In today’s market, partnerships come with a number of risks and uncertainties, leading physicians to question whether they truly want to be tied to a practice for the long term.
In today’s market, partnerships come with a number of risks and uncertainties, leading physicians to question whether they truly want to be tied to a practice for the long term. Physicians should evaluate partnership offers closely to ensure that they are not assuming excessive liabilities and obligations.
When physicians are offered partnership, it is typically in the form of an initial proposal, describing the terms upon which they will be admitted as a partner. The offer will usually propose that the newly admitted partner “buy in” to the partnership over time and suggest that the practice deduct a percentage of this buy-in amount from the new partner’s distributions over the next few years. Scrutinize this offer closely, paying particular attention to the following items:
What type of equity interest is being offered?
The interest should have full rights to voting and control and be of the same type and amount as that of the existing partners.
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How long does the partner have to repay the buy-in?
Ensure that the agreement spreads the payments over sufficient time, so the physician still makes enough to cover bills and expenses.
Is the buy-in amount too high?
A large buy-in amount may be unreasonable and create an undue financial burden on the new partner.
What happens if the practice is sold before the buy-in amount is repaid?
Review the documents to make sure that any unpaid buy-in amount is forgiven in a sale and perhaps even modified in something like an economic downturn.
Before accepting any offer, physicians should conduct their own due diligence, with the assistance of their legal and financial advisers. If your potential practice will not disclose financial statements and tax returns for the past few years, it could mean that the practice does not intend to be entirely open. If you are buying into a practice, you need to know its assets and liabilities to obtain a full picture of its financial health. Look to see that the practice does not have considerable liabilities, like large lines of credit and debt. For instance, a practice may have been funding the existing partners’ distributions with draws on a line of credit. A review of the financials may also disclose unfunded pension obligations, another indication that maybe the practice is not as financially sound as the partners have led you to believe.
Many practices will require the new partner to sign on as a personal guarantor of the practice’s debt obligations and may have the new partner sign onto the real estate lease of the practice. Becoming a personal guarantor of the practice and signing onto leases, in and of themselves, is not an indication of financial distress. On the contrary, if a physician enjoys the benefits of partnership, he or she also should share in the risks of ownership.
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Finally, if the numbers provided by the practice reveal that the new partner still will make a substantial amount in distributions, even after funding his or her buy-in obligation, it may be that a larger buy-in amount is reasonable. However, if a physician finds that the financials do not support the buy-in amount or if the physician will be changing positions in the near future, partnership may not be the right option.