When you graduated medical school, retirement was likely the last thing on your mind. But if you have since moved on to private practice ownership, it’s time to consider what will happen to your practice in the event of death, disability or retirement. Keep in mind, the unique nature of medical practice ownership necessitates pre-planning for both the expected and unexpected. “Succession planning is more complex in the medical field because only licensed practitioners are able to run these businesses,” says Lauren Maxie, managing attorney with NC Planning in Raleigh, North Carolina. “Unless they have followed you into your field, you cannot have a spouse or child listed as your successor.”
Succession Planning for Group Practices
Multi-physician practices are at a distinct advantage when it comes to succession planning. In these cases, the practice can create a buy/sell agreement between the different physicians within the group. “The buy/sell agreement is a legally binding document that says, ‘If any of these events were to occur’—and this would include death, disability, retirement and any number of additional triggering events—‘I am automatically bought out of this company by the other licensed practitioners in this practice,’” says Maxie.
The buy/sell agreement includes detailed provisions on valuation of the practice as well as payout terms. “Once the writing is on the wall regarding who is leaving and who is staying, it can be difficult to come to an agreement on value,” says Maxie. “The doctor who is retiring often thinks the practice is worth significantly more than the guys who are staying, so you do need to include a provision on the terms that govern valuation. These provisions most often involve bringing in an appraiser to look over the company’s financials.”
A second provision dictates the payout terms. Jeff Cohen, Esq., a healthcare attorney based in Florida, explains that there are usually two ways to pay for a practice when selling to a physician associate or junior partner: on a pre-tax basis or on a post-tax basis.
In a pre-tax purchase, the employed or associate physicians who are becoming the owners of the medical practice have a portion of their salaries or bonuses applied to the purchase price. In a post-tax purchase, they get their income, pay taxes on it, then write the seller a check.
A second consideration is the time period over which the payout is made. “It is pretty rare that the payout would be over a one-year period because that causes too many problems for the business,” says Larry Friedman, CPA, MT, director of tax services at Barnes Wendling CPAs in Cleveland. “Paying some sort of deferred compensation over time to the departing physician not only allows the business to continue, it also allows the practice to claim tax deductions for the buyout. Conversely, if the departing owner just sells his shares to the remaining physicians, he gets good capital gains tax results but it’s a bad tax result for the business.”
Sellers usually favor getting paid upfront with the buyer’s after-tax dollars, but will often compromise and agree to accept at least a portion of the purchase price on a pre-tax basis. This is an important area of negotiation as your practice crafts an agreement.
Even with an approved buy/sell agreement in place, disagreements can occur. To ensure a smooth transition, Matthew J. Silla, ASA, CFA, principal of Barnes Wendling, who runs the company’s business valuation department, recommends reviewing the agreement annually with all parties. “Make sure they understand what’s in it and that everyone has some concept of what the business is worth,” he says. “If there is a huge gap in understanding regarding the value, you may want to bring in an independent appraiser to perform a valuation.”