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  • Partnership governance structure

    Hi all, I'm in the process of buying into a small private practice. There will be 3 MD partners, 2 MD employees, and 4 PA employees. We are currently undergoing the valuation part of the process. Once the numbers are worked out, I am concerned about the details of the governance structure.

    For example:
    • How do folks set up decision making in their practice? Is it a straight majority vote? Or are some decisions (kicking out a partner for example) dealt with differently?
    • How is the buy-out structured if a partner wants to leave?
    • How is revenue sharing structured? For example, if a partner goes to part-time, does their revenue sharing change?
    • Do folks have a managing partner? How are they paid?
    Do folks have clauses that they are glad they have in their partnerships? Anyone willing to share a pdf of their structure as an example of what to do/avoid? Important issues I am forgetting?

    Thanks in advance! FF

  • #2
    Simple decisions are majority vote. Retention/partnership is unanimous, jury style (the meeting doesn't end until unanimity achieved so no avoiding the topic).

    Buyouts for vested partners are paid out over 5 years. This is so the clinic continues cash flow; its already harder to have the same volume of patients unless somebody is recruited and ready to go.

    Buy-in amounts depend very heavily on ancillary services, equipment, real estate owned by the practice, etc. A multiple of EBIDTA (earnings before interest, depreciation, taxes, interest) is a common approach but they vary widely. Probably could be its own book.

    Each practice will have its own style. Many are "eat what you kill" with shared overhead. If someone wants to go part time, the electricity and insurance still need to be paid so overhead may not go down much for their portion. Depends on specifics and what is fair for everyone.

    All vested partners take turns being managing partner. Unpaid except in gratitude, on top of typical clinical work. Typically will do it 1-2 times per career.

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    • #3
      Everything pulmdoc said above. Only difference for us is we require supermajority for partnership votes or important decisions.

      Buy-in for asc, real estate, etc is a valuation done every year. No significant buyin for partnership, we don't charge "blue sky"...this it's like $1k for the books.

      Anyone can go partime, but expenses don't change besides your variable which is based off collections. Fixed is equally split.

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      • #4
        “There will be 3 MD partners”

        The limited number of partners will be problematic regarding the voting mechanism. In reading the above, it seems they are appropriate to larger groups. 1to 2 time per career and majority vs unanimous in decisions and expulsion seems pointless. The potential economic impacts are huge. This will be difficult.
        You almost need unanimous consent with well defined entry and exit terms. Eat what you kill with shared overhead with exit terms that make leaving voluntarily not simply shopping a better deal. With 3 votes, you almost need to respect a strong “no” for consensus. 2-1 votes leave a bitter taste. Discretion is to drop it.

        Small (3) group dynamics are different. You also don’t mention the type of practice.
        One plastics was considering a partnership. Cosmetic and reconstruction and new patient referrals and PA supervision/benefit to the physician and other items that impact the revenue stream of each physician are points of dissatisfaction. Even cherry picking patient mix can be problematic in a small group.
        One physician had open slots and the PA’s were booked 100%. You need to have a greater understanding of what operational decisions are going to be followed. Same type of problems occurred with previous small family medicine and ortho practices. You need to strive for 3 equals.
        Problem, resistance to reducing PA to part time or 3 because it’s profitable for the physicians that are fully booked with good payor mixes.

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        • #5
          Originally posted by pulmdoc View Post
          Retention/partnership is unanimous, jury style (the meeting doesn't end until unanimity achieved so no avoiding the topic).
          I’m assuming the partner’s vote that may be voted out doesn’t count in this...?

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          • #6
            Simple majority for most decisions and super majority for big decisions. Having only 3 partners will complicate some things and make some things easier.

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            • #7
              1. Depends on if there is a senior ptr and 2 juniors (be very careful, if so) or 3 equal. Usually (in my experience), majority rules.
              2. Can be a pre-set formula, same in as out, vague, vaguer, etc.
                • Note you should also address divorce, death, disability.
              3. In my experience, typically done on a case-by-case basis. Not sure if I have seen this spelled out definitively, more-so as requirements for call, allowances for time off, etc.
              4. See #1- Sr ptr typically Mg ptr. Pay calc’s are all over the place; fair is how you define it.
              A good contract atty and a good CPA/financial planner experienced in these matters can be very valuable in negotiations/structuring. Entering a partnership is like being married to X number of people. Go into this with eyes wide open - you’ll almost certainly never improve on what you get when you sign (unless selling out to PE).
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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              • #8
                Thanks for the replies everyone.

                Yes, having only 3 partners limits our decision making options (ie. no supermajority) . I like Tim's suggestion of consensus based decision making and seems like it's possible because the other 2 partners are very reasonable ethical people.

                Joanna, how would a buy-out address divorce? It strikes me as somewhat crossing the line between work life and personal life. Obvs I also understand that divorce has financial ramifications. Could you give an example of how it might work?

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                • #9
                  OP, anecdotally an Anesthesiologist lost the partnership interest in a divorce. No longer a partner, he could not work there. The terms of the non-compete meant he had to relocate to a different city about 50 miles away. Appealed all the way to the state supreme court. Partnership and pain clinic and hospital contract destroyed.

                  In a divorce, negotiating with a spouse is not a good position to be in. The partner lost the monetary value and the remaining partners are "squeezed" for survival" by a hostile divorce attorney. Sometimes "maximum damage" is a strong motivator. You need a healthcare attorney to give you advice. One prior partnership agreement was a life insurance policy with the other partners as beneficiaries fixing the value upon disability or retirement. Not a suggestion, speak with an attorney is the point.

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                  • #10
                    Originally posted by CordMcNally View Post

                    I’m assuming the partner’s vote that may be voted out doesn’t count in this...?
                    Obviously the person being voted on doesn't vote.

                    It's only happened twice in 100 years that a partner was voted out, one for dementia and one for losing MD license. Some pre-partners not retained.

                    I think having 3 partners makes unanimous votes more essential, not less. Constant 2-1 votes lead to one person leaving.

                    It's explicit in the partnership contract that nobody who is not a physician partner can own a partnership share. This includes spouses and also prevents a partner from cashing out to a business interest. If a partner dies, the estate must be bought out and there's no option to retain. In a divorce, the valuation is included but the partnership itself is nonfungible. This hopefully avoids the nightmare scenario of a doctor losing his ability to practice and destroying the clinic due to a vengeful ex-spouse.

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                    • #11
                      Originally posted by pulmdoc View Post

                      Obviously the person being voted on doesn't vote.

                      It's only happened twice in 100 years that a partner was voted out, one for dementia and one for losing MD license. Some pre-partners not retained.

                      I think having 3 partners makes unanimous votes more essential, not less. Constant 2-1 votes lead to one person leaving.

                      It's explicit in the partnership contract that nobody who is not a physician partner can own a partnership share. This includes spouses and also prevents a partner from cashing out to a business interest. If a partner dies, the estate must be bought out and there's no option to retain. In a divorce, the valuation is included but the partnership itself is nonfungible. This hopefully avoids the nightmare scenario of a doctor losing his ability to practice and destroying the clinic due to a vengeful ex-spouse.
                      Understand the intent. The value of the ownership assessed in the partnership agreement and the terms of the divorce decree is the point of agreement that a vengeful ex-spouse can be a real problem.

                      ", a partnership of which he was also the president. His annual income was approximately $800,000. In December of 2008, however, he was suspended from the partnership, and he forfeited his partnership interest a few months later." I wonder why?

                      Divorces can be extremely messy and involve many unexpected turns. Here is your partnership interest, no one works there anymore and it is now zero. That might be the response to a vengeful ex-spouse. No more partners work there!


                      Definitely needs an attorney for the specific state to protect all involved. Exit for whatever reason needs to be included.

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                      • #12
                        Originally posted by pulmdoc View Post
                        I think having 3 partners makes unanimous votes more essential, not less. Constant 2-1 votes lead to one person leaving.
                        This.

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                        • #13
                          Originally posted by Future Fire View Post
                          Joanna, how would a buy-out address divorce? It strikes me as somewhat crossing the line between work life and personal life. Obvs I also understand that divorce has financial ramifications. Could you give an example of how it might work?
                          Any number of ways.
                          Ex: In the event of a death/divorce/separation from ptrship -
                          • remaining partners have first right of refusal
                          • remaining ptrs will buy out the survivor according to the following formula...
                          • both mbr and spouse agree (upon entry of mbr into the ptrship) that spouses are not eligible to own ptrship shares
                          • etc
                          Attorneys word this much more eloquently, of course. Above are just some examples I’ve seen in contracts. The contracts that d/n address every possibility you can imagine are the ones that scare me.

                          joHanna
                          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                          • #14
                            Thanks for the followup JoHanna! (And sorry for mispelling your name!)

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                            • #15
                              Originally posted by Future Fire View Post
                              Thanks for the followup JoHanna! (And sorry for mispelling your name!)
                              No problem, I’ve been dealing with it my whole life.
                              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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