Get It in Writing
Many factors underscore the need for written agreements. This example involves the purchase of a practice.
By Richard S. Kattouf, O.D.
My partner and I are equal owners of our practice. He's 15 years my senior and wants to retire, but we're having disagreements on what I should pay him for his half. Any advice you could give would be appreciated.
C.N. Lee, Via e-mail
A: When you initially purchase a portion of a practice, your contract should specify that the buyer has first right of refusal to purchase the remaining practice and property (building) if applicable. Because both partners took financial risks and spent countless hours developing the practice, a clause stating the formula for purchasing the remaining portion should be clear. So many factors are involved.
Consider the following questions when formulating a contract for a practice partnership. During the partnership, did both doctors work similar hours? If, for example, the senior doctor worked three days each week and the new doctor worked five days, then the younger doctor should get a significant break in the purchase price of the remaining half. If both doctors worked the same, then the senior doctor should receive fair market value minus a brokerage fee.
The initial contract should define whether the senior doctor chooses to stay with the practice as an employee and/or private contractor. Spell out the compensation: Is it hourly? Daily? Does the senior get a percentage of his collectable receipts?
As a practice management consultant, I've noticed that optometrists don't define many of the above issues and other standard issues, which are restrictive covenant clauses. These are noncompete clauses to protect the buyer. For example, how long can the buyer use the seller's name? If the contract doesn't define this, then disagreements may arise. Will the seller act as a consultant to the practice? Usually, this is part of the goodwill. In some cases, the buyer will pay for this service. If family members of the senior are employees of the practice, does the buyer want to continue the work relationship?
Meet Dr. Sonlet
Dr. Sonlet called my company with a situation similar to Dr. Lee's. He purchased 50% of a practice 12 years ago. In reviewing the figures of the initial buy-in, I found that he'd overpaid by $70,000. There was no stipulation as to how and when the two partners would sell the other 50%. The senior doctor (seller) owned the building and Dr. Sonlet (buyer) paid a fair market rental to him. For the lifetime of the partnership, the senior paid all repairs and maintenance for the building from their joint account. (This amounted to more than $60,000.) He also worked about 50% less than Dr.
Sonlet, yet garnered half of the profits.
Both parties can take their share of blame. Dr. Sonlet enabled the seller to take advantage of him. The senior doctor wasn't honest in his using office funds to maintain his building. These types of human dynamics underscore the need for specific written agreements.
Learning the hard way
I appraised the practice and attempted to negotiate the sale of the senior doctor's portion. I subtracted half of what the senior partner spent on the building as well as a portion of what the senior had taken in excess as his draw. The amount that was left is what we offered. The senior threatened to sell his half to a third party and attempted to do so at an inflated value. After three unsuccessful years of looking for a buyer, the senior partner unfortunately became ill and asked me to re-open negotiations. We finalized the sale at a fair value.
The key to avoiding practice purchase headaches is preventive management. Agree on everything and include it in the contract during the initial buy-in.
Dr. Kattouf is president and founder of two
management and consulting companies. For information, call (800) 745-EYES
or e-mail him at email@example.com.
The information in this column is based on actual consulting files.
Optometric Management, Issue: April 2004