Four Mistakes That Will Trip up an Optometry Partnership
September 26, 2018
By Nathan Hayes, IDOC Consultant
Strangely, it's much easier to get divorced from your spouse than to break up a business partnership.
Partnerships can be a very powerful way to grow your practice and make the most of the multiple benefits of ownership: higher income, more flexibility with your time, and less stress. Having one or more additional owners can accelerate growth by letting owners spend more time on patient care and the management activities they are best at.
But there are trade-offs. It’s much easier to have a single owner who makes all the decisions. The more owners a practice has, the lower the income potential for each owner. It can be hard to work through impasses when partners disagree.
If you’re thinking of forming a partnership or are already in one, here are four mistakes I’ve seen, and how to avoid or fix them.
1. Wrong or unclear expectations of partners
First of all, owners need to have a clear picture of why they’re bringing in a partner and what they expect from a partner.
There are generally two reasons for bringing on a partner. Either you’re locking in a talented OD who can help grow your practice for the long term or you’re locking in an exit strategy by selling part of your practice now, in expectation that the new partner will buy the rest when you’re ready to retire.
If you’re looking for the long-termer, ask what they bring to the business. How will they help the practice to grow? New patients? Additional services or skills? Bringing in a new partner because it’s "what’s done" is not a good enough reason.
2. Vague criteria for the equity split
Handshake agreements are not your friend. Know from the start how much equity each partner will have and how much it will cost. Put it in writing.
Vague notions of building up 'sweat equity' over time can lower the cost of entry for a new partner, but also lead to conflict over when the new partner has earned their full equity. It’s always best to have a defined price for a defined amount of equity with defined terms (payment period and interest rate) for the buy-in.
3. Wrong pay formula
Over time, the biggest source of conflict I see between partners is a pay formula that isn’t perceived to be fair. Often, at the beginning of a partnership everyone contributes at an equal level. And at first either a straight split of the profits or a pure production-based formula will pay the partners roughly the same amount.
But in practices where partners carry different patient loads (and therefore don’t produce the same revenues) or where one partner shoulders a greater amount of the management responsibility, a more nuanced pay formula is appropriate.
As a baseline, I recommend partners take their pay for three roles as follows:
20% of collected revenue generated by each partner
2%-4% of total practice revenues to a managing partner if one carries most or all the management responsibilities
Divide cash flow distributions according to equity
The advantage of such a breakdown of formula is that it naturally flexes over time. If one partner reduces his workload, his income will naturally drop. If another partner takes time away from patient care to manage the business – allowing others to spend more time on patient care – there is compensation for that role. And majority-minority partnerships have their relative equity reflected in the cash flow distributions.
4. Not planning for exits
Finally, be sure your partnership agreement includes a plan for partners to exit the practice, in final retirement or for any reason along the way. Spell out how partners can withdraw from the partnership. Typically, there will be penalties (a reduced buyout amount) for withdrawing with less than twelve months’ notice or if a partner is being expelled for conduct.
Have a formula in place for valuing the shares and review it periodically (at least every five years). You don’t have to slavishly follow the formula – sometimes younger partners will 'sweeten' an offer to take full control of a practice – but it is very helpful to have some idea of what the buyout would be.
This is especially important if your partnership needs to dissolve due to conflict in the partnership. The worst case is to need to break up a partnership and not have a pre-agreed formula for one partner to buy out the other.
Not to be entered into lightly
Partnerships are effectively a business marriage. Like marriage they can be a huge blessing, but also like a marriage, if they go sideways the consequences are disastrous.
Be sure you do your due diligence and have explicit terms, drafted with the advice of an attorney, before you formalize a partnership. If you’re in a partnership that hasn’t formalized the answers to these issues, start now. The goal is to have a long-term relationship that makes all parties more successful – in terms of income, free time, and quality of life – than they would have been otherwise.
My best wishes for your continued success.
Nathan Hayes is the Practice Finance Consultant for IDOC. He is a 10-year veteran of the eyecare industry, working at HMI Buying Group and Red Tray, Prima Eye Group from its inception and now IDOC. In his current role, Nathan helps OD practice owners manage their overhead, grow practice revenues and profits, and maximize their personal income, free time, and professional satisfaction. For questions or comments about this article, please contact firstname.lastname@example.org.