If you have been offered the opportunity to buy into a medical practice, congratulations! For most physicians, this will be a tremendous opportunity. Being offered an ownership interest indicates that the current owners recognize your worth and are inviting you to “join the club.” It is hard to imagine a greater validation from your peers.
At the same time, physicians do need to protect themselves from a bad deal. In my 40 years of practice, the vast majority of opportunities to buy into a private practice have proven to be excellent deals. However, I have seen outliers where the “opportunity” would have been a lousy deal for the physician.
One important issue that physicians or their legal counsel should review prior to accepting a purchase offer is the corporate governance documents. Most practices give their new partners equal votes and equal ownership. However, I have reviewed corporate articles of incorporation or bylaws that gave the founding partner a majority vote in any decision. “Partners” in that practice effectively had no voice in corporate governance.
I have also reviewed documents where there were multiple classes of partners. “Founding members” had more rights than “senior partners,” who in turn had more rights than “junior partners.” Needless to say, a “junior partner” was effectively an employee who was compensated on an “eat what you treat” basis. The new physician basically had all the downsides of partnership (no guaranteed income) with the downsides of being an employee (no real say in corporate governance).
If it is a relatively small practice, it would be appropriate for the new partner to be on the board of directors (if a corporation) or be named as a manager (if an LLC or PLLC). For a larger group, it probably makes sense for a smaller group of physicians to make the day-to-day decisions. But even in larger groups, there should be some decisions that require a majority (or even a supermajority) of the owners to decide. For example, bringing in a new partner, selling the practice, or incurring a very large debt should not be decided by a small cadre of physicians—all the owners should have a vote.
In a corporation, the shareholders’ agreement should be examined. It is important that the methodology used to determine your buyout price is the same methodology used to determine your buy-in price. For an LLC or PLLC, this methodology would usually be contained in an operating agreement.
It is not unusual for the partnership interest to be purchased over time. If that is the case, it is reasonable for the practice to insist upon a security agreement, where the shares being purchased are held as security until the purchase price is paid. If this is the case, however, these shares should be released as the purchase price is paid. Sometimes you see security agreements where all the shares are held until the last payment is made.
The new partner will also most likely be required to execute an employment agreement with the practice. The biggest concern in a shareholder’s employment agreement is that the new physician’s agreement is substantially identical to those of the other partners.
Perhaps the biggest issue that requires examination is the financial stability of the practice. Here again, in the vast majority of cases, the practice is financially strong. However, I have encountered instances where reimbursement dropped or expenses increased, and the existing partners borrowed money to pay themselves. When the new partner comes in, that physician is expected to guarantee a portion of the debt. On the other hand, mortgages and debts to purchase equipment are less of an issue since these were generally legitimate business expenses secured by an asset, where the new physician will effectively own a portion of the asset (and the income generated from that asset). The best way to check the financial stability of a practice is to review the tax returns for the last few years.
In general, being given the opportunity to buy into a medical practice is a major lifetime event that is worthy of celebration. However, physicians do need to protect themselves to make sure that the opportunity is not actually a trap.
Dennis Hursh is a veteran attorney with over 40 years of experience in health law. He is founder, Physician Agreements Health Law, which offers a fixed fee review of physician employment agreements to protect physicians in one of the biggest transactions of their careers. He can also be reached on Facebook and LinkedIn.
Dennis is a frequent lecturer on physician contracts to residency and fellowship programs and has spoken at events sponsored by numerous health systems and physician organizations, including the American Osteopathic Association, the White Coat Investor, the American College of Rheumatology, the Pennsylvania Medical Society, the Pennsylvania Society of Cardiology, and the American Podiatry Association.
Dennis has authored several published articles on physician contractual matters on forums such as KevinMD and Medscape. He is also the author of The Final Hurdle – A Physicians’ Guide to Negotiating a Fair Employment Agreement which is considered the go-to resource on physician contract negotiation.
