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Successful planning for your retirement or exit from medical practice ownership – Healthcare


If you are a shareholder or owner in a medical practice, it is
vital to have an exit or succession plan. At some point you will
either retire, or sell your share of the practice. To ensure you
can hit your target exit date and cash out with an excellent
valuation, a strategic approach is required.

As with all business exits there is always the possibility of
bumps in the road. Too often, exit plans do not eventuate as
intended. In this article, we explore the risks to a financially
successful exit and four core considerations to start thinking
about now to help you reach your exit planning goals.

Risks to your Exit or Succession plan

There are a number of risks to a successful exit plan. They
include but are not limited to these issues:


  • Bankruptcy


  • Divorce


  • Illness or diminished capacity


  • Death


  • Decreased practice valuation


  • Unforeseen practice liabilities

To effectively strategise your exit and ensure it can eventuate
in the time frame intended, we wish to draw your attention to the
key considerations many practice owners do not think about until
they are too close to the point of exit.

Consideration 1: What could happen between now and your planned
exit?

Do you currently have documented and legally binding guidelines
to follow if:


  • You or a business partner was to get sick and unable to fulfill
    their obligations?


  • You or a business partner was to die?


  • You or a business partner were impacted by a mental health
    issue?


  • You or a business partner were to go through a divorce (or de
    facto relationship breakdown)?

What would happen in the event any of these issues were to arise
between now and your exit? How could this impact on the businesses
current operations, profitability and valuation?

It is not uncommon for a marriage breakdown to cause significant
issues within a practice as the affected person or people go
through this significant life event. If you do not have a formal
agreement that details the processes to follow in the event someone
is unable to continue to work in the practice or needs to sell
their share in the practice to pay out a divorce settlement, this
can significantly impact the business, including each of the
owners. As people go through the process of divorce, business
development or expansion plans for the practice may need to be put
on hold.

Similarly, what would happen if one owner in your practice were
to face a mental health issue, disability or illness that meant
they could not fulfill their obligations as an owner? Most owners
will want assurance that not just anyone can be sold a share of the
practice. Therefore, comprehensive detailed steps and processes
should be established between practice owners in a Partnership or
Shareholder Agreement to ensure there are control measures in
place, in situations where there might otherwise be no control.

The Agreement should also specify how decisions are made to help
reduce the risk of disputes (e.g. whether majority, special or
unanimous approval is required). It should also include mechanisms
for how disputes are to be managed. Generally these agreements also
include restrictions on the transfer of shares or units
(pre-emption rights), which can prevent ownership being transferred
to an undesired third-party.

Consideration 2: Is your current structure suitable for your
plan?

The business structure you have in place currently may not be
beneficial to realise your exit goals.

Effective succession planning may require a change in business
structure. It may be beneficial for you to move from your current
structure to a company structure, unit trust, hybrid trust or other
partnership structure in the future to mitigate risk and maintain,
or increase, the valuation of your practice.

In our work and in collaboration with accountants, we often see
that when a unit trust or a company structure is used, succession
can be far easier, as doctors buy in and sell out of practices.
However, ultimately, it is your accountant that will provide you
with advice and guidance as to which structure you and your
business partners should consider.

Consideration 3: A smooth transition to sale

While the idea of a practice’s valuation decreasing might
seem unlikely, be warned that there are a number of ways in which
practices can lose market share or their profitability can be
severely impacted.

In previous articles, we have explored unforeseen financially
crippling payroll and legal issues that practices have found
themselves facing. We also highlighted the legal and financial
consequences that have arisen for practices that, despite their
best intentions, as a result of hiring doctors as independent contractors,
have been found to be in breach of the Fair Work Act or
the Corporations Act, resulting in significant fines
and/or a requirement to back pay superannuation and other
costs.

The financial implications for a practice, and the fallout that
can occur as a result, both internally and publicly, is often
significant. It is not uncommon for avoidable issues like these to
cause fractures between business partners, impacting owners
personally and having an effect on patient retention, particularly
where these issues have appeared in local media.

As part of the transition towards an exit and to ensure that a
practice’s value can be maintained, risk must be mitigated.
This is hard to identify which is why it is important to engage an
advisor to review your risk with regularity.

For our clients, amongst other mitigation activities, it
routinely involves reviewing all existing employee and contractor
agreements to ensure consequences like those detailed above do not
need to be managed.

While this is only one way in which a practice’s valuation
could be negatively impacted, risk mitigation reviews and strategic
exit planning go hand in hand and result in better financial
outcomes overall.

Consideration 4: Planning now for an optimal future
valuation

To maximise the valuation of your practice in time for your
intended exit date, you must first be aware of the current
valuation so you know what is to be maintained (at the very least)
and whether you are happy for that to be the valuation when you
exit. Knowing the current valuation is also important for borrowing
capacity, wealth planning and investment decisions.

Once you know your current valuation and if you want to take
action to help it reach a specific figure, you will need to engage
an advisor to devise a strategy to help you get there.

If there are a number of owners in your practice, any strategy
will need to be made in consultation with them, which can take
time. Not everyone in business together has the same goals, or the
same sense of urgency to discover opportunities and put plans into
action. For this reason, it is imperative you commence discussions
with your partners and an advisor that has a deep understanding of
the obligations and requirements specific to medical practices, as
early as you can.

Whether you intend to sell a share of your practice, or sell the
practice as a whole to a corporation, there are many elements they
will consider. While we have explored these elements with depth in
another article – How to sell a medical practice: Key steps to
prepare for a successful sale
– essentially, there are a
number of key components that buyers look at that either add value
or reduce it. By creating a plan to progressively tick these key
elements off over time, there is genuine potential for a
practice’s valuation to be truly optimal and attract not just
one, but a number of interested buyers.

The early bird catches the worm!

Proper preparation to exit your medical practice is vital. As
with most things in this world, the beginning is usually more
exciting than the end. For example, we focus a lot of time and
energy on the birth of a business but when do we stop to consider
what happens at the end? An exit can be as complex and
multi-faceted an endeavour as starting a practice.

It is important that your exit or succession plan is established
early. This will allow you to negotiate on your own terms. Start
having conversations now with your key advisors – your accountant,
financial advisor and lawyers like us who specialise in working
with medical practice owners.

While talking about death, disability, divorce or retirement may
not be pleasant, these topics cannot be ignored and comprehensive
exit planning is what protects the best interests of you and your
family.

Life throws us all types of curve balls so while we want to
ensure you can mitigate your risk on that front, we also want to
ensure you have your eye on the prize now so you achieve a
financially successful valuation and a smooth transition out of
practice ownership. Meeting with us early about your plans to exit
is not a commitment to proceed. Instead, early discussions provide
clarity about what needs to be considered specific to your
circumstances to ensure you can experience your financially
successful exit, without any delay to your timeline.

Related Articles: How to sell a medical practice: Key steps to
prepare for a successful sale

Growing Pains | Challenges for Growing Medical
Practices

From Sole Practitioner to Medical Centre
Owner



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