Ending a Partnership Without Pain. Partners don't stay together forever.
Having a comprehensive "exit" plan will help prevent problems.
By John B. Pinto

In Anna Karenena, Tolstoy wrote: "Happy families are all alike; every unhappy family is unhappy in its own way." It's precisely the same with eyecare "families." Ophthalmic partnerships, like marriages, rarely start out with the expectation of a contentious ending. But no business or personal relationship comes with a lifetime guarantee. Are you prepared for the highly likely contingency of a partner leaving, or the somewhat less likely chance of a total practice dissolution?

In this article, I'll explore some of the circumstances that can have a major effect on an ophthalmic partnership, with particular attention to how you can prepare in advance for "un-partnering." Please remember that every situation is unique, and that when crafting or revising formal partnership or corporate documents, you should always seek the advice of competent legal counsel. Trying too hard to save legal and other professional fees today can be the fastest way to spend many multiples of your savings in the future.

Avoiding partnership disruptions

When a new, partner-track doctor joins an established practice, the typical arrangement is to provide for an initial associateship period of 1 to 3 years. After this "engagement" phase, and with mutual agreement, the associate transitions to partner. Lots of work goes into this associate-to-partner transition, but rarely is the same amount of effort applied by doctors and their attorneys to the partner-to-non-partner transition.

There are numerous motivations and drivers for un-partnering. As the cynical old saying goes: "Partnerships only get into trouble in one of two circumstances ... when things go well or when they go poorly."

If you're a partner in a practice, there are a number of types of partnership-threatening situations you could encounter. Following are the most common sources of partnership breakups and advice on how you can plan ahead to deal with or head off these potentially disruptive occurrences:

• Death or permanent disability. These are finite, irreversible events, and while they are sad occurrences, they are often the easiest events to manage. Every partnership or shareholder agreement should specifically cover these eventualities -- and whether a buyout is optional or obliged. Life, disability and business overhead/continuation insurance policies are commonly used to soften the blow.
• Economic difficulties. Money problems are a far more common -- and in many cases reversible -- reason for a possible split-up. To avoid economic surprises, every intelligent partner agreement should contain provisions calling for formal budgets and spelling out practice-threatening circumstances that warrant deeper investigation.
  Here's an example of suggested language: "The practice administrator and managing partner will jointly prepare at least annually a formal report to the board of directors reviewing the status of the practice's profitability, patient volume and business system integrity. Whenever quarterly profit margins fall below 35%, monthly patient visits fall below 450 per average M.D., or the accounts receivable increase to more than two times average monthly charges, a Special Task Force selected by the board will be formed to investigate the problem and apply appropriate solutions." If you set guidelines, you may never need to wind down the business for economic reasons.
• Interpersonal conflict. Ophthalmologists, as a rule, don't play well in groups. The same competitive skill and lust for control that creates great ophthalmologists can smother collaboration. Some of the happiest surgeons I've met are soloists. Many ophthalmic partners have to work at suppressing their basic lone wolf natures to keep a partnership together. Contract terms can help in making the team effort succeed, with rules for conflict resolution, tie-breaking and formal arbitration.
• Retirement issues. Planned retirement and semi-retirement (e.g., from surgical to nonsurgical care) should be the easiest transition to manage, but it's often difficult, due to the common tendency for surgeons and their partners to be in denial about ever leaving active practice. Planning for that inevitable gold watch day is put off, as if retirement were a kind of small prelude of death. Try to get past this taboo. Ideally, a retirement event should be planned at least 3 years in advance to allow a new associate to settle in, and to allow the practice to prepare for temporary or permanent revenue reductions. Indeed, when working with client practices on this issue, I often suggest that the retiring partner's buy-out be sweetened if he provides adequate notice.
  Here's an example: "A partner retiring after giving 24 months or more advance written notice shall be paid, in addition to his pro-rata share of group accounts receivable and net tangible equipment value, a goodwill payment equivalent to three times his average monthly collections. A partner retiring with less than 24 months notice shall receive no terminal goodwill payment."
  Many ophthalmologists prefer to semi-retire from their practice, rather than stopping practice abruptly. This can be a good deal for both sides. The senior doctor enjoys several additional years of a less-intense, perhaps nonsurgical, "emeritus" practice, while his junior partners get the benefit of active patient transfer and ongoing management and clinical consultation with a seasoned pro. So long as the chemistry between Dr. Junior and Dr. Senior is good, this arrangement is wonderful. But if the senior doctor's skills are eroding, or he reacts badly to stepping down the practice ladder, it's best for all concerned to break off completely.
  I generally advise that semi-retiring partners revert back to being an associate, or at least relinquish a portion of their stock, when transitioning. As a guiding principle for all partners, young and old, a doctor's equity and voice in management decisions should be roughly pro-rata to his individual collections. As an example, a semi-retired doctor, with a one-third stock position, but generating only 10% of the practice's collections, should in most cases probably not be getting 33% of declared dividends or enjoying one-third of the control over board votes in the practice's critical decisions. Ten percent would be more fair.
• Removal for cause. Of course, the most difficult separations are involuntary, when an under-performing or grossly misbehaving partner has to be removed for cause. Most employment and partner contracts don't go far enough in spelling out just what "cause" means. This may be a small problem in a large partnership, where a majority or super-majority (e.g., eight or more out of 12 partners) are likely to vote rationally. In small partnerships, where politics and bitter feelings can outweigh economics and ethics, I generally advise the founder to retain majority control over partner termination to avoid being removed from his own practice.
• Sale of a practice. Although practice sales to physician practice management companies (PPMCs) and hospital institutions have slowed drastically, these transactions are still occurring, and I believe could increase again with the development of alternative PPMC models in an ever-tougher reimbursement environment. As unforeseen as such a transaction may be today, some partners may choose to protect their interests generically so they can be individually excluded from the transaction. Such so-called "loss of control" passages provide a trap door for doctors who want to avoid the perceived ills of such events.
  Language might include something like, "In the event of a sale of the practice to another practice, a hospital, a practice management company or similar entity, whereby the partners effectively lose control over the practice's operations, a dissenting partner shall be released from the corporation's restrictive covenant, and will be allowed to establish an independent practice within the practice's defined service area." Note that such a stipulation may constitute a "poison pill" for an otherwise-desired acquisition, and may run counter to the interests of those doctors in the practice who are nearing retirement.

Deal with potential profit loss swiftly

Whether a partner departs gently or roughly, the event often leaves about the same fixed overhead to be covered by fewer doctors. For example, with the loss of a junior associate, professional salary and benefits costs may decline $200,000 annually, but that same doctor may be generating $500,000 in revenue, for a net $300,000 shortfall. To restore profits, the remaining partners and the administrator need to rapidly ratio costs downward, find new revenue, or both. The impact of a senior subspecialist leaving even a large group practice can be catastrophic. In one client setting, the potential loss of a senior retinal specialist -- who was unhappy with her compensation package -- was calculated to be more than $1 million. The board wisely relented to her demands, though not all the partners liked the idea. The result was that each of the other five partners only dropped about $20,000 in their annual personal incomes instead of the potential $200,000+.

At times there's no direct economic punishment for losing a partner, but there can be a cost in lost goodwill. In one case, a locally beloved, but internally irascible and economically floundering senior partner in a group practice was asked to leave. The day the decision was announced, a carefully worded letter was sent to all of the practice's referral sources before Dr. Grouch had a chance to call his cronies to complain.

About half of the time, unhappy departing partners will sign off on a noncompetition agreement, and in some jurisdictions these agreements -- if well-crafted -- have real teeth. The rest of the time, the practice left behind is forced to compete with a former partner. In these cases, as the surviving practice, it's wise to play your strongest cards, and play them fast:

• Realize that you have the high ground.
• Review your legal options.
• If so advised by counsel, you may be able to bluff and outlast your ex-colleague with well-placed legal firepower.
• Withdraw the departing partner's access to the practice computer system to avoid conversion of the "practice's" patients to the individual doctor.
• Contact all of the ex-partner's patients. Any patient with a pending appointment should be notified by phone and re-appointed with another doctor, if this is what the patient desires. (Note that the AMA's ethical guidelines suggest that patients be actively advised by a doctor's ex-employer and given every opportunity to connect with their existing doctor. I have never, at least in disputed situations, seen a practice be so generous as to help their new competition, but in at least one state, these guidelines have been incorporated into official medical practice regulations.)

If you decide to leave

Of course, if you're a partner considering moving across the street, your situation is reversed. You might need to:

• Review your legal options. You may have rights that significantly exceed the strictures of your contract.
• When necessary and legally advised, bluff. Your former partners may back down rather than try to enforce some elements of your contract.
• If your contract stipulates liquidated damages that must be paid if you compete, work out the numbers -- between damages, legal costs and startup costs, it may be more profitable for you to simply relocate to a new market.

For all sides, getting the documents right from the outset of the relationship is crucial. Shaving costs by avoiding attorney, accountant, and consultant reviews is false economy. One west coast client is still unable to terminate his associate because a couple of years ago he tried to save legal costs by using an old contract from his former employer in another state. The $2,000 he saved 2 years ago is now costing $15,000 in salary per month for the remainder of a 4-year, no-cut contract.

John Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management consulting firm established in 1979. John is the country's most-published author on ophthalmology management topics. Recent books include John Pinto's Little Green Book of Ophthalmology and Turnaround: 21 Weeks to Practice Survival and Permanent Improvement. He can be called at (800) 886-1235, e-mailed at pintoinc@aol.com, or found on the web at www.pintoinc.com.