Starting or joining a medical practice as a principal is an exciting time for many doctors. It’s a time for new opportunity, career development and running your practice as you see best.
But for every new venture started, there are also those that come to an end.
And while everyone hopes that the end of a business is due to a well-earned retirement or planned sale, the reality is that for some, a sudden departure of a business partner may quickly throw a business into chaos.
As the scenario* below illustrates, things can quickly go from bad to worse if a proper succession plan is not in place.
Doctors Rocha, Mullins, Sanchez and Khan run a medical practice together. They are equal partners and have worked together for many years in business premises they co-own.
None of the doctors have plans to retire in the foreseeable future.
On a typical Wednesday morning, the practice receives a phone call. Dr Mullins has been involved in an accident and has passed away.
The surviving doctors hold an emergency meeting to try and ensure Dr Mullins’ patients continue to be looked after.
A few weeks later, the doctors sit down to discuss what to do.
Dr Mullins’ family has called and asked when they should expect their share of the business to be paid out to them. Unfortunately, there is no documented valuation method or agreement as to how the business should be valued.
When discussions turn to revenue sharing, things get even more heated. Dr Rocha says that everything should remain even, but Dr Sanchez argues she should be compensated for taking on the lion’s share of Dr Mullins’ patients.
After much back and forth, the remaining doctors finally agree on a valuation method and organise their accountant to prepare the valuation report.
While waiting on the report, significant tension remains between the doctors as they try to resolve the revenue issue and the conflict begins to impact the practice.
When the accountant returns with the business valuation, a new problem arises. The practice has been quite successful and along with an increase in property prices, Dr Mullins’ share has increased considerably.
The remaining doctors consider buying out Dr Mullins’ share. None of them have sufficient cash on hand to buy out the share. Dr Rocha’s recent divorce means his borrowing power has reduced considerably. Dr Sanchez has recently purchased a new investment property and the bank has turned her down for further finance. Dr Khan has some borrowing capacity but not enough to cover a full quarter share of the business.
They are yet to find another doctor who might be interested in joining their business structure in place of Dr Mullins.
Meanwhile, Dr Mullins’ family calls for an update on when they will receive their payment and threatens to force sale of the practice if they don’t receive something soon.
As disputes over revenue splitting continues, Dr Sanchez decides she no longer wishes to remain in the practice.
With no alternatives available, the doctors start searching for a prospective buyer of the practice.
The dilemmas faced by the doctors could have easily been avoided if a proper succession plan had been in place.
Rather than simply hoping for the best, a succession plan spells out in detail what should occur if you, or one of your business partners, should suddenly pass away or lose capacity. It can also help fund the buyout of an exiting partner so that you can continue practising, rather than worrying about how you will afford an unexpected purchase.
Features of a succession plan include an agreed business valuation formula and mechanisms for how an exiting doctor’s share of the business can be sold to a third party or purchased by the remaining doctors.
If the practice had also organised buy/sell insurance, the family of the affected doctor could be paid out via insurance. This allows the other doctors to continue working without having to overextend themselves to finance the payout themselves.
If your business has not considered its succession future, or you haven’t reviewed your structure in some time, now is the time to get organised.
If you have any questions, or would like more information about how we can assist your practice, please call 1800 867 113, or fill out this form to organise a confidential discussion at a time that suits you.
Key person insurance+ can provide your practice financial protection in several different ways, including mitigating revenue loss from the death, sickness, or invalidity of the key person, covering replacement costs, servicing debts, addressing goodwill write-downs, providing liquidity, and maintaining supplier relationships.
If you are thinking about taking out key person insurance, book an appointment with Avant Life Insurance for advice tailored to your personal circumstances.
Michael Mobberley is a Senior Associate in the estate planning and commercial law practices at Avant Law, based in Sydney. Michael is an accredited specialist in Wills & Estates and holds a Masters degree in Corporate, Commercial and Taxation Law.
Michael provides advice to both individuals and businesses on a range of matters, as well as acting for clients in contested estate and family provision claims.
Disclaimer: Scenarios* in this publication are fictitious and any resemblance to real persons is purely coincidental. The information in this scenario does not constitute legal advice or other professional advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest, and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of its content. The information in this article is current to 16 January 2024. Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme.
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Liability limited by a scheme approved under Professional Standards Legislation. Legal practitioners employed by Avant Law Pty Limited are members of the scheme.
