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In physician partnerships, a well-planned exit strategy helps physicians minimize conflicts and ensures a smooth transition when partners leave the practice.
When forming or continuing a medical partnership, whether organized as a professional corporation or limited liability company, the best time to consider exit strategies is at the commencement of the arrangement. Even the friendliest of partnerships will eventually see one or more members leave due to retirement, disability, personal situation, or death. Waiting until the need for an exit strategy arises can result in ambiguous situations that lead to acrimonious negotiations or costly litigation. While even the best plans cannot anticipate all possible circumstances, proper planning can help to set mutual expectations and avoid many unpleasant scenarios. Here are some basic concepts that an operating agreement (for an LLC), a shareholders’ agreement (in a professional corporation), or other contractual documents should address to plan for future scenarios:
- Buy-Sell Rights and Obligations: Questions to consider include:
- Should a member have the right to sell to a third party?
- If a member wants to leave, should they have the right to be bought out?
- What if more than one member wants to leave simultaneously?
- What rights does a member have who becomes disabled?
- As members age, should they have the right to work part-time and receive a partial buyout?
- If a member dies, what rights will their estate have to be bought out?
- Valuation Method: Once a scenario arises in which a buyout is to occur, how will the buyout price be determined? There are various alternatives to choose from, including formulas based on gross revenue, net profits, book value, and accounts receivable, as well as valuation based on an independent appraisal.
- Funding Mechanisms: Having determined the value of the exiting member’s interest, it is important to establish how that amount will be paid. A single lump sum could place the practice in a cash flow crunch and hamper its ability to continue. Options include installment payments over time, installments limited to a percentage of cash flow, and/or use of life insurance policies to fund a buyout in case of death.
- Non-Compete and Non-Solicitation Clauses: To preserve the practice’s interest in the goodwill of the departing physician, consider including provisions that prevent a departing physician from competing directly with the practice within a defined area, and that prohibit the departing physician from soliciting patients and staff after leaving.
- Dispute Resolution: The inclusion of mediation and/or arbitration provisions can help avoid costly litigation should a dispute arise among the partners in the practice.
- Tax Implications: Consider the tax consequences of different exit strategies for both the departing physician and the practice.
In fashioning a plan, it is important to work with legal and financial advisors who specialize in healthcare to ensure that the strategy selected will comply with legal requirements, allow for the continuation of the practice following a physician partner’s departure, and achieve intended financial goals.
By carefully considering these factors and drafting a comprehensive exit strategy, physicians can minimize potential conflicts and ensure a smooth transition when one or more partners decide to leave the practice.