Succession Planning

Succession Planning

According to the American Medical Association nearly 40% of doctors in the U.S. are aged 50 or older, and one in four are 65 or older. For many physicians,  retirement is a fast-approaching reality.

One of the toughest challenges facing a small medical practice is succession planning. Physicians must negotiate their way through unique legal challenges specific to their profession.

A large practice group may have multiple owners and well established procedures for succession, but many small or solo practices do not have a clear direction or set pipeline of potential successors waiting to take over.

At MedGC we can provide the legal guidance necessary to make a good succession plan and at the same time ensure that your current patients continue to receive the care they expect.

Physicians typically have four options when making a succession plan.

Like any other business, a medical practice often represents a large portion of the owner’s net worth. A physician’s retirement years can rest on the successful transfer of ownership. We work with physicians to make a strong succession plan so that they can properly monetize and value their practice.

Without a plan a physician may only get a fraction of practice’s value when its patients are merged with another practice or lost entirely to gradual dissolution. Active planning takes time to develop and mature and must be done well in advance of an exit.

A buyout by a partner requires strategic planning and is typically done when a practice first forms. To accomplish a successful partner buyout the practice must have an operating or shareholder agreement. The agreement will have the terms and conditions governing how a partner exits.

A well drafted agreement will cover how the practice is valued and the time and manner in which a physician can exit. We suggest that the practice periodically review the buyout provisions and make necessary adjustments to meet the ever-changing needs of the practice.

Establishing a succession plan is one of the most important business decisions a practice owner can make.

Provided a succession plan for a junior associate begins with hiring the right associate. For this reason, it can involve more planning and can be more difficult than selling the practice to an outside party.

Physicians must determine if the practice has sufficient volume to handle hiring an additional associate. Additionally, when hiring, steps should be take to evaluate if the new hire is capable of running the practice.

Choosing this exit strategy can provide great flexibility for the exiting physician and it allows them to maintain control over the day-to-day management of the practice. This can also provide for the best transition of the patient base. This strategy, however, requires the exiting physician to take on certain training and management duties to ensure the associate properly trained.

Strategic, long term planning, is best in this case and basic steps should be considered in preparing a succession plan that transfers ownership to ensure that maximum value is preserved.  To preserve and extract the maximum value of the practice, succession planning should begin early, preferably 7 to 10 years before retirement to ensure a smooth transition.

All practices, from a simple family practice to a complex group, need a succession plan. A Buy/Sell Agreement is an essential tool in a good succession plan. Proper planning greatly helps during times of transitions or when issues arise

One of the major issues in any Buy/Sell agreements is valuation. We have tools and resources that help a practice determine the proper value of their practice. Additionally, we can craft language in operating agreements or shareholder agreements that spells out the valuation process is determined.

In recent years that has been a flurry of activity for hospitals, larger practices and even private equity firms acquiring closely held practices.

Selling to a merging with a hospital or large practice has advantages and may offer significant benefits. When considering this option, a practice groups needs to know exactly what they are getting into.

The bottom line is not necessarily the best option and many physicians don’t count all the conquests of such a sale. If this option is desired, planning ahead and preparing for the inevitable due-diligence associated with such a transaction requires time and effort.

A strategic plan should be implemented several years ahead of time to ensure all aspects of a potential sell are know and accounted for. Often these deals require the selling physician’s group to remain actively involved for several years after the sale to ensure a smooth transition. Integration can take time.

Something else to keep in mind is that these deals typically involve some payment structure spread over a defined term. Expect an initial payout and then an earn-out period for a few years.  Another element to think about is the appropriate salary after the sale, during the transition period. These deals can be financially attractive and reduce the uncertainty associated with managing your own practice.