The Solo Physician’s Multi-Year Parachute

By Barry M. Schwartz, Esq.

A physician who is in practice with one or more partners probably has a reasonable expectation that his or her medical practice will continue after the physician’s death, disability or retirement.  But what about physicians who do not have partners?  How do they plan for the future?  What steps can they take in preparation for a sale?

When a solo physician (even one in “concierge” practices) does not make such plans, the axiom “people do not plan to fail, they fail to plan” rings true.  When a physician dies without warning or becomes disabled without having a succession plan in place, the next-of-kin or legal representative often scrambles to determine whether some portion of the practice can be sold.  Sometimes a business broker is engaged to find a purchaser.  Unless a junior physician is working in the practice pursuant to a written buy-sell agreement when a dire event occurs, the physician’s estate is almost certain to get less than fair value for the medical practice.

More often than not, a solo physician will retire from the practice of medicine before he or she dies or becomes disabled.  How can a solo physician plan for retirement, ensure the continuity of the practice (for the benefit of patients and the physician’s legacy), and maximize the value of the practice for buyout purposes?

Although every solo business owner faces this dilemma, business continuity for a solo physician is unique for several reasons.  First, the universe of potential buyers is limited since (in most states) only a licensed physician can own a medical practice.  Furthermore, physicians usually want to ensure that their patients end up in capable hands.  Also, the good will of the practice – the devotion and commitment of the patients to their physician – has a limited lifespan and can quickly evaporate if a replacement physician or practice is not ready to step in when the physician has “checked out.”  In fact, the practice’s value may plummet once the physician has died or is no longer able to care for patients due to his or her incapacity.  Therefore, a solo physician should be especially sensitive to the importance of continuity planning.

What should a solo physician do to plan for retirement?  To avoid a desperation ad in the newspaper, or having to engage a professional business broker immediately prior to retirement, a “multi-year parachute” approach might be considered.  At least 4 – but preferably 6 or more – years prior to anticipated retirement, the physician should take a junior (preferably younger) physician into the practice.  This will allow the retiring physician to: (a) determine if the junior physician is professionally capable of serving patients, (b) introduce the junior physician to patients, staff, hospitals and other professionals; (c) allow the junior physician to get to know the practice from the “inside”; (d) “mentor” the junior physician; and (e) ensure that the junior physician has an opportunity to build financial strength to eventually purchase the practice.  From the outset, the physician should discuss the ultimate goal of being able to sell the practice to the junior physician at a mutually acceptable time, perhaps 4-6 years after the junior physician’s engagement.

To a large extent, the multi-year “parachute period” is an opportunity for both the retiring physician and the junior physician to conduct due diligence on each other and to make sure the “fit” is good for both sides.  Usually the parties can determine within the first or second year whether or not there is a “good fit.”   If the “fit” is not comfortable for either side, the unsatisfied party should do everything possible to end the relationship and move on.  If there is a comfortable, symbiotic relationship, the retiring physician can commence a negotiation with the junior physician for a buy-out to take place over time – perhaps over a period of 3-5 years.  While a junior physician can sometimes obtain a loan from a commercial lender to finance a complete buyout of a medical practice, it is less costly – and often more appealing – to have the retiring physician finance the buyout.  (Of course, if the junior physician has the financial ability to pay 100% in cash at closing, nothing beats that).  Essentially, the parties must agree on a buyout price, how that amount is to be paid, whether the purchase note (which is often the financing vehicle) is secured through a pledge of the equity being purchased or a lien on assets, and the continuing role (if any) of the retiring physician during and/or after the closing of the sale.

Regardless of whether the junior physician or another party is the purchaser of the practice, the physician should take the following steps in advance of marketing the sale of the practice:

1) Have a top-notch support staff in place.  Assembling a competent, reliable, professional and pleasant staff is no easy task, but a physician – especially in a solo practice – who successfully does so will immeasurably benefit, both professionally and financially.  In the sale of a practice, although there may be no quantifiable value to a “workforce in place,” even one unprofessional or unruly staff member can be a black mark to a potential purchaser.

2) Make sure corporate practice documents are in order:  Most (but not all) solo physicians use a professional corporation or professional limited liability company to conduct business.  The entity’s articles of incorporation or certificate of formation, bylaws, operating agreement, and corporate minutes should be in hand and kept up-to-date.  Engaging competent corporate counsel is both critical and comforting.

3) Put the practice’s financial books and records in shape.   Applicable tax returns and taxes (including payroll withholdings) should be timely filed and paid.  A certified public accountant should regularly prepare or review the practice’s bank statements, profit and loss statements, balance statements, and tax returns.  All receipts (including cash) should be reported as taxable income so that taxes are paid thereon.  A potential purchaser cannot be expected to pay for unreported income.  Every potential purchaser will ask to see financials for current and prior periods.  Financials which are inaccurate, nonsensical or fabricated will not only kill transactions, but could lead to civil and criminal fraud claims, unfathomable defense costs, and years of aggravation and stress.  Engaging competent accounting professionals is both critical and comforting.

4) Ensure that employees sign NDAs and vendors sign Business Associate Agreements.  Patient information, medical records and confidentiality are critical components of every medical practice.  Every employee should sign a non-disclosure or confidentiality agreement, and the practice should maintain fully-signed copies.  Every third-party vendor which has any opportunity to access, see, handle or funnel patient information should sign a Business Associate Agreement which is HIPAA-compliant and in accord with other Federal and state regulations.

5) Make sure agreements with lenders, tech-support contractors, vendors and suppliers are in writing, fully signed, and kept current.  Documents which are not fully signed will provoke additional scrutiny and create unnecessary uncertainty and stress.  Agreements with equipment lenders, medical waste disposal companies, alarm companies, billing companies, and payroll providers should be fully signed and dated and maintained in electronic and (where needed) paper form.

6) Have a fully executed copy of the lease and all amendments handy.  If the practice has a written lease (and perhaps a personal guaranty from the physician-owner), make sure to have fully executed copies in the file.  Pay rent and CAM charges on time.  It is also helpful to stay in the good graces of the landlord since landlord’s consent may be needed for the assignment of the lease to the practice purchaser.

7) Ensure that medical office technology is current with appropriate back-up systems.  Digital medical records technology has taken flight.  A practice without digital records technology will simply not have the same value as a practice with such technology in place.  Backup/redundancy information systems should be in place, and tech support should be available.

8) Licensing must be kept current.  A retiring physician must make sure that his/her professional licensing and accreditation is current through the payment of fees, board-credentialing, and attendance at continuing medical education seminars.  In addition, staff licensing and accreditation must similarly be maintained.  Even the practice’s x-ray and C-scan machines may need periodic safety inspections and permit updates.

9) Make sure professional and liability insurance policies are up-to-date and accurate.  The retiring physician’s medical malpractice policy should cover the entity (if one is used), using the precise corporate name, and the carrier must be notified of all professionals rendering services through that entity.  (In some states, individual practitioners must have policies which insure them personally).  General liability, hazard and workman’s compensation insurance policies should be in force and paid in full.

In summary, the foregoing steps should be used by any practice which may be sold, not only one which is owned by a solo physician.  An insider – such as the junior physician–who understands the practice, its patients, its staff, its billing and its operations is more likely to be willing to pay a fair market price for the practice than another physician or practice which can only learn about the practice through due diligence.  For that single reason, a retiring physician should want to find, train and ‘vet’ a junior physician because s/he presents the best opportunity for a successful, “multi-year parachute” for the retiring physician.

Barry M. Schwartz, Esq., of Cole, Schotz, Meisel, Forman & Leonard, P.A., represents medical groups and physicians in the acquisition and sale of professional practices and in corporate matters.