By Catherine Lightfoot, Director of Healthcare, EEPB
When a physician embarks upon succession planning with regard to his or her practice, it should also include careful consideration of buy/sell (a.k.a. buy-in/buy-out) agreements. What to include. What to watch out for. When and how to execute. Both scenarios require professional assistance (legal and/or accounting) to ensure proper and thorough planning in the present, with provisions to modify in the future as things change…and they always do! In this article, you will see that these inextricably linked instruments are critical to strategic planning over the life cycle of your business and beyond. In these unprecedented times, it is more important than ever to create new, or review existing, succession plans and related documents to not only have them in place but to ensure their relevance.
Succession Planning
As discussed in my prior article on Succession Planning (HMJ June issue 2021), it all starts with establishing the valuation of your practice. This typically involves looking at three years’ worth of financial data to arrive at an accurate number that reflects your assets, earnings, expenses, debt, and don’t forget, goodwill (a less tangible but nevertheless important aspect). The sooner you get started with calculating your practice valuation, the better. I recommend taking the time to clean up itemized expenses, an area that is frequently neglected since it can significantly impact your valuation figures.
Once again, COVID-19 is having an effect on these valuation numbers. The most important element in the valuation process is your cash flow; however, physician movement is changing how that looks. I have seen doctors move back to hospital employment, while others continue to work remotely, and still, others opt for 100% telehealth positions out of state. So, the valuation that you prepared a few years ago may not accurately reflect today’s evolving medical practice scenario.
Internal vs. External Buy-In Agreements
Although some employees wish to become partners, some may stay in employee status. Of those partners, many want/expect the opportunity to “buy-in” over time (via years of paycheck deductions), making the path to succession relatively seamless and predictable. Buy-in agreements with internal partners are separate from employee contracts but are relatively straightforward, including an anticipated schedule of complete buy-in. The alternative is to negotiate a lump-sum buy-in with an external provider or financial entity interested in investing, which involves a more complex process, including copious documentation to fulfill the buyer’s due diligence (i.e. Letter of Intent (LOI), Acquisition Agreement, Ownership Agreements, and Employment Agreements) before a decision is even made. Although the level of detail and timeline may vary depending on the type of succession, buy-in agreements are extremely important, as they could potentially be in place for as long as 30 years.
Buy-Out Clause
Most buy-in agreements include a buy-out clause that specifies the terms according to which a partner leaves the practice due to retirement, resignation, disability, or death. These provisions affect the value of your practice at times of departure, insofar as other partners will typically buy back ownership shares of any departing partners. Since this can impact your financials, buyouts may be renegotiated. Buy-out agreements can also include a non-compete agreement (NCA) to restrict a departing partner’s freedom to join another practice or establish one of their own for a specified period of time.
Plan Ahead, and Continue to Plan
Getting an early start is critical in succession planning, as it can go through several iterations. And the landscape of your practice, itself, will change over the years as partners are added, making it necessary to revisit the plan periodically (and in some cases, start all over). Furthermore, buy-in negotiations can become contentious, dragging things on for months or years, especially when competition among family members and big egos come into play. In such instances, hiring a healthcare lawyer, business consultant, or accountant can be very helpful to maintain a sense of objectivity.
Conclusion
How many of you are approaching your final years before retirement and do not have a succession plan? These past few years have been hard on healthcare providers and burnout is real. Do not be one of those unfortunate owners who are ready to retire and do not have a successful reward for all of the years you invested in your practice.
At the end of the day, succession plans need to have an undisputed value, readily available documents and records, and an identified valid candidate(s)—from inside or outside the practice. The buy-in agreement needs to be carefully prepared to cover the management of the practice, partner voting rights, and other governance issues that will protect the livelihood of you and your successor(s). This should not be a “rush” project by any means, as it defines the future of your hard-earned practice. Allocate enough time to get it right. Planning ahead on identifying key agreement terms, candidates, and values will streamline the process and make your succession planning a success.