Whether you are a solo practicing physician or a member in a larger group practice, it’s wise to begin thinking about succession planning. I have found in my consulting practice that many physicians seem to wait until the last minute to address the issue of succession. With advanced succession planning however, you can come to a financially beneficial conclusion and ease the transition of ownership.
Solo physician practices
Individual physicians must pursue the future of their practice with intensity and thoughtfulness. The good news is that the extra effort can have a direct effect on the financial rewards of succession planning. This process requires realistic evaluation of your financial needs and the emotional effect of passing the practice on to a new physician versus simply closing it.
Three Succession Planning Options
Typically, individual physicians have three basic options for succession planning:
- Slow down gradually and close the practice when the financial rewards are no longer worth the effort, selling the equipment for a nominal value.
- Maintain a full-time schedule until the day of retirement and then sell the practice to a single recruited successor or a potential buyer.
- Recruit a successor early, build the practice until it can support two physicians, and then sell the remaining half of this new multi-physician practice to a third physician.
The timetable for each of these three basic options depends on how long it takes to recruit a successor (or find a buyer for the practice), if one is needed.
The first option, which doesn’t require a successor physician, is the quickest. Winding down and closing the practice will result in a decline in compensation and, ultimately, a nominal sale price. If you happen to find an eager buyer while you are winding down the practice, you can simply shift to a variation of the second strategy, selling the practice to a single successor upon retirement.
Selling the practice to one physician produces a fair market value practice purchase. There is reduced compensation during the transition period because your one physician practice must support the income of two physicians.
The timetable for the second option varies based on whether you are recruiting your successor from a resident or fellowship program or recruiting a physician that is already in practice. The third option requires not only recruitment of two physicians, but also enough time between those recruitments to successfully build a practice to accommodate additional physicians, so it takes twice as long as the second option.
If you decide to pursue an option that involves selling to a third-party, you should obtain a practice valuation from an experienced financial/practice valuation advisor as a first step. This gives you a realistic expectation and a basis for negotiations that can’t be dismissed as simply a personal opinion of your own practice’s value.
Finally, use other area resources. Discuss your plans with the hospital or hospitals at which you practice, for example. Hospitals in underserved areas need to maintain physicians. Hospitals in competitive markets need to maintain or build their physician and patient bases.
Larger group practices
Established multi-physician 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:
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?
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.
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.
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.
Have questions? I’m here to help.