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Succession Planning for a Medical or Dental Practice

March 30, 2015

Not many business owners want to think about a time when they will have to hand over control of their company, but succession planning is necessary for any business owner. It is especially important for medical and dental practitioners because only those with formal training and licensure can take over the business. Developing a succession plan keeps the practice running, providing continued healthcare to patients and jobs to employees who work for the practice.

Succession planning also enables the owner to convert the equity he or she has created in the business to cash for retirement. The structure of the succession plan will depend on the type of practice. A member of a group practice will need to create a buyout agreement with the other partners to determine compensation. Solo practitioners will need to find a buyer or a merger partner to take over the business.  In either case, a succession plan enables the owner to manage the transition of his or her business to future owners and management.

Succession Planning for a Group Practice
Multi-physician practices, or group practices, should create a buyout agreement for any physician that decides to leave the practice. A buyout agreement, or buy-sell agreement, is a legal agreement between the owners of a business that determines how the future sale or buyout of an owner’s interest in the business will be handled. The document should identify the seller, the buyer, the trigger events and the terms of the sale. In the case of a group practice, the seller is a partner in the practice and the buyer is the medical group. Trigger events could be death, disability, retirement or voluntary withdrawal from the practice.

A buyout price is usually determined by a self-adjusting formula and is typically based on the seller’s productivity. A self-adjusting formula keeps the agreement current without the partners having to revisit the agreement each year to re-set the value. A current agreement is not only important for retirement planning, it also protects a practitioner’s family if his or her career ends prematurely. In the event of a death, the surviving family would not have negotiating power with the remaining partners. The buyout would be carried out exactly as the as the agreement states, whether it is up-to-date or not.

Succession Planning for a Solo Practice
For a sole practitioner, succession planning requires the physician or dentist to find a buyer or recruit a successor who will eventually buyout his or her stake in the practice. Potential buyers could be younger physicians who may have joined a group practice with the hope of eventually becoming partner. These physicians may realize that the price of becoming partner is so high they might be better off buying their own practice. Even physicians finishing their residency could be potential buyers. They may find the purchase price to be lower and the potential income greater than other options.

For a physician or dentist that prefers a more gradual transition, another option is to bring in a junior physician or dentist with the expectation that they will eventually take over the practice. It is important to prepare well in advance for this possibility.  Ideally, a junior partner should be brought in three to five years prior to when the current owner plans to retire. This gives the owner ample time to watch how the new partner works and decide whether it is a good fit for his or her practice. If things do not work out, there is time to search for a new successor. This option is also good for patients. A gradual transition gives patients time to get acquainted with the new care provider and is likely to result in higher patient retention.

Planning for retirement is not just about contributing to a 401(k) or a profit-sharing plan. A well thought out succession plan allows physicians and dentists to cash in on the equity they helped to create in their business. Succession planning is also important for patients. Finding a successor ensures patients will receive uninterrupted care into the future. The type of succession plan needed will depend on the type of practice.  

A group practice requires a buyout agreement among the partners and a sole practitioner will need to find a buyer or a merger partner to transition the business. Whatever the case, succession planning is important for the continuation of a practice and it is never too early to being planning for the future.