Ophthalmology Business

DEC 2012

Ophthalmology Business is focused on business topics relevant to the entrepreneurial ophthalmologist. It offers editorial, opinion, and practical tips for physicians running an ophthalmic practice. It is a companion publication of EyeWorld.

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T here are two ways for a physician partner to exit a medical practice: the planned transition and the unplanned transition. The great majority of partnership documents I have seen address, in some form, the planned buy-out of a partner. However, many partnership documents I have reviewed have failed to address when an unplanned event triggers the buy-out of a partner. Planned buy-out A planned buy-out is addressed in most partnership/partner agreements. It typically specifies—just like a buy-in—how the partnership share is to be valued and paid out. A planned buy-out is an orderly process where the departing partner has provided proper notice and the practice can prepare accordingly. Under a planned buy-out there should be little to no disruption in patient care, practice productivity, or financial performance. Unplanned buy-out An unplanned buy-out is usually triggered by an unforeseen event. Some—but not all—of the reasons for an unplanned buy-out could be: • A partner's death from accident or sudden illness; • A partner's disability from accident or sudden illness; or • A partner's withdrawal from, or the termination of, his/her employment with the practice without proper notice. Additionally, there are unforeseen legal issues that can cause an unplanned buy-out: • A partner being named as an individual in any lawsuit or legal proceeding that may damage the reputation of the practice; • The partner's disqualification from the practice of medicine; or • The adjudication of a partner's bankruptcy, an assignment for the benefit of the partner's creditors, or the administration of the partner's assets in any type of creditor's proceeding. In addition to all the above, the partners themselves may instigate an unplanned buy-out for administrative reasons, such as: • A partner being "voted out" of a practice for a reason outlined in the Partner's Agreement; or • A severe reduction in a partner's contribution to the practice, drastically altering the practice's financial performance. Ramifications of an unplanned buy-out The two areas most obviously affected by an unplanned buy-out are the practice's reputation and/or the practice's financial situation. If the unplanned buy-out was triggered for legal or disciplinary reasons (i.e., the arrest or conviction of a partner, disqualification to practice medicine, etc.) then the practice's reputation may be affected, and the loss of the partner's productivity also likely means the practice's ability to treat patients and financial performance is affected, particularly if the departing partner had a unique skill set within the practice. A practice may engage the services of a PR firm to address those issues that may affect its reputation, but what about the financial aspect? If one doesn't have provisions in place addressing the unplanned exit of a partner, a practice could be hit with a double whammy of losing the exiting partner's productivity while also having to find the funds to pay for that partner's whole buy-out. Key-man insurance may cover some of the circumstances (and buyout) surrounding the unplanned exit of a partner, but it would be very unusual for such insurance to cover all of the possible scenarios. What then? An absolute worse case scenario is where a practice may be legally liable for payment of a full buy-out but financially can't afford to make the payments because of the unplanned loss of the departing doctor's productivity. The result could be the messy dissolution of the practice—an unpleasant outcome for the departing partner who was hoping to receive buy-out funds as well as the partners who wish to continue practicing. With that in mind, I take the position that if proper notice isn't given for the buy-out, some or all of the departing doctor's goodwill may be forfeited and excluded from the buy-out. Since the departing physician isn't available to transfer the goodwill in a timely manner, it simply follows that not all (if any) of the goodwill should be paid out. In this way, the practice—whose financial performance may be hit by the unplanned loss of the departing doctor's productivity—isn't put into a bigger financial bind by having to fund a full buy-out. In an unplanned transition, a practice may be able to pay for the departing doctor's share of tangible assets and A/R but, under some circumstances, greatly reduce or eliminate what they may pay for goodwill. Summary The departure of an established physician partner from a practice can be unsettling, even more so when the departure was unplanned. While the planned buy-out can be addressed, it is the unplanned buyout that looms as potentially dangerous. Failing to consider the ramifications of an unplanned buy-out can be severe for all involved. OB Editors' note: Mr. Ruden is an Accredited Valuation Analyst, MedPro Consulting & Marketing Services, Scottsdale, Ariz. Contact information Ruden: bruden@medprocms.com December 2012 • Ophthalmology Business 13

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