Maximizing the Value of Your Partnership

What should you be doing to prepare your partnership for the new year?

By Michael P. Hatch, CFP, JD
 

Many physicians take on a partner, or several, at some point in their careers. Partners can increase business revenue, provide more uniform coverage, reduce stress, improve patient care, and of course, allow you to have the free time to pursue your other interests. But every partnership needs a checkup now and then to ensure that your partnership is truly providing the intended benefits to all involved, as well as preventative measures to ensure that all the bases are covered, should something go awry. Here are 10 things you should review now as we come to the end of 2003, and prepare for 2004.

Is your partnership relationship formalized in some way?
The benefits of a written agreement are manifest. It forces you to think out in concrete terms, why you have partners, what the workload expectations are, compensation policies, and so forth. It helps you to divide up responsibilities, before one partner feels overburdened or underpaid. Discuss medical and nonmedical issues such as finances, marketing, networking, and specialization of certain types of cases. Consider having a managing partner. If one person is clearly better at managerial tasks, consider establishing that person as managerial partner. A stipend for this, or a reduction in caseload might be appropriate to balance out the equation.

Review your choice of business operating entity.
It goes without saying that the traditional partnership, or sole proprietor structure, are the worst of all structures from a liability standpoint. This is because in most states, it exposes each partner or sole proprietor to the full personal liability for their own acts, and acts of other partners. (I say it goes without saying, but according to the most recent US Bureau of the Census, 1997 Economic Census, partnerships or sole proprietorships comprise 79% of all business in the US. I am sure there are some medical practices buried in those numbers.) In every state, there are options to preserve both the tax advantages of a partnership (its pass-through nature), with the liability limiting features of a corporate structure. These include partnership entities such as the Limited Liability Partnership, as well as corporate structures, such as Limited Liability Corporations, or S-Corporations. Even without the pass-through nature of other entities and the potential for double taxation, a regular C-Corporation may be appropriate for some practices. The Small Business Administration has detailed information and resources to further explore these options, at www.sba.gov/library/pubs/mp-25.pdf.

Execute a Shareholders Agreement and/or a Business Buy-Sell Agreement.
These form the backbone of a true business succession plan. Very few businesses actually have a Shareholders Agreement or a Buy-Sell Agreement in place, but you should try to benefit from the mistakes of others, rather than your own. We can probably all recount the difficulties of a colleague or friend whose practice went into disarray when a partner died, or got divorced. There are some risks that we are all accustomed to living with, but mortality, in the long run, is 100%—we are all going to pass away at some point, we just don’t know when. Reviewing your succession planning, including both planned and unplanned separations from the practice is simply smart business planning. It forces you to think and talk about when you plan to retire, who could take over for you in the event of an emergency, and what is fair and reasonable buyout to a departing partner. With so many obstacles in this modern business world, it is best to negotiate what is fair and reasonable now, while all parties are not under the pressure of a trauma or other unplanned event. To protect the business and your family, a Shareholders Agreement and/or a Buy-Sell Agreement should have, at a minimum:
• provisions for how interests in the business entity can be transferred in the event of a partner’s death, divorce or disability, or other circumstances that might require a business transfer, such as withdrawal from the business, operating disagreement, or insolvency of a partner.
• definitions of what constitutes a violation of the agreement, triggering a buyout (for example, how is a disability defined?)
• formulas used to calculate the value of the entity
• payment terms, reasonable noncompete agreement, separation of patients, records, equipment, and so forth.

Fund the Buy-Sell by maintaining sufficient life insurance on your partners.
This will take care of the ultimate reason why a partner or shareholder needs to be bought out—premature death. Of course, there are other reasons that would necessitate a buyout, but life insurance is a simple and cost-effective way to take care of this one. A typical policy covering a 45-year-old male for $1 million of 20-year level term, might cost $1,600 to $2,000 per year, from a top-rated insurance company.

Purchase sufficient business overhead and personal disability insurance for yourself, and make sure each partner has done the same.
According to more than one study, you are at least six times more likely to be on extended disability, than to die, at younger ages, and still twice as likely even after age 55. For the medical practitioner, this can be more threatening than a death because the remaining partners are left with a dramatically increased caseload, usually accompanied by a decrease in revenue, a relatively fixed level of overhead, and the uncertainty as to how long the situation will last. In a death situation, you know that you must either take on a new partner, or alter your overhead structure. In a disability, however, the remaining partners are left to try and keep the ship running, in hopes that the partner can return. Business overhead disability insurance can pay the practice or the physician a benefit to make up for the lost revenue and help cover the fixed overhead costs. Business overhead insurance generally starts quicker, pays for a shorter duration of time than a personal disability policy, and is generally less expensive as well. Typical business overhead policies begin providing benefits after 30 or 60 days of disability and pay for 12 to 24 months. Of course, you should also be sure to maintain sufficient personal disability insurance—that will pay you sufficient monthly income to meet your expenses—to age 65. Many people underestimate their true income needs. The bottom line is to be prepared and plan ahead.

Utilize a business consultant to advance the practice to the next level.
Tiger Woods has a coach. If your practice is in a growth and expansion mode, why wouldn’t you take on a neutral third-party who can offer objective, insightful recommendations as to how to improve your practice? Of course, you need to carefully examine your practice’s needs so that you can bring in the right type of expertise. Do you routinely run into information systems issues, or do you lack sufficient referrals in your specific area of expertise? Obviously, a health-care information technology specialist is very different from a practice-marketing specialist. The bottom line is that consultants often have a very different and beneficial way of looking at issues, by virtue of having seen and worked on that very problem, dozens of times in the past. Typically, the best consultants will be referred from a trusted colleague or associate—conferences are another good way to find these types of resources.

Maximize retirement savings using newer plans.
Many plans have some time or notice requirements, and if you are planning to set up a new plan in 2004, now is the time to act. We all would like the piece of mind that comes with financial security, and most of us would like to retire one day. See the July/August 2003 and September 2003 issues of Endovascular Today, which reviewed details on current options.

Don’t forget year-end tax planning for the business.
This includes a review of corporate/personal tax rates to look for income shifting opportunities, distributing bonuses to owners (to avoid double taxation), recognizing tax losses so they can be claimed, utilizing Section 179 Deduction limits for items that you know the practice will need, maximizing charitable deductions, and reviewing income limits for retirement plan contribution purposes. Of course, you must have up-to-date financials to make year-end planning possible, and this is one good test of how well organized the practice is from a financial perspective: can you easily put your hands on year-to-date financials, through September 2003, that are well thought out and provide true management information?

Review other strategic financial issues for the practice, such as capitalization, use of debt, and operational issues, such as cash flow management and payables, receivables, or reimbursements.
Many individuals refinanced their home mortgage in the past year, yet they neglected to look at their business borrowing costs. Also, many small businesses only renew lines or letters of credit, receivables financing, and so forth, once per year at the end of the year, or at the bank’s convenience. Now may be an excellent time to review and renegotiate those credit facilities, to lower your long-term borrowing costs, and lock those savings in for the future, while interest rates are still at 40+ year lows.

Remember why you established a partnership in the first place.
You probably found a colleague whose work you were impressed with–someone you felt shared your values and work ethic. Figure out a way to maximize those benefits and minimize the shortcomings. Celebrate your successes. Make the business and strategic planning process not just another task on your list, but a long-term process of ensuring that you are getting what you want and need out of the practice. The act of business planning and establishing structures and systems makes economic sense as well; your practice will become more valuable over time to a potential buyer, because it should enhance growth. It should aid your whole practice in focusing on what is truly important.
Best wishes to you and your family for a safe and enjoyable holiday. See you in 2004!

Michael P. Hatch, CFP, JD, is a Financial Advisor and Principal with The Sterling Group, a financial planning and fee-based investment manager, located in Southern California. The Sterling Group is affiliated with Linsco Private Ledger, (member SIPC), the largest independent brokerage firm in the US. Mr. Hatch specializes in working with entrepreneurs and professional practices, assisting them in defining and implementing their financial, philanthropic, and intergenerational planning strategies. He may be reached at (626) 440-5995; michael.hatch@lpl.com.

 

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Endovascular Today is a publication dedicated to bringing you comprehensive coverage of all the latest technology, techniques, and developments in the endovascular field. Our Editorial Advisory Board is composed of the top endovascular specialists, including interventional cardiologists, interventional radiologists, vascular surgeons, neurologists, and vascular medicine practitioners, and our publication is read by an audience of more than 22,000 members of the endovascular community.