Most studies show that a business partnership often lasts between three and five years. Making it past that point usually results in a long-lasting and successful business. Dermatology remains one of the most competitive specialties in medicine, so it is important that obstacles do not hinder your ability to maintain a thriving practice.
In 2021, the dermatology industry was valued at dollars and will continue to grow. Keeping up with this growth is ideal, but something like a difference in opinion with a partner can hinder your chances at success. Buying out your business partner can be a necessary decision, albeit a tough one to go about. In order to have a successful transaction and preserve the relationship of your partnership, these are some of the best tips to follow when going through a buyout.
Plan Ahead
The initial agreement with your partner needs to anticipate the terms of a buyout. Trying to unravel a business without enforceable guidelines can result in significant delays or even lead to litigation. Arguments over record custody, valuation and even announcements to patients can become combative and expensive.
Gather What You Need
It’s time to gather the needed information to start this process. You need to find formation articles, partnership, operating or shareholder agreements and any other relevant documents to review. When reading over these articles, check for any buyout clauses— there are oftentimes a guide to handling a buyout included within these documents.
Sit Down with Your Partner
Talk to your business partner and inform them that you think the best framework for the business moving forward is through a mutual departure. Discuss the reasons why you believe a buyout is the best path forward. Remember, dermatology is a competitive industry, so every move counts.
Keep it fair and professional. You need to articulate your vision for a plan that is fair to all parties— you, your partner, employees, vendors and patients. Because this is your idea, the ball is in your court, and it is important to have all of the relevant information in one place before proceeding further. You don’t want to make this more difficult than it has to be.
At the same time, if they are going to receive a significant buyout; for example, beyond just their own share of accounts receivable outstanding, then you have a right to protect the goodwill they leave behind. This means clear expectations about adherence to restrictive covenants, including whether or not they can solicit patients, geographic restrictions, and ensuring neither party disparages the reputation of the other both in announcements and in marketing.
Hire a Valuation Expert
If the agreement governing your relationship requires a valuation, or if it is not address in the agreement, then it is time to hire a valuation specialist to accurately assess the equity value of your dermatology practice. This is a crucial step in the buyout process as a valuation expert can give an objective number to you and your current partner. The specialist will produce a detailed report that outlines the value of each aspect of your practice. This gives a good idea of how to move forward to both parties by providing transparency and accuracy.
Because dermatology practices consist of expensive equipment on top of staff and medicines, an accurate value is important to this process. Without it, one or both parties could be flying blind through the deal.
Keep in mind that whoever pays the expert will sway the resultant valuation in their favor. For this reason, you may want to split the expense.
Funds and Loans
Figure out how you want to fund the process. All forms of financing are worth considering in order to create a deal that works for all. Small Business Administratino, private equity, owner financing and personal funds are all viable options to consider when laying out the framework for a buyout.
Although you aren’t starting from scratch, a new path still requires a fresh set of funds; particularly as a result of the loss of revenue arising from the partner’s departure. Generally speaking, an SBA loan is the best type of loan for a practice in medicine and the U.S. Small Business Administration guarantees up to 85 percent of the loan. SBA loans carry low-interest rates and long repayment terms. Doctors remain some of the strongest candidates for this type of loan.
If you need faster financing for your deal, then a short-term loan could be another useful option. These loans carry higher interest rates and shorter payback periods, but are valued for their speed. Remember, dermatology tends to produce a good amount of revenue, so if you have done the math and decided you are able, a short-term loan could be the best option for you.
Alernatively, you and the withdrawing partner can agree that they will personally finance the payout. Specifically, they will agree to forego payment up front and instead accept payment in installments over time. If you agree to a plan, you may want to hedge your risk by capping each installment payment at a percentage of your own monthly revenue. This way, your cash flow will not suffer and you will not need to run to a bank to get a loan that you have to pay back with interest in order to cover this non-operational expense. In exchange, the departing partner may want interest to accrue since they will not have immediate use of such funds, and may further expect collateral rights. When you grant collateral rights; meaning, a lien on your revenues and hard assets, that will prevent you from getting your own loan to fund your business, because lenders will not want to wait in line behind your former partner. These negotiations therefore require a balancing act of practicalities and risk allocation. After all, if you go out of business, their buyout will be threatened.
Attorney
After following these steps closely, you should have a basic understanding of the value of your practice and what’s fair to each party.
Concurrently, it is time to hire an attorney to guide you through the process, help you navigate these considerations, and craft a buy/sell agreement.
Buy/Sell Agreement
As a threshold, the buy/sell agreement will address the important agreements at issue, including:
- Price and payment terms
- How accounts receivable outstanding are split up (less of outstanding accounts payable), as well as allocation of any cash reserves
- The form of announcement letter to patients (and referral sources)
- Disposition of medical records (and right to access copies)
- Restrictive covenants, including:
- Geographic practice restrictions
- Non-solicitation
- Non-disparagement
- Avoidance of using confusingly similar practice and brand names
- Return of property, including equipment and confidential information
- Removal of the former partner from being a personal guarantor on leases and bank loans to the extent possible
- Cancellation or sale of insurance policies held by the partners or company on the physicians (life insurance, key man policies)
- Reimbursement of a former partner’s share of any pre-paid expenses (security deposits, pre-paid malpractice premiums)
Additionally, liabilities attributable to the term of partnership can rear their head and result in lawsuits and payor audits years after a partner leaves. Given that the partner enjoyed the profits from the enterprise while they were still a part of the business, leaving the physicians who remain holding the bag for an occurrence while they were together can be unfair. The buy/sell agreement should address when the former partner can be expected to pony up their share of legal fees, payor refunds or settlement costs for acts attributable to their time as a partner.
At the end of the day, unravelling the business relationship can be complex. The more that is addressed at the initial partnership stage by entering into proper agreements, the better.
