No one plans for a marriage to end in divorce, but it's wise from a legal point of view to plan ahead with a prenuptial agreement. Ophthalmic practices don't escape divorces either. In order to protect all of the involved parties, it's es-sential to create a solid partnership contract. By planning ahead, the contract can help reduce the emotional and financial cost of a practice split-up.
In this article, several consultants and a practice administrator offer recommendations on how to plan for the future during contract negotiations, in case the time comes to part ways.
Hire a Professional to Assist
A vague, poorly written contract created by an attorney friend of one partner is what led to a nasty split-up at the Utah practice where Charlotte Timmons was the practice administrator. With two interpretations of the contract and one partner unwilling to compromise on the buy-out, it became a worst-case scenario as the former partners ended up in litigation, she reports. She adds that an investment in legal fees up front could have avoided larger legal fees at the end.
When adding a partner to your practice it's worth the expense to hire an attorney to represent your interests when it comes time for writing up a contract, says Sandra E. D. McGraw, JD, MBA, an attorney at The Health Care Group (Plymouth Meeting, Pa.), which offers consulting services to medical practices and health-care entities. "It's in your best interest to hire a lawyer familiar with ophthalmology practices, since they differ from other medical or surgical specialties. For example, they tend to be capital-intensive," says Mrs. McGraw. They also tend to have different subspecialties within one office; that means different surgeons bringing in different amounts of money depending on what types of surgery they perform.
"Take a little time to address issues on the front end," recommends Brad Ruden, MBA, a consultant with MedPro Consulting & Marketing Services in Scottsdale, Ariz. "Not every scenario can be foreseen and incorporated into partnership documents," he says, but what is in the contract will provide "a guideline for how the situation should be handled." He advises each party to have a competent attorney or consultant represent them during the contract stage to "clearly outline responsibilities and obligations [to each other] in writing."
Mr. Ruden sees danger in verbal agreements. He advises any compromise or mutual agreement be included in the contract so a clear understanding exists.
Negotiating the Partnership Contract
The contract is the minimum guarantee of what will occur in a worst-case scenario when a partner leaves the practice, says Mrs. McGraw.
Thinking ahead can help you avoid problems in the following six common areas for exit mistakes.
• Include buy-in and buy-out formulas. This is probably the most important part of a contract, Mrs. McGraw says. It should include specific formulas to follow to determine the cost factor for both scenarios, and both formulas should be similar. Formulas stated in the contract need to be the same for all of the partners in the practice, she says, although amount totals may come out different. Mrs. McGraw suggests using terms that are self-adjusting over time or with the situation. Since monetary values change as a result of inflation and overhead costs, use terms such as "a year's salary" instead of specifying a dollar amount.
Too often Mr. Ruden sees prospective partners focusing on just the buy-in factors and not spending equal time discussing the buy-out. He advises the same formula be used for buy-in and to accurately assess the value of the doctor's share when the buy-out time comes. The formula should also take into account the goodwill factor and surgeon's productivity during his time with the practice. Don't forget to include a schedule for the buy-out compensation. The values for buy-outs should take into account hard assets and accounts receivable, and include a formula for how to value them, as well as who will do the valuation, he says. Pick an appropriate time, such as the prior year, to have the practice appraised for valuation purposes, to be conducted by a neutral party.
• Decide who gets custody of equipment. Don't just say, "fair market value" to split up the cost of equipment, Mrs. McGraw says. Include a formula for assessing the equipment cost. Mrs. Timmons suggests having equipment professionally appraised for value periodically, or whenever a new partner comes on board, to keep the value current.
• Include a non-compete clause. Having this in the contract protects the existing practice, says Daniel M. Bernick, JD, MBA, who is also with The Health Care Group. This clause, how-ever, needs to be reasonable and include a radius no larger than necessary to protect the core service area. The time should also be reasonable—for example, one to three years. He says it would be wise to check the laws in your state, as some, such as Texas, California and Alabama, have non-compete clause requirements.
• Include what will happen with the surgeons' patients—and employees. Mr. Bernick recommends the inclusion of a non-solicitation clause to prevent the leaving partner from asking patients to follow him or her. However, should patients choose to, they're free to go. The contract should include a clause restricting removal of patient contact information or medical records, and state whether the practice as a whole will send out a letter to patients informing them of the doctor's departure. This clause should also prohibit asking office staff to leave with you.
• Don't forget to discuss the goodwill factor and other things that are hard to put a price tag on. Mrs. Timmons says, this includes the practice name, reputation in the community and location; office staff, referral sources and contacts; computer and business systems and marketing plans; website domain name and even the practice phone number (especially if it is something such as EYE-2020). The contract should include compensation for these items to the departing partner, who will have to start from scratch if he is not joining another already functional practice. Again, an agreed-upon formula should be used to determine the negotiated goodwill value, Mrs. McGraw says, taking into consideration factors such as location and the eye market in the area.
• Avoid a long, messy goodbye. For friendly split-ups, such as retirement or a move out of state, six to 12 months' notice is ideal. For more acrimonious situations, 30 to 90 days notice would be acceptable, Mrs. McGraw says.
Mr. Bernick says, especially in buy-out situations, a year's notice is needed for friendly departures, to ensure time for the practice to find a replacement. In order for a partner to get the full value during a buy-out, it will be important to follow the notification terms stated in the contract.
Other Things to Keep in Mind
Though these suggestions may seem obvious, all too often neither occur, leading to problems in the office.
• Review contracts every eight to 10 years to ensure nothing has changed. Mr. Bernick recommends contracts be reviewed regularly to take into account reimbursement or equipment changes, or just to make sure the values in formulas are adjusted fairly as the market changes. Perhaps an optical shop was added to the practice since the contract was drawn up, or new office locations added, which can change the description of the practice and its assets. A contract review can also be done when a new partner comes on board.
• Keep a "very open line of communication." Mrs. McGraw says the number one reason she's seen for practice split-ups is a lack of, or a breakdown of trust, either of which usually leads back to a lack of communication. The partners don't meet and talk regularly about the practice, she says, and that turns into a rut that everything is fine until it's too late. If personal changes are taking place, such as the desire to go part time or adjust working hours, she advises surgeons discuss it with their professional partners so issues can be worked out before problems arise. Mrs. McGraw says don't assume that just because you are a partner or an owner you can do whatever you want whenever you want to.
Keep an open line of communication with your office staff as well, to reinforce that their employment is secure. While you don't have to share every little detail about what's happening, don't keep your staff in the dark. As soon as a partner gives his notice of intent to leave, fill your employees in.
Ultimately, says Mrs. McGraw, it makes better sense to think through what's fair in the beginning and take the time to do the contract right, than to try and sort things out when a partner announces he's leaving. Mr. Bernick agrees. "The contract serves as a means for the practice to protect itself," he says, "and it protects the employee as well."