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When to firm up partnership arrangements

By Jeffrey B. Sansweet, Esq

When I speak to groups of physicians, particularly residents and fellows, about negotiating employment contracts and co-ownership arrangements I am always peppered with questions about the details of becoming a partner and the buy-in, even though that may not occur for several years. In this article, I will not explore the substance of a buy-in arrangement, but rather the timing of, and to what extent, the arrangements are discussed.

There are various times the co-ownership arrangements can be discussed and firmed up. A physician may be an associate pursuant to an employment contract for anywhere from one to four years (although the most common pre-ownership period is two or three years) without any discussion of co-ownership until near the end of the contract term. The arrangements may not be finalized for several months, which could mean a retroactive effective date of co-ownership.

At the other end of the spectrum, a group practice may go over all the details of co-ownership with a new physician at the time of negotiating the employment contract and may even include those terms in the contract.

Alternatively, discussions may begin a year or so prior to the targeted co-ownership date, with enough time to have everything calculated, agreed upon and executed by the effective date.

With all these variations, what should a resident do? How far should he or she push for “partnership” details? What should the practice do? When should it make a commitment? The final answer is, it depends (after all, I am an attorney).

From a resident’s standpoint, if you are looking for a long-term relationship, you should at least ask a lot of questions about the practice’s future plans. If you are joining a sole practitioner who has never had an associate or partner, it is likely that the details of the buy-in, net income division, management, buy-out and other issues have not even been contemplated by the practice owner. It is still worth asking whether the owner foresees an equal partnership after a certain number of years. You should also ask about the practice finances. If the owner starts to get offensive, it may be time to stop pushing if you have a gut feeling that the owner is a fair and reasonable person. On the other hand, you don’t want to take a position, possibly move your family across the country, and get “sticker-shock” when the offered buy-in is astronomical.

If you are joining a larger practice that has more than one owner, it is more likely that the practice has a very good idea of what the co-ownership arrangements will look like. Many practices, absent unique circumstances, treat each new owner consistent with the previous owners. This can be good or bad for the new owner. If the previous deals were not particularly reasonable, it does not give you much leverage to change things. However, if the previous new owners each negotiated a little bit better deal, you reap the benefits.

From the practice’s standpoint, in today’s world of managed care and decreased reimbursement, the practice may not want to commit to a particular course of action before the “honeymoon” period of associateship, even if it has taken on partners in the past. The practice may prefer to simply tell the prospective candidate that it hopes to offer co-ownership after two or three years, but that the practice cannot commit to that now. The practice may also tell the candidate the details will be worked out then, depending upon the practice finances and his or her performance.

Often, how far one goes in this battle depends on leverage. If the practice is desperate for a physician due to, for example, shortages in the specialty, difficulty in drawing people to the location, or the abrupt departure of a physician, the practice may need to concede and provide partnership details. If the practice has several qualified candidates, it can decide and disclose less.

In any event, assuming the practice is willing to commit to writing some co-ownership details prior to a physician commencing employment, the issue arises as to what type of writing. The most common is a letter of intent which is not legally binding and is separate from the actual employment contract. It might spell out the intended timing of co-ownership, whether or not the physician will become an equal owner in terms of equity and voting, the formula for the out-of-pocket buy-in, the formula for any tax-favored income reduction part of the buy-in, the method of dividing income in general (i.e., equal, productivity, or combination thereof), the buy-out, and any related entity (e.g., real estate partnership) issues. Occasionally, letters of intent are extremely detailed and include most of the above, but more often, they are a bit vague and may only include some of the above. In my experience, almost all practices follow through in good faith with the letter of intent. Thus, although not be legally binding, it does give the new physician some sense of security in that they know what to expect.

One might think, then, that it always is beneficial from the resident’s standpoint to push for and get a letter of intent. Not true. It can be costly in terms of legal and accounting fees to negotiate prior to beginning employment. You also may not have much leverage or knowledge of the practice and its owners at that time. You may feel like you need to accept the proposal and regret it later. I had a client who was presented with a very detailed letter of intent along with her initial employment contract. She was comfortable with it at the time. When time came to negotiate the co-ownership after three years of employment, the sole practice owner presented my client with various documents which followed the letter of intent to a tee. However, my client was not happy with the terms of the percentage reduction of her net income entitlement and would not agree to certain “seniority rights” that did not provide her with security and voting power. She ended up leaving the practice. One never knows, but there is a chance that she might have been more successful in her negotiations if the letter of intent did not exist. The practice owner felt that she knew what to expect and he would not give in.

I have also had practice clients that refused to commit to writing certain details about the future or refused to provide certain financial information, and lost candidates for those reasons. The owners of a practice are often very reluctant to share financial information with someone who has not even begun employment. I certainly do not feel a practice should turn over its recent tax returns, financial statements and billing records to every prospective candidate. However, I think the practice should feel comfortable giving a candidate that it sees as viable at least a ballpark idea of the practice’s gross collections, overhead and net income of the owners.

Some practices go further than a letter of intent. They may provide in the employment contract itself that, if the physician remains employed as of a certain date, he or she will be offered “partnership.” Some go even further and provide for the buy-in formula and other details in the contract. Typically, this may occur in larger practices. The resident should certainly examine the deal closely with his or her advisers prior to signing the contract. Although legally-binding on the practice, keep in mind that the practice can typically terminate the physician without cause during the employment period, so it may not be an actual commitment.

Regardless of whether a letter of intent or any other writing mentions the future arrangement, the practice should present the associate physician with the co-ownership documents and dollar figures well in advance of the targeted effective date. The documents may include a Stock Purchase Agreement, Employment Agreement, Shareholders Agreement, Bylaws, Promissory Note, and Stock Option. These documents take time to draft and negotiate. The accountant needs time to do the calculations. I have been involved in numerous deals which end up being finalized one year after the effective date, which creates unnecessary complications and hard feelings.

Jeffrey B. Sansweet, Esq., is a shareholder with the health care law firm of Kalogredis, Sansweet, Dearden and Burke, Ltd. in Wayne, Pennsylvania.

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