Tips for succession planning for private practices

June 25, 2016

Nearly 40% of doctors in the U.S. are aged 50 or older, and one in four are 65 or older, according to the American Medical Association. For these baby boomers, retirement is a fast-approaching reality. As they ponder their next life phase, doctors who own private practices face several challenges unique to the profession.

Nearly 40% of doctors in the U.S. are aged 50 or older, and one in four are 65 or older, according to the American Medical Association. For these baby boomers, retirement is a fast-approaching reality. As they ponder their next life phase, doctors who own  private practices face several challenges unique to the profession.

Physicians can only pass their business on to another physician, naturally limiting the number of available potential buyers. And this small pool grows smaller still as a large number of younger doctors are turning away from private practice to work for large healthcare providers. 

At the same time, the physician’s personal finances and plans for retirement may be inadequate. Doctors typically have a high level of student debt that must be paid off before retirement savings can start, and the length of schooling involved generally means that doctors don’t reach their peak earning age until much later in life. 

Between needing to balance business finances with personal retirement priorities, many private practice owners may emphasize the former, leaving themselves vulnerable.

For many physicians, simply acknowledging these obstacles is the first step on the path to discussing and creating a business transition later in his or her career, and, following that, retirement. As with all matters financial there can be substantial advantages to starting early. Below is a road map to help you get going.

Preparing for a sale

Establishing a succession plan is one of the most important business decisions the owner of a practice can make. The succession plan should provide for both ownership transfer and management continuation in the event of disability, death or retirement.

The structure of the succession plan will depend on the type of practice involved. A physician in solo practice, for example, will need to consider hiring a junior physician who can take over the practice, or finding a potential buyer or merger partner. As a last resort, a solo practice may need to wind down gradually if no other options are available. 

A group practice, in addition to the options noted for solo practices, has the possibility of a potential physician partner buyout. Another increasingly common scenario is to sell the practice to a hospital or a health system.

A formal buyout arrangement, often referred to as a buy-sell agreement, establishes how much the selling or retiring physician partner will receive for his/her interest in the practice upon the occurrence of certain trigger events, such as the death, disability, retirement or voluntary withdrawal of a physician from the group practice. 

 

Whether it involves a solo or a group practice, basic steps should be considered in preparing for the succession of the practice ownership to try to ensure that maximum value is preserved: 

 Plan early for practice succession and retirement. To help preserve, enhance, and extract maximum value from the practice, succession planning should begin early, preferably seven to 10 years before retirement.

 Assemble a team of competent advisers who have in-depth knowledge and experience working with physicians, their practices, and their unique planning needs. A qualified tax advisor, attorney, and wealth adviser should form the core of the team.

 Implement a plan to retain, recruit, and reward key physician and non-physician personnel to shore up the practice and to aggressively grow its gross and net income, especially during the seven to 10 year period prior to retirement.

 Approximately six months prior to retirement, engage a qualified appraiser who specializes in medical practices to ascertain the value of the practice.

 Consider how a practice’s underlying real estate should be owned. A practice that owns its real estate may subject that property to liability and creditors’ claims flowing from the practice. Proper ownership of a practice’s underlying real estate (i.e., in a Limited Liability Company), whether by the solo physician or a group of physicians, may provide  added protection of the real estate and an additional source of potential growth and income into retirement.

Preparing yourself for retirement

On a parallel track to planning for practice succession, the practice owner should develop and implement a complementary wealth accumulation plan to supplement the income expected from the sale of the practice. 

This plan might include, among other things, taking full advantage of tax-deductible contributions to qualified plans (defined contribution and defined benefit plans), building up an investment portfolio outside of a qualified plan and utilizing certain financial instruments to provide tax-advantaged income.

 

Structuring the transition

There are many ways to finance the sale of a practice. Consider early on how the acquiring physician(s) will compensate the retiring doctor or doctors. 

Different structures have different tax consequences and create different demands on cash flow. Typically, the seller needs to be compensated for a lifetime of building equity in the practice; the buyer needs to have sufficient capital to invest and grow.