This post will focus on more complex private practice and partnership-type contracts, in a very general sense. Please note that there is wide variation in these kinds of contracts, with the larger variability coming from the specialty involved and the location of the practice. That said, let’s jump in.
So the idea of partnership comes in many, many flavors… However, in the general, you receive access to the inner workings of a practice and become privy to more important financial information. You will learn more about the business side of the practice, such as: how much is the practice billing for, what is the projected billing for the year, what are the expected accounts receivable, etc. The degree of information you are allowed access to can vary widely depending on how the group is run.
So, in general, in a partnership structure you are no longer an “employee” of the group. You are now a partner in the group and your new salary is usually based on a some calculation of the amount of revenue the corporation generates. In a pure partnership, this would look like an even split between all the “partners”. However, this can be complex in situations where there are “senior partners” or “junior partners”.
In addition, in order to be able to enjoy your new status as a partner, you will probably need to do some sort of “buy-in” as a new partner. This amount can vary from tens of thousands to hundreds of thousands of dollars based on the corporation structure. For example, a practice which owns a considerable amount of equipment or has tangible assets in the form of an office building, machines, furniture, etc. will have a much larger buy-in than one who has no tangible assets.
To give a very simple example, at my prior job in private practice, had I been able to stay, I would have made partner after one year. My group was very democratic and the partners all split the revenue evenly based on your Full Time Equivalent (FTE). I would have been 1 FTE, with 2 other full-time people has 2 other FTE, and 2 other people as 0.5 FTE (part-time). My group did not own any equipment, but there was a very small buy-in. I forgot exactly how much it was, but it was almost negligible.
Why do I need to buy-in if there was no equipment to be bought?
Well, there are two ways to explain this answer… but it’s actually better to consider it a combination of both. You can consider it a gesture of good faith and/or “paying your dues” or you can see it from the standpoint that I would become partner in this group based on a contract with the hospital that I had nothing to do with. In that sense, the buy-in is in order to “pay” for the contract that the prior partners had worked hard to secure.
It’s also appropriate to understand that the Chief or President of the group has additional administrative duties and this is either reflected by a small decrease in expected productivity compared to the others, or is paid slightly more, or receives a bonus of sorts based on how much revenue was generated each year. In my case, our President was a hard-working guy and although it was expected that his productivity could be less than a 1.0 FTE, he repeatedly outproduced us on top of being the President. Like I said before, this group of people was as pretty awesome.
Shares are something that more complex than a normal partnership and this can be done in multiple different ways. However, in general, as partner, you are allowed to buy part of the practice in the form of shares. For the sake of simplicity, let’s say 100% of the company is available in the form of 100 shares.
There are a total of 10 partners, so each partner can buy 10 shares each. So now each partner owns 10% of the company. The company pays a base salary of $200,000. However, the partners each receive a bonus each year commensurate with the amount of shares they own.
So the revenue the corporation generates for the year is $2,000,000. Each partner gets $200,000, the base salary. There is no “extra” above the revenue generated, so it ends there. Now in the case that the corporation generates $3,000,000, each partner receives a base salary of $200,000 and a bonus of $100,000.
Obviously, this becomes more complex when the different partners own different amounts of shares. Also, you can imagine a situation where the company generates annual revenue which is less than what the base is supposed to be. For situations like this, there are usually stipulations to decrease the base salaries or a necessary emergency board meeting to vote a decrease in pay or something to that effect.
Now, what happens in the case of an associate?
Well, let’s change the above scenario. There are 8 partners and 2 associates with base salaries of $200,000. The revenue for the year is $3,000,000, so the associates still get $200,000 each. The remainder, $2,600,000 is divided up amongst the 8 partners, which is $325,000. In this scenario being a partner is very nice, as expected. But remember, the partners also had to pay some form of a buy-in and will probably need a few years to recoup that investment.
However, what happens if it’s a “down year” and your annual revenue is $1,800,000? Well, you still have to pay your associates their base of $200,000. This leaves the remaining $1,400,000 to divide amongst the partners, which is $175,000. In this case, the partners make less than the associates.
Obviously, this is not optimal, and would probably necessitate an emergency board meeting if projections for the year were that low. This emergency meeting would most likely have to do with letting one of the newer associates go since the practice doesn’t have the volume necessary to accommodate that associate.
Now you can imagine that there is implementation of layers of control such that certain senior partners are never able to have less shares than a junior partner. Also, you can make each share that an individual owns is worth a “vote” on the board. Doing these two things basically makes it impossible for a junior partner to ever gain as much voting power as a more senior partner unless the senior partner wanted them to. Now, there isn’t anything inherently wrong with that, it’s just something you need to be aware of.
Please note that these are just my experiences with contracts and what I have heard in general. There is wide variation in terms of how private practices are run. I think that any private practice contract, especially one relating to a buy-in, shares, and/or partnership NEEDS to be evaluated by a contract lawyer.
More so than that, it ideally should be a contract lawyer who has experience with private practices in your specialty AND your location.
Prices go up as these contracts get more complex, but please believe me that a good contract lawyer will save you a lot of grief down the line.
Partnership can be simple or complex.
Consider buy-in as paying for the privilege of being partner and join “the club”.
Shares are another way of demonstrating “levels” of partnership.
These contracts are complex with multiple layers of complexity. Get a contract lawyer.
More so than that, get a contract lawyer experienced in your specialty AND your geographic location.
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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