CONSIDER FACTORS OF JOINING A PRACTICE
BY STEVEN PELTZ, CHBC
Physicians are among the few professionals who tend to start their own businesses. While this affords them great flexibility in terms of establishing a working environment tailored to their liking, it also presents them with large responsibilities. Oftentimes, they find it beneficial for their practice and themselves to recruit a partner.
A solo practitioner's decision to hire a new partner stems from growing practical needs. Solo practitioners tend to resort to recruiting a partner when they find that the time they have is not sufficient for the number of patients they see. A second practitioner may be needed to take advantage of new opportunities. Older physicians nearing retirement may be looking for a younger person to eventually buy them out. These and other factors tend to lead solo practitioners to enlist new partners.
Owner's Financial Risks
While hiring a new practitioner can be very helpful, it can also be a risk for the established practice for the following reasons:
There may not be good chemistry between the 2 practitioners.
The new practitioner may not be a hard worker.
The new practitioner may not be someone who can effectively run the practice.
The new practitioner may have family or other obligations and may leave the practice before paying for their costs.
While there is risk involved for a practitioner joining a practice, it's the owner of the practice who takes on most of the risk associated with hiring a new doctor.
If you're a new physician joining the practice, the practice has to pay for your salary, Social Security, malpractice insurance, and health insurance. The practice will likely also need to hire additional staff, purchase equipment, and incur other expenses.
The owner pays for these expenses for several months before you generate a cash flow to pay for your direct expenses. If you leave after a short time, the owner has invested time and money in an investment that didn't work.
If you work out, then the owner is entitled to receive a return on their investment. This usually means you will generate collections above your costs and associated expenses. Those new profits that weren't there when the owner worked on their own are a result of your efforts.
If the owner offers you an opportunity to become a partner, the process generally follows this path. If there is 1 owner and they want an equal partner, they offer 50% of the ownership to Dr. New. If there are 2 owners, they offer 33 % of the ownership to Dr. New.
VALUE OF A PRACTICE
If you ask 3 people to value a practice, you usually get 3 different values. You may also get 3 different formulas to arrive at the value. When someone is going to become a partner, the value of the practice has to be determined. That value will hold for the entire buy-in process. Each time someone buys in, a new valuation should be determined. That value holds for the period of time it takes for Dr. New to complete their buy-in.
It would be unfair to value the practice during each year of the buy-in and have Dr. New pay more each year because they worked hard and generated more collections. They are buying into the practice that existed before their buy-in. The buy-in amount should not be too high, causing Dr. New to leave and set up a practice somewhere else. At the same time, the amount shouldn't be too low, making the owner feel as if they're giving their practice away.
If a practice has equal partners, they each own the same amount of the practice. Their compensation can be different, depending on the compensation formula. They have the same vote and share profits based on equal ownership. When someone new buys in, they each may give the new person the same amount of stock.
If there's a decision to be made and the 2 partners take opposite sides, it's essentially a stalemate. This is a very important point. In a business with equal partners, each has the right to make up their own mind. Usually, newer partners defer to senior partners, but only for a while. There is nothing stating that the senior partner's decision is always the best decision for the practice. Both partners must trust that their partner has the best interests of the practice in mind, even if they disagree.
Steven Peltz, president of Peltz Practice Management & Consulting Services, LLC, in Brewster, NY, has been working with physicians and hospitals since 1979. He puts on "Going into Practice" seminars for different residency programs and has spoken at national conventions on mergers, governance documents, and all the issues of practice management. He welcomes questions or comments at 845-279-0226 or firstname.lastname@example.org , or visit peltzpracticemanagement.com.