Recently, a 73-year-old ophthalmologist called me seeking assistance in planning his retirement. He had a practice associate who had joined two years previously — but he discovered the associate was not interested in ownership, leaving the ophthalmologist frustrated and believing he was without options. His story is not uncommon as the baby boomer generation retires, and it underlines the importance of properly preparing for retirement well in advance. For the longer you wait to plan for retirement, the more restricted your options.

An owner heading toward retirement has four basic options for the practice (though there may be several iterations):

• Work until retirement then close the business.
• Merge or sell the practice to another ophthalmologist-owned practice.
• Sell the practice to a private equity-backed management company or another corporate partner or hospital.
• Traditional succession, in which younger ophthalmologists take the helm of the practice and buy out the retiring doctors.

While the first option is certainly viable, most practitioners prefer to ensure their patients and staff are cared for and the business endures. That leaves the remaining three options. To best position your practice for any of those, the critical component is sustaining and growing the revenue and profitability of the business.

When the practice has a track record of growth and profitability, it becomes attractive to any potential buyer, whether an internal physician or an external financial partner. The key for continuous growth is selecting and integrating the right physician(s).

Returning to my client, had he done more due diligence when hiring his associate, he would have realized his associate was not a successor physician. He had assessed the candidate’s medical and surgical skills but forgot to assess leadership ability, business acumen and entrepreneurial attitude — all equally important when identifying potential successors. A traditional succession was my client’s plan, but his associate was not interested.

Knowing his preferred option, my client could have employed several methods (outlined below) when identifying his successor physician, to avoid his current predicament.

1. Plan early.

Truly, succession planning should be an ongoing process and considered at annual strategic planning sessions. At minimum, a defined plan and timeline should be outlined 10 years prior to the planned retirement of a current owner. It is particularly important to plan while retirement is on a distant horizon. Owners who are not immediately affected by succession planning decisions may be better able to prioritize the integrity of the organization above personal needs.

2. Consider mission, vision and values of the practice.

When undertaking any major decision, it is good to recommit to your purpose (mission) and direction (vision) for the practice. A future owner must be aligned with the mission, vision and values of the practice to increase the likelihood of success. Owners who have thoughtfully considered those elements usually do a better job recruiting individuals who will fit nicely into the organization.

3. Define ownership criteria.

Unfortunately, many practices have one simple criteria for ownership in their legal documents: consent of current owners. Having better defined ownership criteria serves a few important purposes. First, it provides clarity for ownership-track physicians. Second, it serves as the starting point for defining triggering events (outside of standards such as disability, loss of licensure, etc.) for divestiture.

Below are a few questions to consider when defining ownership criteria. There are no “correct” answers, but any decisions should be agreed upon by you and other owners.

• Is there a minimum time a person must be an associate before ownership eligibility? It is a good idea to allow enough time to work together to ensure the person is a good fit for the organization and vice versa. One year is the minimum standard, but I most frequently see a minimum of 18 months.
• Does the person need to work full time? These days, more physicians desire part-time work, so you need to agree on the importance of full-time status and how to define “full time.” More and more, I see 4 days per week (including surgery) as the minimum work-week standard. Additionally, you must consider what happens when a person starts as an owner at full-time status and later changes to part time.
• Does the associate need to have the same specialty? Your vision for the practice will help determine that. If you are considering ownership for optometrists within the practice, state laws will also need to be considered, as a few states do not allow joint ownership with optometry and ophthalmology.
• Does the associate need to reach a certain level of production? It makes sense that a person must achieve a certain level of production before buy-in. This ensures recovery of the investment the current owners made to bring the associate onboard. More importantly, it ensures that the associate can afford the buy in and continue to earn reasonable distributions as he or she buys into the practice. A few options that seem to work well when establishing minimal production levels are:
  • Achieving the 25th percentile or higher for your specialty in the revenue per physician benchmark
  • Reaching at least 75% of the average annual collections of current shareholders

4. Put it in writing.

Where necessary, update your practice’s legal documents to reflect the criteria for ownership. At the practice level, it is nice to have a simple, one-page table that summarizes ownership criteria and can be used to educate the associate.

5. Define value.

Standard terminology for value of an organization is often simply “fair market value.” However, it is beneficial (and saves you time and future cost) to define how you will value the practice and the terms for buy-in. For example, a typical partner buy-in for an S-Corp includes an immediate purchase of tangible assets (eg, equipment, furniture, computers) for the percent of ownership the new associate is buying and possibly the value of the accounts receivable. Intangible assets, also known as goodwill, may be handled in different ways, including redistribution of earnings from the purchasing partner to the current owners over a defined period.

When courting partner-track physicians, you do not need to disclose the amount of value, but it is important that they understand the method for calculating value and the terms for buy-in as soon as possible. Transparency of this process with potential associates ensures you are selecting someone who understands and accepts the concepts of value and the terms they will be asked to meet.

6. Identify leadership skills and business acumen.

Beyond patient care, ownership requires adept decision-making, self-awareness, relationship-building and operational skills. For example, if you are a referral-based practice, you should assess the candidate’s ability to make connections and build relationships during the interview process. No matter what, make sure to include interview questions about the business aspects of running a practice. This will enhance the likelihood of selecting a candidate who will be a leader and contribute to the effective management of the practice.

Start now

It is never too early to start planning for the smooth transition of practice ownership — a lesson my client learned the hard way. While my client is attempting to find an ophthalmologist in the area to buy his practice, upfront due diligence on his part would have made his retirement planning process less stressful and prevented him from delaying his retirement date. Transparency with ownership-track physicians will benefit the selection process and increase the likelihood that selected associates will align with your mission, vision and values. Aligned owners will ensure an orderly transition of the business. OM

About the Author:

Maureen Waddle, MBA, is a principal and senior consultant of BSM Consulting. She has more than 30 years of experience in the eye-care industry, working mostly with ophthalmic practices and ASCs.