Dr Smith has been practicing as a solo provider in New York for many years. Although he currently has a very successful practice, because of personal circumstances, he is ready to retire. As retirement approaches for Dr Smith, what are his options with regard to his medical practice? He essentially has 2 options: sell the practice or permanently close the office.
In the event a physician or a practice manager chooses to close the practice, many states (such as New York) have requirements that must be adhered to. For example, a physician may need to transfer his or her records to another physician who will serve as the custodian of records. Furthermore, the physician may be required to notify his or her patients that the practice is closing, among other things, to avoid being charged with abandonment.
Although the provider would like to sell his practice, the reality may be that it will not be worth as much to a potential buyer, because that buyer does not know the patients; as a result, there will likely be attrition with respect to the patients. Unfortunately, although many physicians find themselves in a similar situation, this can be avoided by planning ahead.
An Overview of Succession Planning
The best way for a practice owner to maximize the purchase price for the practice is to have a physician who is already associated with the practice purchase it. Because this physician would be familiar with the day-to-day operations of the practice, the patients, and the location, it will ultimately be most valuable to that individual. As such, if a physician is currently a solo practitioner, the best advice is to hire, before retirement, a physician employee who will ultimately buy-in as an owner of the practice and will subsequently buy the physician’s interest in the practice. Although this process is feasible, it takes time and effort; therefore, physicians must start planning at least 10 years in advance.
In addition to hiring a physician employee with the intent of that individual eventually purchasing a share of the practice, it is imperative that physicians take steps to ensure that their practice is valuable to maximize its selling price. Essentially, the most important assets of a practice are the space (lease), equipment, employees, and patients. As such, physicians need to secure a long-term lease that includes the ability to be assigned; this also applies to equipment, as well as an electronic medical record system.
Furthermore, to maintain the value of the practice, physicians should continue to treat their patients until they are ready to retire. All too often, when physicians decide to “wind down,” they decrease their patient base, which typically decreases the value of their practice.
Forming a Business Entity
Although many physicians operate their practices as a solo practitioner using their personal tax identification numbers, it is recommended that physicians form a business entity. Forming a business entity is a good strategy, because it relates to succession planning, as well as to general asset protection while minimizing the individual physician’s liability and exposure. Although a legal entity does not provide liability protection from professional negligence or malpractice, it shields physicians from liabilities that result from the actions of others. One example is a patient who slips and falls in the office and subsequently sues for the injuries sustained.
Rather than being sued personally, the legal entity will be sued, and the physician’s personal assets will not be at risk. Although commercial liability insurance would likely cover such an occurrence, having a legal entity further insulates the physician’s personal assets. Other examples may include landlord and tenant disputes, disputes with vendors, and liability associated with an employee of the practice or another physician or owner of the practice.
The type of business entity under which a physician can choose to practice includes partnerships, professional corporations, and professional limited liability companies. Each type has its own advantages and disadvantages in terms of personal liability protection, tax treatment, flexibility, and administration. For this reason, it is important that physicians review all the details with their attorneys and their accountants before making a final decision.
Hiring a Physician
As noted above, to maximize the value of a medical practice, it is recommended that practice owners hire a physician with the goal that one day that physician will become an owner of the practice. Before hiring a physician employee, practice owners should check all the potential employee’s references to ensure that this individual will be a good fit; he or she will have access to the practice’s confidential information and will have direct contact with patients.
As such, it is crucial that a well-drafted employment agreement be in place to outline the relationship of the parties and to protect the practice’s confidential information and patients. Ideally, it is recommended that the employment agreement contain a restrictive covenant provision and a nonsolicitation provision to prevent the employee from opening a competing practice in the same vicinity as the practice, as well as from soliciting patients, employees, and referral sources in the event that employment is terminated.
The Buy–Sell Agreement
If the physician employee’s relationship with the practice is going well, the practice owner may consider offering the physician employee an opportunity to become a shareholder, partner, and/or member (depending on the type of entity) of the practice. Before offering the physician employee this opportunity, practice owners must consider what the physician’s buy-in will be, which is based on the value of the practice.
It is recommended that practice owners speak with a certified healthcare accountant or appraiser about such valuation. If the practice is lucrative and has a high valuation, the physician employee may be more willing to pay top dollar to have an ownership interest. If the practice is not financially sound and is not valuable, a physician employee will not want to pay a high amount.
If the physician employee accepts the offer for an ownership interest in the practice, the physician owner needs to make sure that an agreement is in place between the parties (ie, a partnership agreement, shareholders’ agreement, or operating agreement, depending on what entity the physicians render services through). The buy–sell agreement ensures that the business interest of a deceased, disabled, or departing owner is effectively transferred in accordance with predetermined, mutually agreed-on guidelines. As such, the arrangement can be structured whereby the buy-out for retirement may be significant and higher than if the practice was sold to a physician who is not associated with the practice. Furthermore, the arrangement can be structured so that the retiring physician would have the ability to work part-time during retirement if he or she so desires.
Buy–sell arrangements take many forms, and each has its own legal, tax, and financial ramifications. The key is to find the agreement that best fits the needs of the physician’s business and family. However, on its own, a buy–sell agreement is not effective unless the agreement is also properly funded.
Indeed, an unfunded buy–sell agreement may cause severe financial hardship as a result of legal obligations that cannot be practicably fulfilled. Although most physicians are keenly aware of the need to purchase individual disability and life-insurance coverage, few physicians are cognizant of the variety of available insurance policies that are designed to help meet the needs of self-employed physicians and/or the shareholders of a medical practice.
Retirement can be a very exciting and scary time for physicians, because of the many decisions that need to be made. To that end, it is in the best interest of the physician to retain a team of professionals who specialize in healthcare, such as attorneys, accountants, and financial advisors, to prepare for the future.