Partnerships are a lot like marriage. They create a significant life change for both parties. Exciting at first, but also challenging; the legal framework and individual options can be overwhelming.
Well-formed partnerships bring a dynamic synergy to a businesseach partner contributes expertise, time and money. However, partnerships are not right for everyone or every practice. Statistics reveal that more than half of all partnerships failbut, partnership businesses are four times more likely to succeed than sole proprietorships.1
Many partnerships fail because of wrong expectations on one or both sides. While there is no specific cookbook to set expectations straight or guide the formation of a successful partnership, experienced practice owners offer some key points for both the established owner and the new partner to consider.
Advantages to partnerships include sharing the cost of assets, sharing management and ownership responsibilities, and extending business hours.2 Disadvantages include unequal commitment of time or finances, and disagreements in management or goalsnot to mention personal differences.2
A key to forming a successful partnership is finding someone you can both communicate and bounce ideas back and forth with, says John Archer, O.D., in a multi-doctor partnership in
Follow these seven steps for a successful partnership:
Partnership Worksheet 1. Develop a mission statement. This will be the guiding theme for the practice. (Tip: Include the staff in this process so they can take ownership of this mission also.) 2. How will you differentiate your business from the competition? 3. What is/will be your market position? (Consider price, service and product quality.) 4. Set practice goals and objectives concerning: Gross and net revenue for both short-term and long-term. Services offered (traditional and specialty services). Profitability of each profit center (professional services, contact lenses, eyewear, and any other specialty areas). Third-party insurance plans. Staffing and staff development. Community involvement. New technology investment. Personal and career goals. (Visualize where you want to be both short-term and long-term.) Methods of determining income (salary or production based). (Tip: Dont forget to discuss any specific benefits, such as AOA and state association dues, CE, retirement plans, health insurance, etc.) 5. Define the expected roles of each partner. 6. Discuss with your team of advisors how to divide any profits or losses. 7. Agree on a timeline for the partnership formation. 8. Create an exit plan.
Step 1:
Discuss these topics with your potential partner to refine your shared responsibilities, goals and rewards.
The Partnership Worksheet
There are two sides to a business marriage. Gary L. Moss, O.D., M.B.A., C.P.C., director of a national ophthalmic consulting collaborative, Appraisals for Practice Appraisal & Mediation, recommends discussing each others goals and vision for the business before you become partners. The idea is to identify potential areas of disagreement, such as your vision for the business, how youre going to get there, and how youre going to exit.3
Do you both understand the current position of the business? Ask yourselves the tough questions to help clarify this process (you may need guidance from an advisor) and create a clear, shared vision for the eye care practice. (See Partnership Worksheet, left.)
Step 2:
The Dating or Trial Period
The trial period may be the single most important time to increase your odds of forming a successful partnership.
James Albright, O.D., of a two-doctor partnership in
During this time, the associate has the opportunity to work with the staff and develop relationships. He or she can build up a business within the confines of the practice. The associate has less initial overhead cost and can concentrate on building a reputation in the community.
Each partner has his or her own thoughts and beliefs as to how this partnership is supposed to work:
From the owner or senior doctors side:
There are a variety of things to consider when bringing someone new into your practice. Will this person complement the business you have put your heart and soul into up until this point? Senior doctors or established owners are most often concerned with:
Finding the right (trustworthy) person.
Feeling certain that this person will be there for many years to come.
Getting help from the partner with the business decisions.
Securing a fair price for the practice.
How the partnership will impact the economics of the practice.
From the side of the associate or doctor buying in:
Most associate eye doctors still have student loans to deal with, may have recently purchased their first home, and have many other considerations. The buying-in doctor or associate is most often concerned with:
The ability to afford the buy-in process.
Stability and an opportunity to grow and build up the business.
Feeling that he or she is equal with the senior doctor with regards to responsibility within the practice and business decision-making.
Step 3:
The Priceand Financing
The timing of the valuation, the actual value of the practice and the financing terms can be the most contentious part of the partnership process. There are no hard and fast rules when it comes to these areas.
Mark Wright, O.D., in a multi-doctor practice in
Obtain multiple appraisals in order to get a range of values to compare, but the price ultimately comes down to finding a number both sides can agree upon.
My practice partner, Tamara Kuhlmann, O.D., M.S., says the price is a number such that the practice owner has to feel that all the planning and hard work that has been put into building up the practice has been valued fairly to compensate him or her for sharing ownership and profits. But, the established owner needs to be sensitive to the buying-in partners feelings that the amount is a fair value for the business, and the potential earnings he or she can realize later.
The buy-in price can be figured in a number of ways, but Dr. Albright says youll know the number when you reach it: It generally is a price that makes the buyer feel like he or she is paying too much and the seller feel like he or she is getting too little.
On the financing side, the buying-in doctor can get a loan from the bank and pay it back over a period of time. Its easier for the seller to obtain the loan, but tax-wise, it may be much worse for both sides. Seller financing can be a creative solution. The seller will not only carry the note, but also can receive the interest. This can have some positive tax implications to the buyer and seller (so seek your accountants advice). If the price seems steep, the favorable financing terms can help smooth out the agreement.
Step 4:
Hire a Team of Advisors
In addition to an impartial appraiser, your team of professionals should include an accountant, a lawyer, possibly a financial planner and an outside business consultant who is familiar with this process.
Once youve decided on a team of advisors, trust them! It is best to have a leader or point person to coordinate this process. This person needs to be someone with whom both parties are comfortable, and someone knowledgeable about the optometric field and the partnership process.
(Tip: Try and discuss all-important details prior to meeting with your team of advisors. This will save you time and money in the long run.)
Step 5:
The Operating Agreement
Most operating agreements are set up as 50/50 arrangements. This may be a step-wise process according to the buy-in schedule, but the eventual 50/50 agreement (or even split for multiple doctor agreements) gives each partner equal say in how the company is managed. Your legal professional will be necessary to supervise the final partnership agreement.
There are various types of partnership agreements, such as general partnerships (GP), limited partnerships (LP), limited liability partnerships (LLP), limited liability corporations (LLC), and many other types of corporations.4
Each agreement has different tax implications, liability implications, operating agreements and management implications. Ask your consulting team what is best for your specific business and personal situations. Every business entity needs to be evaluated on its own merit and your team of advisors will be able to provide proper direction.
Lets take an LLP as one example. Partnership law makes all partners jointly liable for another partners tort or civil wrong.4 An LLP allows professionals to limit personal liability for the malpractice of other partners. It also allows pass through tax advantages. So, not only is it important to choose a trustworthy partner, but also set up the operating agreement in the most favorable manner for all partners.
Step 6:
Prepare for the Worst Case Scenario
Its important to know how the senior partner plans to transition into retirement. For instance, the buying-in partner may buy out the senior docs share 10 years down the road, or perhaps a new graduating doctor may be brought in to buy out the senior doctor in a specific time frame.
Partnership agreements require provisions in the event of business dissolution for reasons of death, disability or desire to terminate. These protections, often time-consuming to develop, are a vital piece of any thorough partnership agreement. As Dr. Moss believes, The primary critical component of partnership formation is a complete understanding of the consequences of partnership dissolution before it occurs.
Take out term life and disability insurance policies on each other to pay off the surviving partner or protect the business if one of the partners is out for an extended period of time.
(Tip: A buy-sell agreement or buyout agreement can include these items. It will set up who gets what, for what price, and under which circumstances, should the situation warrant. Agreeing beforehand may prevent costly litigation later.)
Step 7 (if necessary):
Consult a Negotiator
Alternative Dispute Resolution An objective negotiator can provide some fair suggestions. This will help open up communication if it has stalled during the agreement process. This type of consultation can be set up as a conference call or in person. If it goes further into mediation, arbitration or even worse yet, adjudication, the partnership most likely will not survive.
When communication is lacking, a mediator may be a significant benefit in saving the relationship. There could be many factors or reasons for those failures. Dr. Wright points out three of the major issues: practice valuation; accepting the valuation; and new partner leadership roles. If the partnership breaks down at any of these points, it may be difficult to repair. A third-party consultant can help resolve minor or major disputes.
There are four levels of dispute resolution: objective negotiation, mediation, arbitration and adjudication.
Dr. Moss recommends the use of a dispute resolution consultant when the parties are unable to compromise on significant differences that may derail the successful completion of a partnership agreement. These types of mediators are not needed at the onset of a partnership formation, but may be helpful at some point during partnership formations and dissolutions of partnership agreements.
Before finalizing the agreement, make sure that youve done everything possible to lay the groundwork for a successful transition. Both parties will best serve the process by sharing goals and showing strong leadership skills. As John D. Rockefeller once said, A friendship founded on business is a good deal better than a business founded on friendship.
Dr. Miller practices in a private, two-doctor partnership in
1. National Federation of Independent Business (NFIB) Web site. What You Should Know Before Forming a Partnership. July 1, 2002. Available at: www.nfib.com/object/1583856.html (Accessed October 27, 2008).
2. Harroch R. Choosing a Business Structure: Advantages and Disadvantages of General Partnerships. November 16, 2006. Available at: www.allbusiness.com/business-planning-structures/business/2513-1.html (Accessed October 27, 2008).
3. Moss GL, Shaw-McMinn PG. Eyecare Busine$$: Marketing and Strategy.
4. Clarkson KW, Miller RL, Jentz GA, Cross FB. Wests Business Law, 9th ed.
