Article Date: 10/1/2005

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When It's Time to Cut the Cord
An alternative strategy for buyers and sellers of private practices.
Gary Gerber, O.D.

The classic transition of an optometric practice from senior to junior doctor involves the senior doctor staying on with the practice for a fixed period of time. In the usual arrangement, the purchasing doctor, Dr. Junior, pays Dr. Senior a salary for his time in the office. So far, so good — or so it would seem.

In our experience, the above arrangement is not only unnecessary but usually costly to both parties. Considering Dr. Senior garners a significant salary, and Dr. Junior has just inherited a huge debt when the practice was purchased, Dr. Junior is going to be strapped for cash. Not having to have to pay Dr. Senior would certainly help Dr. Junior immensely.


Helping the transition?

Let's examine the commonly held motivations for having Dr. Senior stay on. Dr. Senior will generally contend, "I will help with the transition and make sure patients are introduced to Dr. Junior. My endorsement will help with patient retention." Dr. Junior is often insecure and welcomes having Dr. Senior's help with the transition. While all of this is probably true, is it really necessary? Again, our experience is that after a few weeks, Dr. Senior's services are no longer required.

We have also found that Dr. Junior has sufficient clinical acumen to work in Dr. Senior's practice. So, the transitional help really applies more to the administrative end of running the practice. In many offices, these tasks are delegated to the office manager. If that person remains with the practice, the administrative transition will be very smooth and require little input from Dr. Senior. If not, Dr. Junior can generally get up to speed in about two weeks — not two years.

Having Dr. Senior introduce every patient isn't practical. And with a well-crafted marketing campaign that highlights the positives of the transition, you can get the proper message to all patients.

How to make the break

So, how can buy-sell agreements be structured so it's economically feasible for both doctors to accelerate the transition? As in most financial matters, careful planning helps. In this case, Dr. Senior should plan a short transition. This isn't meant to be callous, but once the practice is sold, Dr. Senior isn't entitled to any additional benefits. It's no longer his practice. While this may be emotionally difficult for Dr. Senior, the economic realities are that Dr. Junior is now the practice owner and responsible for making sure the practice runs profitably.

When the exit isn't well planned in advance, both parties can still find some common ground by using the concept of the time-value of money. Let's say the original agreement included a practice sale price of $300,000 and a stipulation that Dr. Senior is paid $600 per week for one year, or $30,000.

An alternative strategy would be to pay Dr. Senior a figure between $300,000 and $330,000 at the closing. That way Dr. Senior gets more of his money up front and Dr. Junior ultimately pays less for the practice. By getting a larger lump sum payout sooner, Dr. Senior can take advantage of the time value of money and invest the money he would have otherwise taken in a paycheck in weekly increments.

Senior doctors take heed. I am not advocating putting you out to pasture without reasonable compensation. On the contrary, by helping Dr. Junior afford your practice and structuring a buy-out plan that is fair to both doctors, your retirement pasture can be greener.


Optometric Management, Issue: October 2005