition/non-solicitation covenant if he or she leaves the practice. The short answer is a definitive "yes." Many co-owners view the restrictive covenant negatively, but a restrictive covenant protects the co-owners equally from a departing co-owner competing with the practice. Restrictive covenants that arise as part of a "partnership" agreement are typically deemed enforceable if reasonable in scope (the geographic radius of the restriction) and in duration (the term of the restriction, typically three years or less).

Conclusion

The buy-in transaction has a natural flow and process. The doctors should focus on practicing and let their advisors advise them. At the end of the day, though, associates considering partnership buy-in have to decide what's best for them, not what is best for their lawyer or accountant. Each deal and practice is unique, so be careful when comparing buy-in deals at different medical practices. It is important to engage an experienced medical transactional attorney and CPA who are familiar with the issues to guide potential partners through this important process.

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.