How to divide bonus etc when partner semi-retires?

[Ronason]

I'm in a surgical subspecialty, single specialty PP with one other doc, who is close to 60 and looking to slow down. We have been dividing things equally in terms of overhead, rent at main site and satellite site, assistant salaries, etc. All except for I pay for an additional MA myself since I'm busier.

He is looking to wind down and do less surgery as soon as next year. Once that happens, it's not so easy to call things equal. Have any of you been in this situation and how did you decide to split overhead and bonuses, etc?

Should it be a fraction of how much time is put in at the office such as 0.75x instead of 1.0? He shouldn't have to pay for 50% if everything still? He will do less surgery and refer more surgical cases to me. Should he get a portion of the income from the surgeries? He will be doing a whole lot more clinic time than me. I'm having a hard time figuring out how to divvy up expenses when things are no longer equal.

Would appreciate any and all advice.

[jfoxcpacfp]

So, do you and the other doc have a kind of joint venture? Iow, this is not a partnership, but 2 separate businesses sharing joint expenses? Do you each contribute a monthly amount to a shared bank account from which joint expenses are paid or does each vendor get 2 checks? Is there a written contract or is this only verbal? Just trying to understand the arrangement better.

Of course, in this situation, I believe you are trying to be fair, which is exemplary, but I wonder if your benefit is going up simply because his need for the shared expenses may go down. Iow, will your income increase because his time decreases? Perhaps you will take over some of his patients? That is a very important question in determining how to structure your agreement going forward. Just because he needs the office space less doesn't necessarily mean you need it more..

[Hatton]

Ideally this something to talk about when you took the job. How long have you been there?  Are you owned by a hospital?  Most surgical practices split the money based on productivity.  I did the case so this is mine.  If he/she will be working in the office evaluating cases and you do the surgery then some ratio might be fair.  Also presumably this person founded the practice and established a referral pattern. The overhead could be split based on the number of days worked per week.

[Ronason]

We are self employed. We are partners. There is no explicit agreement about it how expenses are to split. That was verbal. He brought me in. He founded the practice. He has been extremely fair. I wish to be the same way. We essentially eat what we kill but the overhead has always been equal.

We never planned for this stage, just agreeing to a 50% split of everything. I don't want him paying 50% of things when he's no longer full time. I realize it's wishful thinking to believe that he can maintain his level of income and work less. I shouldn't be paying more for the overhead to compensate his income, of course. I was just trying to inquire if there are any established formulas out there for this kind of situation?

[MichaelB]

My partner and I split "general" expenses, which are the vast majority, based on revenue. Whatever percentage of the total revenue you bring in, you pay that percentage of general expenses. This is rent, utilities, salaries of shared employees, etc. Then, we each pay all of our "individual" expenses. This is health insurance, travel/CME, malpractice, our own MA salaries, etc. This has worked well for us.

The only issue I see with this is if one partner starts working significantly less, say 1-2 days a week, the other will be paying a huge percentage of the expenses. You could build in some kind of sliding scale I would think to balance this out, or bring in a third doc to cover them.

[VagabondMD]

Be careful with this. Did he ask to pay less than 50% expenses? If he only works 50% time and pays 25% expenses, you are essentially getting a pay cut to cover the other 25% expenses.

[Ronason]

No he hasn't asked for anything. I don't plan to give up my compensation so he can maintain his current level of income. I just want to be fair. He has been extremely fair with me, essentially treating me like a partner before I even paid into the practice. I want to do what's right for him in a fair way to both of us. I'm just looking for other people's experiences with this type of situation.

[pulmdoc]

You need to figure out what expenses are scalable (ie the expense can be reduced if your partner uses it less) and what expenses are not scalable (eg rent if you still intend to use the same office space). Potentially scalable expenses include billing/coding/front office if your partner does not want to work every day and you are able to have staff willing to work part time. Rent, utilities, full time staff are not easily scalable. Expenses such as med mal, CME, etc should be individual and would not reduce by going part time.

Have a frank discussion with your partner about what he plans to do and what the projected revenue would be for doing what he plans to do. Go through the books together.
If you are not able to reduce expenses (move to a smaller office for example) but revenue goes down significantly because surgeries fall off, his income may go down steeply and he needs to decide if he still wants to work.

An alternative approach would be to explore bringing in someone else into the practice, with the goal of the new doc buying in as a partner when your existing partner is ready to retire. This would allow the new doc to ramp up quickly and your existing partner to split expenses 3 ways instead of 2.

[jfoxcpacfp]

Ronason wrote:

No he hasn’t asked for anything. I don’t plan to give up my compensation so he can maintain his current level of income. I just want to be fair. He has been extremely fair with me, essentially treating me like a partner before I even paid into the practice. I want to do what’s right for him in a fair way to both of us. I’m just looking for other people’s experiences with this type of situation.

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Just to clarify, then, you are partners but the partnership does not pay such expenses as joint payroll and rent? And do you reduce your guaranteed payments to pay for the extra MA? I think there certainly is a fair way to handle this, but I am not clear on the details of the current, "unofficial" arrangement.

The first thought that comes to mind is that he needs to begin selling part of his ownership share to you or another physician, but I'm having trouble wrapping my mind around the current method financial affairs are handled. This may be a good time to have a frank and honest discussion with your partner and relegate the agreement going forward to paper, signed and notarized. At the very least, it will give you a basis for future partners.

fwiw, your partnership's current CPA should be most helpful in suggesting options and guiding you both. It appears to me as if you have a very open and mutually agreeable arrangement, one of those wonderful, but rare, partnerships, so doubt there is a need for you to each have separate CPAs or attorneys, at least at this juncture.

[Ronason]

We have an associate physician whom we will be offering partnership most likely at the second half of 2017. This will help bring his overhead down automatically and may make it all good from there. Alternatively, maybe I should buy him out to a degree and take on a slightly higher share of the overhead, like 60/40.

Johana, we each draw a fixed amount bi-monthly, less than we actually bring in. We split everything 50-50, this includes the nonscalable and scalable items. The only thing I pay extra for myself is my additional MAs salary. Each quarter, we get bonus distributions based on each of our productions minus the overhead.

[jfoxcpacfp]

Ronason wrote:

We have an associate physician whom we will be offering partnership most likely at the second half of 2017. This will help bring his overhead down automatically and may make it all good from there. Alternatively, maybe I should buy him out to a degree and take on a slightly higher share of the overhead, like 60/40.

Johana, we each draw a fixed amount bi-monthly, less than we actually bring in. We split everything 50-50, this includes the nonscalable and scalable items. The only thing I pay extra for myself is my additional MAs salary. Each quarter, we get bonus distributions based on each of our productions minus the overhead.

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It appears that you already have parts of a reasonable plan in place, then. Still, I think you need to have that conversation and agree to document all agreed upon in writing, for your sake and your partner's. I imagine he's been wondering about the same issues you have and perhaps also doesn't want to rock the boat.

[blowhard]

I went through this recently and here is how we did it:

Every expense that we had to pay whether we are there or not we split 50/50 (Rent/telephone/copiers/some employees), others we split based on our collections for the quarter. So if my collections are 70% of the total, I pay 70% of those expenses. We use the terms 'fixed' and 'variable' as opposed to scaleable and non-scalable, but the concept is the same.

At some point, he slowed down to the point that his collections did not cover even his fixed costs. At that point I bought him out of the practice and paid him a salary until he retired. You should definitely have those discussions with him now, because they will be difficult later. And have an attorney draft up something. It will be well worth the $1000-$1500 costs now to avoid potential future conflict.

My former partner sounds very similar to yours - brought me in, helped me grow my practice, fed me cases when he slowed down and eventually stopped operating.

[Craigy]

blowhard wrote:

I went through this recently and here is how we did it:

Every expense that we had to pay whether we are there or not we split 50/50 (Rent/telephone/copiers/some employees), others we split based on our collections for the quarter. So if my collections are 70% of the total, I pay 70% of those expenses. We use the terms ‘fixed’ and ‘variable’ as opposed to scaleable and non-scalable, but the concept is the same.

At some point, he slowed down to the point that his collections did not cover even his fixed costs. At that point I bought him out of the practice and paid him a salary until he retired. You should definitely have those discussions with him now, because they will be difficult later. And have an attorney draft up something. It will be well worth the $1000-$1500 costs now to avoid potential future conflict.

My former partner sounds very similar to yours – brought me in, helped me grow my practice, fed me cases when he slowed down and eventually stopped operating.

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+1 This is the right way to do it.

A good operating agreement, buy-sell, etc. should be in your immediate future.

Also, to add "scalable" is BS corporatespeak.  The terms you are looking for is fixed and variable.  Don't get hung up on the jargon.   :P

[childay]

Agree with thinking about the expenses as variable vs fixed.  It's easy to split up 50/50 if everyone is working full time but gets much trickier otherwise.  Productivity for the income side is likewise comparatively simple.