Succession Planning for Group Medical Practices

Established multiphysician practices typically have succession plans that are driven by the opposing interests of the entering and exiting owners, who might be shareholders, partners, or LLC members. Consider the following:

1. Buy-in and buy-out. Entering physicians seek the lowest possible buy-in and exiting physicians want the highest possible buyout. That is not to say that either seeks an unfair deal, just that they have opposing interests. Therefore, structuring a reasonable buy in and buy out is critically important and often difficult in today’s healthcare environment. The biggest issue here has to do with assigning a value to practice goodwill. Does the practice have value in excess of its net assets?

2. Malpractice insurance. If a practice’s professional liability insurance is claims-made insurance, then the exit plans must include payment of the malpractice tail. Some insurance companies waive the tail in the event of the physician’s retirement. If this issue is not addressed, there could be significant dispute among the physicians because the tail cost is rising along with malpractice premiums in general. Both the practice and the physician must be aware of the potential for uninsured liability if the tail is not purchased.

3. Restrictive covenants. Practice departures that are real retirements do not usually raise restrictive covenant issues. Physician practice owners should not pay practice buyouts to physicians who leave or retire only to set up competing practices. This issue must be covered in the transition documents.

4. Real estate. Practices that lease offices from third parties may not be confronted with this issue. However, real estate investment is often a component of a physician practice and is usually not part of the professional corporation that serves as the practice entity. If the ownership is linked to the practice, then a buyout provision in the transition plan should be included. If not, then the remaining physicians must be prepared to deal with the real estate owners as independent third-party owners.

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