Blog

The top 4 fallacies about profit sharing medical practices

Pam Newlove Pam Newlove

There are a growing number of mature medical practice owners who should be thinking about how they will exit their businesses. Bringing in the next generation to take over a legacy often presents challenges that threaten a successful transition.

I’m increasingly seeing potential buyers only wanting to join group practices that run a profit share model. There’s less interest in the traditional solo operations or cost sharing models that many practices ran successfully for many years. In time this may start to impact on the value of those businesses.

Surprisingly, the financial mechanics of agreeing on practice values and legally transferring ownership from individuals to a group entity, is where we see the succession planning process end for more than half of the practices considering doing it. Why? There are several possible reasons for this ranging from reluctance to change, to not fully understanding the process required to achieve change.

Here are the top four fallacies about becoming a profit sharing practice:

1. ‘Other partners in my practice don’t work as hard as me'

Perhaps not, but you can’t keep working forever and isn’t it better to have a plan in place to ensure that the practice that you have worked hard to build up can be transferred? You want to reap as much of that value as you can rather than seeing it whittled away. You can set fair market salaries and appropriate profit share models to address this. Similarly, processes for managing those owners not pulling their weight need to be implemented.

2. ‘My fee base is worth more than the others’

We recommend engaging an independent valuer to ascertain the relative worth of individual practices. An agreement can then be reached by the future owners of the purchasing entity as to what they will pay for each practice.

3. ‘We can’t afford to form one entity to buy all of our patient bases’

Healthcare practices are attractive to many lenders, more so than some other industries at times. And funding some of the merged group practice with external debt makes the entry price for a new doctor less expensive. Bank funding is not the only source of debt, as usually shareholders will leave some funds in the company as well. This needs to be proportionate to shareholding.

4. ‘I am too old to take on any new debt’

Your practice probably already owes you money. You have two main ways of getting repaid for that: sell it yourself if you can find someone willing to buy it, or work together with your colleagues to sell it to a jointly owned entity. Obligations to repay such debt are passed to future owners as part of the consideration for sale.

So, where do you start?

To achieve a successful outcome, the process really needs to begin with a strategic plan detailing what the practice is striving to be and what sort of culture the practice will operate under. Once an agreement is reached on what the future will look like, a plan needs to be developed around moving from ‘A’ to ‘B’. Often a restructure will take place at the same time as other major transactions such as moving to a new building for example. This can mean that decisions need to be made around infrastructure as well as ownership.

The moral of the story is that to extract the value that your practice owes you, you need to act early and strategically with the support of your practice owners. This usually leads to a more cohesive outcome with joint ownership in the results and the creation of a practice that is fit and healthy for the future.

Reprinted with permission of New Zealand Doctor, www.nzdoctor.co.nz.