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Being offered partnership in a medical practice is usually good news, but not always. One physician paid $60,000 to buy in, then signed a contract making her cover all of a $325,000 bonus her two partners had given themselves. That meant $9,000 a month out of her pay, and leaving would keep her liable for a third of the office leases until she was replaced. Health law attorney and Physician Agreements Health Law founder Dennis Hursh discusses his KevinMD article “The partnership offer that cost her $325,000.” He estimates he has reviewed four or five dozen partnership agreements and found only two really bad deals. You’ll hear what to ask for in your first employment agreement, while you can still negotiate: the practice’s finances, the shareholder agreement, the buy-in method, and partnership criteria. He also covers a partner title with no ownership or vote, a clause giving one founder 60 percent of every vote, and which decisions should be unanimous. Stay for the gut check and questions to ask before becoming anyone’s business partner.
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Transcript
Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast. Today we welcome back Dennis Hursh, our health law attorney who talks about all things contracts. Today’s KevinMD article is “The partnership offer that cost her $325,000.” Dennis, welcome back to the show.
Dennis Hursh: Thanks. It’s good to be here.
Kevin Pho: All right. What’s your latest article about?
Dennis Hursh: Well, I have to preface this by saying that pretty much every physician I’ve worked with, maybe 99.9 percent, are great people and great partners, good to be with. You just have to be aware that there is maybe that one-tenth of 1 percent you have to watch out for.
I recently represented a physician who was working for a small practice with two owners. They offered her partnership, which sounded great. She paid $60,000 for her partnership interest. Again, that’s not bad; there’s accounts receivable and goodwill, so paying for your ownership interest isn’t objectionable. When she got the employment agreement, the existing partners had declared a bonus to themselves of $325,000 for their valuable administrative work over the years. Now, you might say, “Well, why should she pay a third of that? That’s outrageous.” A third of that would have been outrageous, but their contract said that she paid 100 percent of it. So she had $9,000 a month coming out of her check to pay for their valuable administrative services over the years. It was just a horrible, horrible experience for her.
Also, apparently, she had not checked out the finances of the practice and was told, “We’re doing great.” I think she might even have been quoted a number for what the partners were making. She didn’t look at the finances; she took their word for it. When she came in, she was really making significantly less than she had as an employee. She might have been making a little more if it weren’t for that $9,000 a month coming out to pay the other partners. So I think the lesson there is just look before you leap. Check out the finances, and check out the documents. Partnership is probably going to be a great deal, but just be aware that sometimes it isn’t.
It’s funny; I had another one, and I think physicians are susceptible to this. She got a new employment agreement, and her title was partner, but that’s it. Usually in a practice, partner means something. Nope. She had no ownership interest, no vote, nothing. Her title was just partner, and I think it was a slick way of moving her from a guaranteed salary to eat what you treat. So again, with partnership, you kind of have to do air quotes and ask, “Is partnership a good deal?” It probably is, but you’ve got to look before you leap.
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Kevin Pho: Now, give us some context on that first practice. Can you tell us what specialty it was, and did this particular physician have to work there a couple of years before being offered a partnership track? Just give us a little bit of context on that situation.
Dennis Hursh: Yeah, it was an ENT practice, and she had worked there for two years. They seemed like nice people. She was doing well. She was happy there. She liked the area. So there was nothing that would trigger your Spidey sense going into it: “Work two years, and if we like you, we’ll offer you a partnership.” She worked two years, they liked her, and they offered her the partnership. So, as I said, there was nothing there that on its face would cause you to say, “Oh, there’s something fishy going on here.”
Kevin Pho: Now, when we’ve had you on the show, we’ve always talked about the initial physician employment agreement. This is something a little bit different: a physician who has worked there for a couple of years and is now offered a potential partnership agreement. I’m actually not that familiar with this situation. In general, how negotiable are these contracts, and what are some of the things physicians need to look out for when being offered a partnership track?
Dennis Hursh: Well, I think the first thing, and it’s a big ask if you think about it, is “I would like to see the practice’s finances, and I would like to see the shareholder agreement.” I admit that is a big ask: “You don’t even work for me yet, and you want me to show you all my personal finances and how we run the practice?” But I think most physicians understand that the whole reason you’re joining a private practice is that you want to become a partner. So one of the first things I ask for is, “Hey, what’s the methodology for buy-in? Can you show us how shareholders are compensated, and can you show us the finances of the practice?” I doubt that if she had seen the finances of the practice, she would have stayed there two years. She would have gone someplace else and gotten a decent salary, so she blew two years of her life on that.
As I said, you do have to realize it’s a big ask, but I get it more often than I don’t. From time to time, they’ll say, “No, we don’t want to disclose that.” But this should be in your initial employment agreement; I’m not talking about once you’re offered partnership. Once you are offered partnership, a lot of times there isn’t a whole lot of negotiation, particularly if it’s a big practice: “Fifteen of us have signed this agreement. We’re not going to change it for you. This is what everybody’s signed.” It’s very different if you’re the first partner coming in. Then usually everything is up for grabs, and it’s a negotiable contract.
I have had some where I’ve reviewed the agreement, and the partners agreed to make the changes for everyone. The partners said, “I didn’t know that. I didn’t realize that could happen to me.” So yes, we changed the agreement for everybody. But by and large, you just have to review a shareholder agreement or a partnership agreement with the idea of what’s the worst that can happen.
And there are things that I see. I had one where I think there were six partners, and everything looked reasonable going through the bylaws and everything, until one little clause that basically said Dr. Smith gets a 60 percent vote in any vote. So everything was majority rule, except the founding doctor controlled everything. It’s like, “We can take a vote if you want, but I’m going to vote yes, and it doesn’t much matter what you vote. So if you want to vote, great, we’ll vote.” But again, that’s extremely unusual. Most you see are majority rule. They’re very reasonable.
Things that I push for are that we shouldn’t do a capital call unless everybody agrees, and we shouldn’t bring in a new partner unless everybody agrees. Those are the kinds of big things I think a physician should have control over. But a lot of the rest, you kind of take what the other partners have signed.
Kevin Pho: So in this particular situation, this physician worked there for two years hoping to become a partner, but the agreement she was offered sounds like it was unfavorable to her. And it doesn’t sound like, at that point, two years in, she had a lot of negotiating leverage. You advise physicians going into a private practice to look at the practice’s financial situation, but they may not always get that, because, as you said, a lot of practices are a little hesitant to reveal their books to a new employee. So if they don’t get that, are they just taking it on faith? What kind of advice do you have for these physicians when evaluating private practice options?
Dennis Hursh: Well, it’s kind of the same thing I tell people if they have multiple job offers: Follow your gut. I love telling that to gastroenterologists, but follow your gut. Something may tell you. She even said, “These guys seemed a little sketchy, but they always paid my salary.” She had kind of a bad sense about them. Well, if you’ve got a bad sense about people, maybe you really want to consider whether you want to be their partner. I’m not saying people can’t hoodwink you, but in general, if you’ve just got a bad feeling about somebody, I would trust your gut and maybe not become a partner.
Kevin Pho: And in this situation, once she signed that partnership agreement and had, as you said, $9,000 of each paycheck going to pay the other partners’ bonuses, is there any recourse at that point?
Dennis Hursh: No. She signed the agreement. That was the deal. I think when she looked at it, she was assured, and she didn’t check the finances, which was the problem. She was assured that she’d still make a lot more money than she did as an employee. I think they even said, “You should make X dollars,” and with that assurance, she went ahead and signed it. And then, of course, it was eat what you treat, minus overhead, minus $9,000 a month, and she was making a lot less than she had as an employee.
Even worse, there was one provision that I don’t think I’ve ever seen before: If you leave, you remain one-third liable for all the office leases and everything until we find a replacement for you. It was just the worst deal you can imagine, and she signed it. I’m not sure why, but she signed it.
Kevin Pho: So you said at the outset that the majority of partnership offers are equitable. They’re fair. This is an outlier case. Is that fair to say?
Dennis Hursh: Very much so. Very much so. I’m guessing I’ve done, I don’t know, four or five dozen of these, and I’ve really only seen, I think, two that I thought were really bad deals and not fair.
Kevin Pho: So the second case you mentioned, where someone was a partner in name only: Again, is this something that could be negotiated in the initial contract?
Dennis Hursh: Yeah, I think so, although honestly, that one surprised me too. It said, “We’ll make you a partner.” I was joking with her that we should ask for the title of emperor instead of partner, as long as we’re doing it. But yes, I think so. When the initial contract comes out, it should be made clear that you will be an owner: “Here’s the methodology for buy-in. Here are the considerations for when we will make you a partner, what we’ll look at,” and all of that. I think that would have tipped her off. They said, “Oh, yeah, there’s no charge. You just come in, and we make you a partner.”
As I said, I think physicians are a little liable to this. In the legal world, a partner means you’re an owner in the practice. But I see physicians all the time working for a hospital and telling me what the partner physicians get. It’s sort of a title, I guess, that hospitals throw out, and physicians are just used to hearing it and assume it means something different from what it really means.
Kevin Pho: I can’t help but notice that in both of these outlier cases, the physicians were women. Do you feel that they were taken advantage of because they are women, or are women in general more likely to be taken advantage of when it comes to these negotiations?
Dennis Hursh: I think sometimes, but really to a lesser extent. In both of those cases, I think it was all male owners who were bringing them in. So there may have been something of pulling one over on the woman, but I suspect they would have tried to do this with a male physician, too. I don’t think it was because she was a woman, but that may have been a factor in both of them.
Kevin Pho: As we know, private practices are becoming more and more the minority. So when someone is evaluating a private practice job, other than asking for that practice’s finances, what are some other red flags, and what are some other things they should do on the initial contract? Because, as you said, it’s very difficult to renegotiate once you’re already in that practice.
Dennis Hursh: Well, I think a lot of it is, as I said, “If you’re going to make me a partner, when are you going to consider me for partnership? What criteria are you going to look at? What’s the methodology for my buy-in, and if I buy in, will I be an equal partner?” I think those are all questions they should be willing to answer in the initial employment agreement: “We will consider you in good faith.” Honestly, if they say, “We will make you a partner,” that’s almost a red flag too, because, “You’re a great guy, but the next person we hire is a total jerk. But that’s OK. We said in two years, ‘Meet your new partner.’ None of us like him, but we told him he’d be a partner, so he’s a partner.”
Kevin Pho: We’re talking to Dennis Hursh, health law attorney. Today’s KevinMD article is “The partnership offer that cost her $325,000.” Dennis, as always, let’s end with your take-home messages for the KevinMD audience.
Dennis Hursh: Well, again, if you’re looking at a private practice, one of the biggest things is to follow your gut. Are these people you would like to be partners with in a business? A practice is a business, a business partnership with them. Do you trust them? And then I think the other things are to look at how you become a partner, what’s going to be evaluated, what the methodology is for buying in, and the finances of the practice. Is this something you really want to join? If it’s a sinking ship, why would you want to become an owner?
Kevin Pho: Dennis, as always, thank you so much for sharing your perspective and insight, and thanks again for coming back on the show.
Dennis Hursh: It was my pleasure.
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