Practice Strategies

Practice Killers: The Lowdown on What Can Bring A Practice Down

Medical and dental practices self-destruct on a regular basis. In most cases, the problem is poor decisions —“practice killers” — made by well-meaning partners. These decisions (or the failure to make a decision) typically lead to nasty legal battles, hefty attorney’s fees and, ultimately, a disbanded, disabled practice.

In this first of a series, we’ll look at one common “practice killer,” and explore how taking some specific actions upfront can help avoid serious problems down the line.

Practice Killer #1: Failure to draw up effective, enforceable employment agreements.

Even though “get it in writing” is approaching mantra status, some otherwise sharp physicians still neglect it when it comes to partnership or employment agreements. They decide it's cheaper and easier to trust one another than to pay someone to draft these documents.

Unfortunately, a handshake agreement typically leads only to confusion and conflict. For example:

• Who gets credited for what in a partnership under an unwritten — and complicated — compensation formula?
• What leg does the practice have to stand on when, in the absence of an enforceable noncompete agreement, a disgruntled partner opens his own practice down the hall, taking not only patients but top staffers?
• Or, how about the young associate who jumps ship because he was dissatisfied with foot-dragging on a practice buy-in, as well as a promised bonus — all things that were discussed but never outlined in a formal partnership agreement?

Pave The Road

A good employment contract will pave the way to partnership so that everybody knows what to expect and when. Here are the major issues a well-crafted agreement should cover:

• Buy-in, buy-out and liquidation provisions, including who retains the location, equipment and records of the partnership.
• Coverage arrangements.
• Division of management duties.
• Illness, disability and leave of absence.
• Income, expense and profit allocation, including any deferred compensation.
• Mechanisms for settling disputes.
• Ownership and valuation of assets, including accounts receivable.
• Physicians' individual liability for lawsuits against the practice.
• Purchasing policies, including who's authorized to spend and up to what limits.
• Restrictive covenants (especially an effective noncompete clause).
• Vacation policies.

Keep It Current

Written agreements are not static documents — they need to change with the practice. Unfortunately, many practices change policies but don't think to update key documents. When their office manager or practice management consultant brings up the fact that they should do this, they balk at paying attorneys' fees. As a rule of thumb, you should update a partnership agreement when a new doctor joins or leaves the practice, or whenever the practice materially alters the way it does things.

Likewise, it's important to periodically revisit buyout agreements. Because concepts of what constitutes a fair buyout are constantly evolving, it’s smart to update your buy-in/buyout methodology accordingly.

Cover Your Bases

To craft effective, enforceable agreements, you’ll need an attorney who specializes in the medical field. Likewise, when it’s time to get a practice appraisal, hire an accountant who routinely appraises medical practices.

For more information about our services to the healthcare industry, Contact:
Maxine Lawyer, Director of Healthcare Services at 972.448.6905.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
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