For more information reach out today: P. 630.541.5958 or E. info@midwestlegacyllc.com

Succession Planning is something that must start way before providers start to approach retirement age. We are going to address both solo and group practices This is one of the most crucial decisions a physician owner will potentially face. Succession Planning tackles the critical issues of when and how to retire from your medical practice. Many physicians seem to wait until the last minute and with advanced planning you can come up with a financially beneficial conclusion which can help ease the transition of ownership.

Succession Planning for Solo Physician Practices

Individual physicians must seek the future of their practice with great intent, and they must do so purposefully and with a lot of thought. This extra effort can have a direct impact on the financial rewards of what it means when it comes to succession planning. A realistic evaluation of your financial future and the emotional effect of handing over the practice to a new physician rather than simply closing it does affect all parties involved.

Most of the time physicians have three basic options for succession planning. They include:

1. Slowing down on a gradual timeline and eventually closing the practice when they have reached retirement age and the financial rewards are no longer worth the effort. They sell their equipment for a nominal value and call it a day. Potential buyers usually pop up around this time and closing the doors completely doesn’t happen often.
2. Sustaining a full-time schedule until they are ready to retire. At that time, they sell the practice to a single successor or a potential buyer.
3. Initiating the recruitment of a successor early, building up the practice to accommodate supporting two physicians, and then selling the remaining half of this now multi-physician practice to a third physician.

The Timeline for Succession Planning

If a successor is needed, the timeline for two out of the three essential options will be contingent upon how long it takes to find the right successor or buyer for the practice. Let’s break this down a little more.

Obviously the first option won’t require recruitment and is the quickest option to get out. Winding down and eventually letting go of a practice will result in a decline of financial gains and ultimately a simple sale price. Depending on the market, if you happen to find an eager buyer while you are beginning the wind down, you can basically shift to a variation of the second strategy and sell the practice to a single successor at retirement.

Selling the practice to one physician usually produces a fair market value purchase. Reduced compensation is normal during this transition period because what was once a single physician practice must now support the income of two doctors.

Some things to consider with this timetable: the second option varies on whether you are recruiting your successor from a resident or fellowship program or selling to a physician who is already in practice. The third option not only requires the recruitment of two physicians but also means allowing for enough time between these said recruitments to successfully build up the practice to accommodate the addition of more physicians. This can sometimes take twice as long as the second option mentioned.

If pursuing an option that involves selling to a third-party, obtaining a practice valuation from an experienced financial-practice valuation professional is a first step. This way you are getting a realistic expectation and subsequently a basis for negotiating that brings validity to the sell as opposed to ‘an opinion’ of your own practice’s value.

Lastly, utilize other resources. Discuss your plans with those you work with, hospitals you align with for example. They are underserved in many areas and rely heavily upon maintaining the physicians they have grown to rely upon. Hospitals situated in a more competitive marketplace have a need to sustain or build their physicians and patient bases.

“You can’t make short-term decisions for long-term gains.”
Christopher Gandy, LACP

Succession Planning for Group Practices

When an established multi-physician practice is looking into what’s next when it comes to succession plans–those plans are typically driven by the opposing interests of both the entering and exiting owners. They might be shareholders, partners, or LLC members. When this is at play here are some things that are smart to consider:

I. Buy-in and buy-out. Entering physicians seek the lowest possible buy-in and those exiting are looking for the highest possible buyout. This does not mean that either party is looking for an unfair deal, they just have opposing interests. Therefore, formulating a reasonable buy in and buy out is exceptionally important–especially in today’s somewhat difficult healthcare climate. One of the biggest issues here has to do with assigning a value to a practice’s goodwill. One must ask, does the practice have value more than its net assets?

II. Malpractice Insurance. If a said practice’s professional liability insurance claims-made insurance, then it is critical that the exit plans must include payment of the malpractice tail. Many insurance companies waive the tail in the event of the physician’s retirement. What happens if this issue goes unaddressed? There could end up being a compelling dispute between the physicians since the tail cost is on the rise along with malpractice premiums in general. All parties, the practice, and the physician, must be aware of the potential for uninsured liability if the tail isn’t purchased.

III. Restrictive Covenants. This issue must be covered in the transition documents. Here’s why: practice departures that are real retirements do not typically raise restrictive covenant issues. Practice owners should not pay practice buyouts to doctors who leave or retire only to set up competing practices.

IV. Real Estate. If you lease from a third party, then the likelihood of this being an issue is non-existent. Yet, the truth is by the time of retirement, real estate investments are normally a component of a physician practice. It is also not typically part of the professional corporation that serves the practice entity. However, if the ownership is linked to the practice, then a buyout transition plan should be included. What happens if not, then the remaining physicians must indeed be prepared to deal with the real estate owners as independent third-party owners.

For more information reach out today: P. 630.541.5958 or E. info@midwestlegacyllc.com