Considering a Private Practice with Partnership – Part 2

Whether you are a newly trained physician eager to find a private practice to join or own a private practice and are thinking about bringing on a partner we hope to provide some things you’ll want to consider.
Let’s first address the physician who is evaluating a private practice option.  Contrary to popular belief private practice is not a dinosaur.  While many opt for the perceived security of hospital employment private practice in certain circumstances maybe a superior option and offer its own form of security.  In most if not all instances starting out by joining a private practice is likely to begin as an employee of that practice with an opportunity to become an owner or better put shareholder.  The choice to pursue a private practice often comes down to economics and autonomy.
When evaluating a private practice where ownership is offered common sense and due diligence is required.  At Pacific Companies we have evaluated private practices for the purpose of recruiting that first-time associate who will journey on the “path to partnership” 100’s of times over nearly 3 decades.  Our goal is to create a match that will last between the new physician and the established physician / practice owner.  To this end we look at key financial performance numbers over a multi-year period to assess growth and financial viability or the practice.  We look at things like gross revenue, collections, overhead and many more numbers as they compare to similar size practices.  Additionally we quantify “the need” for an additional provider as well as the how.  The how is literally how will this new physician build a practice and where will the patients come from.
Beyond the review of financials and more subjective “need” and “how” we ask for and review working agreements that will establish the frame work for the path to partnership.  These documents include everything from an employment agreement to a buy/sell agreement.  There is more than one way to structure a partnership or path to partnership however there are a few basics.
The basics include determining the value of the practice and what percentage of ownership is available.  The methodology of buying in or the “buy-in” as well as the “buy-out” should be documented as well.  Depending on the future plans for the practice there should be a shareholder’s agreement as well.  Many practices hold ancillary revenue generating equipment, facilities or real estate in a separate entity, usually an LLC.  The potential for ownership in these assets should be clearly delineated in advance as well.
Finally there are the more pedestrian elements to consider including both clinical and non-clinical support staff, a clear determination on revenue and expense distribution and eligibility requirements for partnership.
Now let’s talk about the owner/shareholder side of the equation.  Much of the above pertains to the established practice owners as well.  Specifically, engage an attorney who can develop the necessary documents referenced above and the goal of creating an opportunity for a new physician, associate, employee, partner that is appealing and therefore likely to yield success in the recruitment effort.
When a physician owns a solo private practice, he/she must consider the future. and start “succession planning” because if there are not new younger physicians coming in and joining a practice, the practice will eventually cease to generate revenue once the current provider retires. So, if a physician has a large practice built up and wants it to continue to thrive, the best way to do this, is to bring on a partner. This works best partnering with younger physicians who can grow into that partnership. This allows the original practice owner to have more flexibility, stay in the practice and over a period of time scale back their day to day involvement, as they get closer to eventual retirement. The other thing this does is potentially creates a more economically viable practice by splitting the fixed portion of the practice overhead in half.  We believe that a well executed succession plan will ultimately result in greater value being extracted by the original shareholder(s) over an extended period of time.
Some owners hesitate to add an eventual partner fearing that bringing on another physician may cannibalize their practice. There is the potential for this at least initially but evidence tells us, both anecdotal as well as looking at economics, that the increased availability of a service will increase its demand. By bringing in another physician,whatever the specialty, you will most likely be attracting new patients that were not coming to the practice before and lower the practice overhead per provider in the process. The timing of bringing on a partner is another important consideration.  It is best to do this when you have at least 5+ years left before retirement, as this gives you substantial time to oversee the practice and reap the benefits of the growth as well as transition existing patient to the new physician.
So, if you are a practice owner thinking about bringing on a partner/associate, make sure to prepare your practice for this by developing the necessary legal documents, agreements, and employment arrangements. These are all considerations that need to be taken into account, as your potential partner is most likely going to have an attorney look over everything to see if this is a beneficial opportunity.
If either of these scenarios is something you’re considering, give us a call and we will be happy to expound on this.  We look forward to hearing from you.