By Eric Resnick

Published November 2007

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You have created a profitable practice which serves the community that employs dozens of people and treats hundreds of patients. The hard part of the business cycle is over. But do you have a plan in place to survive financial shortfalls and emergencies? Are shareholders best-positioned for what happens after exiting the practice?

How much cash does a practice need to function? A practice can have a robust patient list, excellent facilities, staff and expertise, but without a reliable cash flow, it may have difficulty operating. Or at the very least, the shareholders may have to endure some withheld paychecks. A practice official must have the capability to fiscally run a practice or plan with a professional who can assist in obtaining financing.

A practice should plan for cash crunches and obtain a line-of-credit. This bank loan allows a practice to borrow up to a limit established in the loan agreement. Cash is deposited and withdrawn as much as you like. Interest, which is determined at a variable market rate, is accrued only against what is borrowed daily.

Medical practices sometimes find it difficult for financial institutions to lend to them due to a lack of capital. Asset-backed loans such as equipment or buildings can serve as collateral. The only other common, significant practice asset that can be collateralized under a loan agreement is the practice’s receivables, typically at a discounted rate. The last resort to guaranteeing a loan would be collateralizing against officer personal assets.

Qualified borrowers should seek loans where the Small Business Administration (www.sba.gov) acts as guarantor. The SBA backs loans that banks usually do not support. Certified Development Companies are SBA-certified nonprofit organizations that package, close and service SBA-guaranteed loans.

When accepting new partners into a practice, a solid employment agreement should be in place at commencement of employment. Included in the agreement, other than the usual employee duties and compensation, should be non-compete clauses. These clauses limit where or when an individual practices immediately after leaving the practice and also denies solicitation of practice employees. Other elements to an agreement are non-solicit clauses of practice patients, confidentiality clauses that protect practice intellectual property and a probationary period which allows the agreement to be voided after signing but prior to a specified date. The probationary clause lets both parties out of much of an agreement if things are not right from the start.

Without a doubt, patients like to see the same doctor on each visit and having a continuous staff is an advantage to maintaining a practice’s image. Finding good help can be more costly, at times, than maintaining the current staff when considering training and recruiting costs of replacements. "Set a good tone at the top," says Dr. Wilbert Warren of Philadelphia Health Associates. "Always have an open-door policy to address your employees’ concerns. Be flexible when it comes to providing time off for employees for personal matters, with or without pay, depending on compensation policy. After all, most doctors are family members too and should be able to relate to conditions that arise." These understandings lead to goodwill from employees and develop good morale.

Offering employee bonuses is an incentive for good performance. Bonuses should be merit-based and are best defined through a defined bonus program. The bonus program should be prefaced that the bonus is tied into overall practice performance. Be careful when offering employees bonuses – after a few bonus periods, employees may feel entitled to no less than the prior period bonus if not more than the prior year. What is meant to be a good thing can be turned against an employer. Defining the program upfront can offset unrealizable employee expectations.

Insurance coverage should be sufficient for the standard property and professional liability exposures. But a practice should also consider covering itself for liabilities such as employee discrimination, business interruption, crime (which includes not only theft of property, but also forgery and pilfering of electronic information) and catastrophic losses that exceed the general policy. Remember that most states require workmen’s compensation insurance which covers employees for lost wages as a result of a work-related incident.

Who will run the practice if an owner is suddenly out of the picture? How will the transition to the heirs or spouse be managed? How will you pay for an emergency?

Practitioners invest resources keeping the practice afloat, but they often do not pay as much attention as they should to the distant future. A proper succession and/or business continuation plan should be evaluated at least every three to five years. Proper business valuation and risk mitigation strategies should be part of this process.

As a business owner, it is critical to always have an exit strategy. More options create more leverage while fewer options equate to lost dollars. Ego and reality often conflict when a business owner tries to sell a business without proper planning. A business in the eyes of the current owner may be worth several times more than what the actual market will bear.

Two partners who never have had conflicts can find themselves in an uncomfortable position when the practice changes its ownership structure. A Buy-Sell Agreement establishes a predetermined business price and a buyer for the business interest; verbal agreements are difficult to enforce, so all Buy-Sell agreements should be in writing. An attorney is essential to produce this binding agreement. Every time an owner joins or leaves a practice, the agreement must be revised. At least two individuals should be designated for safeguarding the location of the agreement.

A business valuation should be performed in conjunction with a Buy-Sell Agreement. A Business valuation is a process applied by a qualified valuation expert to determine the fair market value of an owner’s interest in a business. Working with the proper business consultant will insure that you are on the path to a proper exit.

Once the Buy-Sell Agreement is in place, a practice should consider insuring itself for the disability or death of an owner. Insurance protects the cash flow of the practice in the case of a disability or satisfies financial expectations of a spouse or heir in the event of death. Insurance proceeds provide immediate liquidity to a business owner that may otherwise not be available.

"Certain buy-sell insurance life insurance policies have a feature called a Business Exchange Rider allowing ultimate flexibility when adding or subtracting key employees," says Keith Campbell of Campbell Financial Group, LLC in Exton, PA (http://www.campfg.com). Keith explains, "A Business Exchange Rider provides a surrender charge free exchange of a life policy for a new one on a different insured. This allows a business to maintain key-person or buy-sell insurance without concern for losing built-up cash value with a change of insured. Any gain in the policy may be taxable at the time of exchange."

During a career, disability is more common than death, although life insurance policies are more prevalent. About 30 percent of all people ages 35 to 65 will suffer a disability that lasts at least 90 days and one in seven will be disabled for five years or more, according to America’s Health Insurance Plans 2004.

Disability insurance pays an insured person an income stream when that person is unable to work because of an accident or illness. Pay out is based on a percentage of wages over the period of disability. Critical care insurance fills the gap that disability insurance does not cover or would make the disability premium cost-prohibitive. It covers critical diseases such as cancer, heart attack and stroke among other life-threatening diseases. Critical Care may be stacked on top of existing disability insurance to help supplant additional needs.

Building a relationship with a qualified agent is as important as establishing one with a good lawyer and accountant. You need an agent who has access to as many insurance companies as possible and who acts in your best interest.

Steps to ensure a practice’s future have costs, but peace of mind has its own value. A proper plan will insure that today’s responsibilities do not turn into tomorrow’s headaches.

Eric Resnick is an associate of Margolis & Company, a regional CPA and healthcare consulting firm located in Bala Cynwyd, PA. A member of the firm’s Healthcare Advisory Services Group, Eric specializes in areas of compliance, corporate and individual tax planning, payroll tax, and the use of specialized data extraction software.