Practice Transitions

WHEN - WHY PARTNERSHIP FROM THE YOUNG DOCTOR’S STANDPOINT

There are only two reasons for undertaking partnership. They are:

1. When a doctor in his fifties, or perhaps early sixties, is seeking an orderly way to reduce his time commitment and then to retire, there must be a “Transitional Arrangement”. We shall discuss this at length later in this chapter.

2. The second reason for partnership is when the current practice owner believes that he has carried the practice to as high a level as he can. Therefore he wishes to have another doctor join him. He is prepared to split the treatment burden, the management effort, perhaps over a period of time he would split the profit equally. He also believes partnership will enable the practice to continue to grow and be productive.

First to examine in detail Reason 1:

There are several factors that the newly graduated doctor should be aware of as he approaches this arrangement:

Usually an older doctor seeks to bring in a new doctor and to reduce his own present work commitment. He has the further desire to retire within a period of several years. He wishes the entering doctor to assume some of the treatment responsibility from the very beginning of the arrangement.

This is a reasonable expectation, and in most cases this assumption of much of the treatment responsibility by the entering doctor works out just fine. NOT ALWAYS, however! There are potential problems to be aware of and to guard against for the young doctor entering into this pact.

The practice may be quite small relative to practices of this nature in general. That would mean that there would not be enough practice net income (profit) to pay reasonable salaries to both the senior doctor and the junior doctor. Should that be the case, there is only one choice.

The senior doctor should immediately retire, or as soon as an orderly transfer of the practice can be arranged. For most practices that should take six months to two years. Some senior doctors might wish to stay longer, but it just isn’t reasonable to do so. The practice net income is inadequate to provide a living income for two families. Where this situation exists, the senior doctor must stay just long enough to introduce the entering doctor to the patient family and the referral base..

In the case of a specialty practice, there must be an effort made by the senior doctor to introduce the new doctor to the senior doctor’s referring sources. The doctor who faces retirement must be prepared to give his referring doctors a STRONG message:

That message is: The senior doctor will consider it a “personal favor” for the referring doctors to continue to refer their specialty patients to the replacement doctor. The reason the continuance of the referral pattern for the specialty patient in truth is - every entering doctor purchasing a practice from a retiring doctor expects to pay for it with income derived from the practice.

Should the present referring doctors discontinue their historic referral pattern of sending their patients to this practice, the new doctor’s income will decline, perhaps drastically. Then - the entering doctor finds that he doesn’t have enough generated net income (profit) to make a modest living for himself and to pay for the practice. Note the sequence of the preceding sentence: First, the purchasing doctor must make a living, however modest it may be. ONLY THEN will he make payments for the practice purchase to the now-retired senior doctor.

This leads us to state a PROFOUND TRUTH! From the standpoint of a doctor seeking to get into his chosen profession - the LARGER the practice that he contemplates purchasing, the better off he is! The chances are that he will make a living and be able to pay off the obligation for the purchase of the practice. The pay-off period will probably be shorter, less painful, and more financially rewarding than if he had purchased a smaller practice for a lower purchase price and proceeded on the theory that he would further build the practice.

Let us add some additional TRUTHS in the consideration of the purchase of an older doctor’s practice.

Virtually all practices will take from five to ten years to complete the purchase payments. THE LARGER THE PRACTICE IS AT THE TIME OF PURCHASE, THE MORE NET INCOME WILL BECOME AVAILABLE FOR PERSONAL LIVING AND FOR PAYING OFF THE SELLING DOCTOR! That sentence should be expanded.

The senior doctor should always train the entering doctor on the mode of practice. Obviously the young doctor who becomes trained to treat a larger patient family will have an improved basis for his own future well-being.

There is one further truth to be added to the previous premise: It is easier to build a practice from a large base than to build a practice from a small base or NO base. Think about it! It makes good sense. With a larger patient family, there are more people to influence their friends to come to that practice than if the practice is small and has fewer patients to influence for increasing the patient family size.

That same premise proves why it is better to buy an existing practice than it is to start a practice from NOTHING, when there are NO patients to influence their friends to come to you for their medical/dental needs.

This explains why there are so few new practices starting from scratch these days. Years ago most new doctors opened an office and slowly developed an active patient family. It is far easier, quicker, and less costly to purchase the practice of a retiring doctor. The larger the practice being purchased, the sooner the new doctor achieves a level of comfortable income, satisfaction, and professional maturity.

There are still too many cases in which a senior doctor (50 to 65) with too many patients - thinking of retirement - wishing to reduce his commitment - and desiring a transition with a minimal income reduction, seeks a graduating doctor to join him in his practice.

He makes the lowest possible commitment of guaranteed income to the young doctor, a verbal promise of ownership to come later in order to bring the young doctor aboard. Frequently there is NO contract to start. The senior doctor may also delay establishing a written plan for the transfer of the practice. The senior may also delay as long as possible the reduction of his personal practice income and increasing the income of the young doctor. He further delays, as long as possible, announcing the price he expects the young doctor to pay for purchasing the practice. At times he doesn’t commit to anything in contract form. The senior doctor plays the role of surrogate father to the young doctor.

THE DAY FINALLY ARRIVES WHEN THE SENIOR DOCTOR MUST RETIRE - EITHER HAPPILY OR UNHAPPILY. Then - THE SENIOR DOCTOR IS AT THE MERCY OF THE YOUNG DOCTOR! This is the price doctors pay for NOT properly planning the entry of a young doctor and the price and transition program to follow. It happens less frequently than in the past, but still much too often

To be completely fair: Many senior doctors are too kind and develop such a warm and loving relationship with their junior doctor that when the time comes for them to leave the practice, they just about give away the practice.

I recall one such situation, where the junior doctor LEFT the practice two years after joining a senior doctor in the above situation. He told me that he “resented” the condition of being considered the SON of the senior doctor. The senior also intruded into his personal life as well as acting as his mentor in the practice. The young doctor told me:

“He wanted to treat me like the son he never had. I have my own father who I love and respect. I resented his desire to intrude into my personal life. I found it unacceptable and thus decided to leave”.

However, every proposed basis for purchase begs the question: How can a young, just graduated doctor be expected to know how large a practice SHOULD BE, COULD BE, as well as a host of other questions that must be answered when he is ready to face the world in his chosen profession. He is surely not well prepared to know these economic factors, monetary practice values, and so many other transition conditions. Let us list the questions that he is rn-prepared to face!

1. What is a practice WORTH?

2. How should it be paid for?

3. What are the Income Tax implications of the payment for the practice being purchased?

4. What is the profitability of the practice being considered compared to the profession in general? Is the Net Profit and the percentage of Net Profit average, better than average, or worse than average?

5. Is there real estate associated with the contemplated purchase? Is it owned by the doctor selling the practice? Is the lease “FAIR” and does it last for a period of time long enough to guarantee continued occupancy for not less than the pay-off period? Is there an option to purchase the real estate being offered? Is the purchase option reasonable?

SO MANY QUESTIONS? WHERE TO FIN]) THE ANSWERS?

NEVER rely solely on a Practice Salesman to provide the answers to these questions! The contemplating purchaser must have his own knowledgeable advisor, one who has no personal or monetary interest in the transaction, and who will help evaluate the answers to the above questions. Who to turn to?

Acknowledgeable advisor could be the Accountant that will be retained in the event the practice is purchased. This is “chancy” however, as just about EVERY Accountant (and Attorney) who believes his advice will lead to a new long-lasting client will profess to have EXPERT advice and knowledge about the profession, the real estate, and every other question that is associated with the decision to purchase the practice. The key is to obtain references to determine the quality of services provided, as well as the level of actual experience with similar practices the accountant has.

There are so many questions that present themselves that are crucial to the just-graduated doctor that it must be frightening beyond belief to that neophyte doctor. These are all good, serious questions. How DOES a young, inexperienced doctor face all these crucial questions?

HE MUST HAVE ADVICE! Usually his teachers can be of some help. They should be able to recognize a GOOD or EXCELLENT practice. They probably can’t be expected to know what a “fair” price is for the neophyte doctor to agree to pay for the practice. Perhaps they will know a capable and experienced Consultant who could advise the purchaser as to the “fairness” of the price, the rental conditions for commercial property in the area, and even the kind of purchase option for the real estate that could be prepared

Most Graduate Training Programs offer some especially successful doctors of the medical or dental specialty to act as teachers to these emerging doctors. These teachers are most often very successful in their specialty areas. They donate their time to this teaching effort as their way of thanking the profession for the blessings they have received. Most often these part-time, successful doctors can be approached and will be helpful in evaluating the contemplated entry into the profession. They may be able to separately advise the young doctor as to whom to turn for advice about the real estate matters that present themselves.

Now let us turn to the YOUNG doctor who will NOT be facing the senior doctor’s retirement in the near future, and who wishes to become a partner.

There is one fear that presents itself:  Is the doctor seeking a partner running a TRULY SUCCESSFUL PRACTICE? Or is this doctor less-than-successful and is turning to another doctor to help him build up this practice? It would be unusual for the young graduating doctor to tell the difference! Here too, turning to a part-time successful practitioner for advice may be the best source for help.

Many practices wishing to bring in another doctor to the practice are reluctant to give out financial information until there is a serious indication of forming a relationship.

That is understandable. From the time that revelation of information occurs, however, the contemplating purchaser must be in a position to evaluate the practice performance being considered to join - as well as - the actual OFFER being made to work at the practice. What is the program for sharing profits? What will be expected as payment for the partnership interest being purchased?

Probably the most important questions to be answered are:

IS THIS PRACTICE WORTH JOINING? IS IT AN EXCEPTIONAL PRACTICE, OR IS IT LESS THAN EXCEPTIONAL LOOKING FOR A CRUTCH TO BRING IT UP TO A HIGHER LEVEL OF SUCCESS?

There is one rather easy test that can determine the above condition. If the practice Net Income does not seem sufficient to COMFORTABLY provide two doctors with reasonable annual incomes, the chances are quite conclusive that the practice is in need of a Consultant rather than a partner.

It seems appropriate for the young graduating doctor to ask two definitive questions. They are:

1. What was the Gross Income of the practice for each of the past three years? Does it show growth? Is it “flat”? Is it declining?

2. How many new patients have joined the practice in each of the past three years? The answer is revealing only to some degree. The need for new patients is always great in Specialty practices, whereas Primary Care practices do not need a great many new patients each year.

This is not the same as joining a rather small practice where the senior doctor is planning to retire in the immediate or near future. In that situation, the acceptance by the young doctor could be a proper choice, especially if the young doctor believes that he can build the practice and that it WILL provide an ADEQUATE living and also provide the ability to pay for the practice.

However, let me repeat - when the available Net Profit is insufficient to provide two doctors with satisfactory annual personal incomes, and where both doctors intend to continue to work with the practice, quickly dismiss the opportunity to join that practice.

When the practice being considered for joining by a newly graduating doctor is being run by a younger doctor who doesn’t contemplate retirement in the next decade - -

AND--

When it is determined that the practice being considered is truly a LARGE and PROFITABLE practice - - AND - -

When your association will lead to an EQUAL ownership status with the principal of the practice - - AND - -

When the present owner/doctor is truly over-worked and overwhelmed - - PLEASE DO - - JOIN THIS PRACTICE. Your future should be_______.

Be sure to use the proper help in making arrangements to join any practice - once you have decided that THIS is the practice you wish to purchase or join. Be certain that all agreements are committed to writing and are properly prepared.

To close this section, I would like to reveal that the easiest partnerships I ever work with - and ALWAYS look forward to being involved with - are those of a father-son practice transfer program.

Invariably, I find that the father always wants to do MORE for the son than is “usual”. He is ready to provide a higher starting salary than is customary. He is ready to quickly share profits of the practice. In several such programs, the father has said to me:

“Would it be all right for the practice to purchase a car for my son? He could really use a new car.” I spend more effort in restraining the senior than I ever need when I am helping with a junior/senior partnership of unrelated doctors.