This is the time for careful observation. Does the newcomer have excellent clinical skills and bedside manner? Does he or she generate a similar amount of revenue as the existing partners? Is the doctor willing to accept constructive criticism and improve performance if needed? Does this person inspire your trust, respect, and confidence?
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Compatibility and trust are crucial. Does the individual work well with the existing partners, staff, and patients? Does the new physician share a common vision with the other members of the clinic? Does this person offer helpful input during discussions and contribute to decisions that affect the clinic? If you were to retire tomorrow, would you feel confident leaving the practice—and your patients—in this person’s hands?
A potential partner needs to care deeply about the practice, and not just see it as a place of employment. Look for someone who is motivated and wants the clinic to thrive rather than simply maintaining the status quo. Someone who is “partner material” should put the best interests of the practice above their own self-interest—for example, making an investment in a new piece of diagnostic equipment, even though it will cut into profits.
Do not offer the new doctor a partnership if you have serious reservations at the end of the “engagement” period. Although you may feel obliged due to the doctor’s years of service, you should not add a partner who will not benefit the practice. Additionally, you want to avoid the possibility of a separation down the road, which is almost certain to cause financial and emotional damage, and potentially added legal problems and expenses.
The Partnership Agreement
Negotiations for partnership arrangements should begin as early as six months before the effective date. If negotiations last longer than expected, the partnership documents may be applied retroactively. In practices that already have two or more partners, the new partner will often be asked to accept the same terms as the existing partners. Key issues to consider when drafting a partnership agreement include:
- The buy-in: How much the new partner should pay for his or her share of the practice will be based on the value of the practice’s tangible assets and its average earnings. The new partner may pay up front, over a period of time with interest, or by accepting a percentage reduction in income over a period of time. A combination of any of those payment approaches may also be used. Typically, the new partner buys into the practice over a period of three to five years. Structuring the new partner’s buy-in as a percentage of their income has several benefits. First, it avoids disputes about the exact value of the clinic’s assets. Second, it links the new partner’s buy-in price with the practice’s performance, because his or her income depends on the practice’s profits.
- Division of net income: Most practices divide their net income among partners in one of three ways. The first approach is to divide all profits, based on what percentage of the practice each physician holds. The second is to divide the income based on each physician’s relative productivity, as measured by his or her fee collections. The third uses a combination of the two. For example, 50% of the clinic’s net income may be distributed equally, and the other 50% may be distributed based on relative productivity. Alternately, there may be an equal base salary for all partners, and bonuses based on relative productivity.
- Decision-making powers: Some practices require a 70–80% supermajority, rather than a simple majority vote for major decisions. Examples of major decisions include adding a new partner, hiring or firing a physician, changing the practice’s location, large expenditures, and acquiring, selling, or merging a practice.
- “Senior doctor right”: In a two-partner practice, the senior partner may retain a “senior doctor right” for a mutually agreed-upon period. In the event of a separation, the senior partner would be entitled to keep the practice’s name, tangible assets, medical charts, and location. The senior partner may also have the power to break deadlocks on certain decisions.
- Termination: A partner should not be vulnerable to termination without cause. What constitutes justifiable cause for termination should be included in the partnership agreement. It should also stipulate how large a majority is needed to terminate a partner. For example, a practice with six physicians may require a unanimous vote to terminate, while a larger practice may only require a supermajority vote of 80%.
- Losing a partner: Partnership agreements should include provisions for a partner’s retirement, resignation, death, or inability to work. A buy-out agreement may be included or may be negotiated later.
- Debts: If a practice has existing debt, the new partner is usually asked to sign on as a guarantor along with existing partners. However, the agreement should absolve the new partner of responsibility for actions that occurred before he or she gained partnership status.
Deciding to add a partner to your practice is an exciting and potentially lucrative move. Understanding what goes into this type of agreement will protect you, your practice, and your future partner.