Partnership Proposal: Is this a good deal?

[Uncle Scrooge]

My wife has been working as a Nephrologist for 3 years.

When she joined, she was told there was a partnership track and while they didn't have any information, she was told that they'd figure it out by the time she would be up, which is now.

At the time, the group consisted of 2 senior partners (A, who built up the practice from scratch, and B who joined 10+ years ago). There was also a junior partner C, who started work a year earlier than my wife.

Dr. C always thinks he's getting the short-end of the stick. He was up for partnership last year but they haven't finalized anything yet. He never understood the concept of what he was buying into, since the practice doesn't really own anything (such as dialysis machines). So they've spent a year going back and forth about the partnership with no resolution so far.

I understand his concern - In a medical practice, it sounds like you're basically you're buying into your own productivity (and that of a few RNs, PAs, and 1 non-partner-track physician), accounts receivables, and existing contracts with hospitals/insurance companies.

Also, since he and his wife have no roots in California, there is always a chance he might decide to move somewhere else. Paying into the practice might hinder his flexibility.

Dr. B developed a terminal disease and has a 5-year life expectancy. Actually it was 6 months, but that was 2 years - Yay for experimental treatment! He has been phased out and is working 9-5, with no call and no weekends.

Dr. A has had bad experiences with partners in the past. He has had a few junior partners that quit and dissolving the partnership has always been messy.

Based on this background, Dr. A has proposed the following:

"Dr. C and my wife become board members of the group along with Dr A. The three of them control operations, make strategic decisions and hiring decisions. They have equal voice in compensation of ALL employees and physicians, both with respect to the amounts of annual compensation, and the allocation between salary and bonus, which will be evaluated annually. The Board of Directors will work together to make these practice management and financial distribution decisions. The Board of Directors will have access to all the financial and contractual documents and information of the practice to review. The Board will have the authority to admit other physicians to the Board of Directors as well.

Dr A retains full ownership of the group (it's a C-corp). If and when he decides to sell, Dr. C and my wife get first right of refusal.

Advantages:

1. formal authority to guide and develop the practice
2. opportunity to enhanced enjoyment of the financial and other benefits of the practice
3. no capital investment

Disadvantages:
1. no actual ownership of the practice"

This is an informal proposal and he's stated that he's not married to any of these but would like to open up a discussion.

From my point of view, it sounds like a great deal. You get the benefits of partnership without putting up any money. If Dr. C decides to bail, then it's a clean break. Also, if medicare reimbursements decline, the value of the practice goes down and so would a future valuation.

My main concern is that the chain of ownership becomes messy in case of Dr. A's sudden and unexpected death.

But I'm not an expert of partnership deals, so I would be grateful for the collective opinion on whether this is a good deal, how we should structure this, and what pitfalls should we be aware of.

Thanks!

 

[jfoxcpacfp]

Dr. A is in a most tenuous position. In the case of his sudden death, his spouse gets nothing except any remaining billing and A/R. In the case of his disability, same thing.

I don't see much to lose by going with this, as long as they are not required to buy in at a certain point. Is there a non-compete in place?

Other than information, what do the 2 board members have to gain by signing on? "Opportunity to enhanced enjoyment..." - what the heck does that mean for them? Suspicious. I guess I also don't understand what Dr. A gets from doing this. Are the partners threatening to walk away?

[Uncle Scrooge]

Thanks for your response Johanna!

Dr. A has done quite well for himself and is quite sharp. He has ownership interests in multiple dialysis clinics and I have no doubt his wife will be well taken care of.

I think by disclosing the finances of the group, Dr A wants to provide an opportunity for profit-sharing by all board members, even if they aren't owners.

I asked my wife why he was offering this option, since it he seemed was at a disadvantage. She said he's built this up by himself over the past 25 years and he's not ready to give up yet.

I don't know if Dr. C has threatened to quit, but it's a known possibility he may just leave the city/state. His wife (also a Nephrologist) dislikes her group, which has a lot of disfunctional physicians in it. There have been talks that she may come work for this group as a non-partner-track physician.

Also, despite being exceptionally brilliant, Dr. C has poor social skills, is not widely liked, and often rubs nurses and hospitalists the wrong way. Despite one's competence, it's hard to sustain a practice if people stop referring patients to you.

On the other hand, my wife has incredible people skills, and is very well-liked.

It could be that Dr. A envisions my wife taking over the practice if Dr C. leaves - maybe he thinks his option enables a cleaner break?

 

[jfoxcpacfp]

Thanks for the insight - makes more sense now. Dr. A appears to be much more astute than I gave him credit for after your first post. It sounds as if your wife has a better understanding of him, also. In any event, maybe he is testing them out as partners by observing how they perform in a leadership role before he commits. The prior breakups may have taught him that. Of course, I'm just guessing at this point. Your wife is the one who knows him. Seems she has nothing to lose by sitting on the board. I know of a few physicians who would have liked such an opportunity before signing on the dotted line.

[Uncle Scrooge]

Thanks for taking the time to review this with me. Just putting my thoughts down has provided more clarity.

The more I think about it, the better it seems.

Would this sort of proposal require a contract, beyond what was spelled out in the original email?

Historically, the group has been incredibly lax on paperwork. My wife had an interview, and then a celebratory dinner several months before she finished fellowship, but there was no written offer until I pushed her to ask for one. She signed the 2-page offer letter, and that was all in terms of contract paperwork.

 

[jfoxcpacfp]

Uncle Scrooge wrote:

Would this sort of proposal require a contract, beyond what was spelled out in the original email?

Click to expand...

This a question for an attorney. My .02 is that the employer should ask the employees to sign a nondisclosure agreement and anything else necessary to protect his interests.

[erictait]

This type of arrangement most definitely needs a contract, preferably by an attorney, but if you all feel comfortable without one that is on you.

 

But you have to have something in writing to memorialize the intent of how things are supposed to operate.

You especially need to have the profit sharing component of the arrangement spelled out EXACTLY, bc that is the whole point of this.

How is profit defined?

What expenses are being deducted from patient revenue?

Does productivity level factor into salary and then potential profit sharing percentages?  What is being proposed?

If Doctor A dies suddenly and you have right of refusal, what does that mean?  Can you just take over or are you expected to pay for the practice?

If you are expected to pay, what are the valuation metrics that will be used and who will be charged with hiring the valuation expert?  Is there a mechanism to challenge the valuation?

These and many more scenarios need to be fleshed out during this discussion and business attorneys are pretty good at looking at all of these variables and working through what-if scenarios.

 

You are very astute to understand that a practice such as this (and most practices unless they have a recurring cash revenue client base) is really not worth much, and avoiding "buying in" is a must in my opinion.

[childay]

Eric hit it on the head.  All 3 "partners" need to agree on the compensation arrangement before signing up..  Admittedly there seems to be little downside for you.  Could Dr. A be planning on selling the practice to a hospital system, and thus cutting the other physicians out?  I am also unclear on whether these "ownership interests" in dialysis clinics are included in the arrangement or now.

[Uncle Scrooge]

Thanks for replying Eric and Childay.

These are great questions. I'll will start taking notes, and pretend I came up with them. 

Nothing is currently being proposed. Only that the junior partners will have access to the financials and collectively will have a say in how to distribute the profits. And they will be able to revise the income/profit split every year.

The dialysis clinics are NOT part of the practice. However, medical directorships at such units are, since that is time taken away from seeing practice patients.

It is unlikely that a hospital would buy out the group. It might make sense for an HMO (like Kaiser), but none of the hospitals where the group practices operate that way. They all hire independent doctors or groups.

 

[VagabondMD]

If Dr. A and your wife are not equal owners of the practice, they are not true partners, IMO. Controlling senior partners always downplay the advantage of being an equal owner. That is one way you know you are being screwed.

Dr. A sounds greedy and manipulative, and it appears that your wife has done well building her reputation and has significant leverage in this negotiation. If I were advising your wife, I would recommend that she obtain the same ownership interest as Dr. A or leave.

 

[Uncle Scrooge]

Vagabond, I've previously suggested to my wife she look for a group with better 401k plan, but she's flatly refused.

She's not interested in moving.

I don't think dr A is necessarily greedy. He's just cautious from being burned in partnerships before.

[VagabondMD]

Uncle Scrooge wrote:

Vagabond, I’ve previously suggested to my wife she look for a group with better 401k plan, but she’s flatly refused.

She’s not interested in moving.

I don’t think dr A is necessarily greedy. He’s just cautious from being burned in partnerships before.

Click to expand...

Well, if she will not use her leverage, she will continue to be employed by Dr. A, not matter what he calls her.

Coming out of fellowship, I remember interviewing for a group and hearing of the generous salary (it wasn't) and two year partnership track (it wasn't). As it turns out the real partners, a father, son, and the best friend of the son, were 45-45-10 owners of the practice. The father, who started the practice did not even work any more and drew a full "partner" salary, in addition to the profit from the business. The remaining 10 or 15 rads, called "partners" were salaried employees who maybe received a few crumbs of "bonus" now and again.

When I asked about the potential of buying into the practice, I was cautioned, "Oh, you would not want the cost, hassle and aggravation of all that blah, blah, blah..." What they were really saying is that they were getting f'ing loaded on the backs of the employees, er, "partners", and they did not want anyone else in on their action.

The interview ended rather abruptly. I realized pretty quickly that this job was not for me, but I thought I was playing along reasonably well. I guess I am not a very good actor. The managing partner (Mr. 10% above) said point blank, "It appears to us that you are not interested in joining our practice." I was stunned, as I figured that they would play along, too.

I replied, "Well, you are correct. How about we shake hands, and you get me to the airport?" And it was over.

[Uncle Scrooge]

Vagabond MD wrote:

Uncle Scrooge wrote:

Vagabond, I’ve previously suggested to my wife she look for a group with better 401k plan, but she’s flatly refused.

She’s not interested in moving.

I don’t think dr A is necessarily greedy. He’s just cautious from being burned in partnerships before.

Click to expand…

Well, if she will not use her leverage, she will continue to be employed by Dr. A, not matter what he calls her.

Coming out of fellowship, I remember interviewing for a group and hearing of the generous salary (it wasn’t) and two year partnership track (it wasn’t). As it turns out the real partners, a father, son, and the best friend of the son, were 45-45-10 owners of the practice. The father, who started the practice did not even work any more and drew a full “partner” salary, in addition to the profit from the business. The remaining 10 or 15 rads, called “partners” were salaried employees who maybe received a few crumbs of “bonus” now and again.

When I asked about the potential of buying into the practice, I was cautioned, “Oh, you would not want the cost, hassle and aggravation of all that blah, blah, blah…” What they were really saying is that they were getting f’ing loaded on the backs of the employees, er, “partners”, and they did not want anyone else in on their action.

The interview ended rather abruptly. I realized pretty quickly that this job was not for me, but I thought I was playing along reasonably well. I guess I am not a very good actor. The managing partner (Mr. 10% above) said point blank, “It appears to us that you are not interested in joining our practice.” I was stunned, as I figured that they would play along, too.

I replied, “Well, you are correct. How about we shake hands, and you get me to the airport?” And it was over.

Click to expand...

Wow! That sounds terrible.

The proposal pretty much states the directors will have equal say in determining income/bonus structure, and the finances will be opened, so I don't think the situation is as dire as your previous encounter.

Also, the practice isn't large enough to fund a partners salary without him working full time.

Dr A, is a extremely hardworking. I think his intentions are without malice. Dr B developed a terminal disease and his scaling back created issues of work-load and pay. Dr. A has had to buy him out, and he wants to prevent this sort of situation in the future.

 

[Zaphod]

Uncle Scrooge wrote:

Vagabond MD wrote:

Uncle Scrooge wrote:

Vagabond, I’ve previously suggested to my wife she look for a group with better 401k plan, but she’s flatly refused.

She’s not interested in moving.

I don’t think dr A is necessarily greedy. He’s just cautious from being burned in partnerships before.

Click to expand…

Well, if she will not use her leverage, she will continue to be employed by Dr. A, not matter what he calls her.

Coming out of fellowship, I remember interviewing for a group and hearing of the generous salary (it wasn’t) and two year partnership track (it wasn’t). As it turns out the real partners, a father, son, and the best friend of the son, were 45-45-10 owners of the practice. The father, who started the practice did not even work any more and drew a full “partner” salary, in addition to the profit from the business. The remaining 10 or 15 rads, called “partners” were salaried employees who maybe received a few crumbs of “bonus” now and again.

When I asked about the potential of buying into the practice, I was cautioned, “Oh, you would not want the cost, hassle and aggravation of all that blah, blah, blah…” What they were really saying is that they were getting f’ing loaded on the backs of the employees, er, “partners”, and they did not want anyone else in on their action.

The interview ended rather abruptly. I realized pretty quickly that this job was not for me, but I thought I was playing along reasonably well. I guess I am not a very good actor. The managing partner (Mr. 10% above) said point blank, “It appears to us that you are not interested in joining our practice.” I was stunned, as I figured that they would play along, too.

I replied, “Well, you are correct. How about we shake hands, and you get me to the airport?” And it was over.

Click to expand…

Wow! That sounds terrible.

The proposal pretty much states the directors will have equal say in determining income/bonus structure, and the finances will be opened, so I don’t think the situation is as dire as your previous encounter.

Also, the practice isn’t large enough to fund a partners salary without him working full time.

Dr A, is a extremely hardworking. I think his intentions are without malice. Dr B developed a terminal disease and his scaling back created issues of work-load and pay. Dr. A has had to buy him out, and he wants to prevent this sort of situation in the future.

 

Click to expand...

I dont get that though. He wants the benefit of a partnership, ie shared expenses, etc...without any of the downsides like whats happening to Dr. B. Well, me neither, but thats simply too bad. Everything is a trade off.

[Uncle Scrooge]

 

Click to expand…

Wow! That sounds terrible.

The proposal pretty much states the directors will have equal say in determining income/bonus structure, and the finances will be opened, so I don’t think the situation is as dire as your previous encounter.

Also, the practice isn’t large enough to fund a partners salary without him working full time.

Dr A, is a extremely hardworking. I think his intentions are without malice. Dr B developed a terminal disease and his scaling back created issues of work-load and pay. Dr. A has had to buy him out, and he wants to prevent this sort of situation in the future.

 

Click to expand…

I dont get that though. He wants the benefit of a partnership, ie shared expenses, etc…without any of the downsides like whats happening to Dr. B. Well, me neither, but thats simply too bad. Everything is a trade off.

Click to expand...

In a small partnership, with 4 doctors, if one partner is unable to work how is this typically dealt with?

Are the remaining 3 partners expected to shoulder his income for the rest of his life?

Do they refund him his buy-in?

Is there a key-man insurance coverage to buy-out his share?

Or is he just shown the door?