Transition and Exit Planning for the Healthcare Practice Entrepreneur

An excerpt from Lucrative Practices: The Comprehensive Handbook for Healthcare Executives, by Michael B. Spellman, Ph.D.

Business experts invariably recommend that every business plan includes exit strategies and plans for the transition of ownership and leadership that ensure the business continues and the profit potentials are realized. Although these plans will change over time as the business or other circumstances change, exit planning should be a part of every start-up plan.

When more than one person owns a practice, their partnership agreements should provide predetermined routes of transition and exit. Although there are many variations on the theme, it is important for partnership documents to specify the terms by which stock can be transferred or sold by a partner who wants to leave the practice. Perhaps because decisions of this sort are inherently complex, the contractual language surrounding these options also tends to be complex.

Here is just one example of how such language might be constructed. The partners who are remaining have the “first right of refusal” to purchase the stock of the partner who is leaving. This means that the partners who plan to remain may purchase the departing partner’s shares at a predetermined price. The price can be expressed in dollars or in a formula that varies with a factor such as last year’s revenues.

Should the remaining partners decline to exercise this option, the departing partner may present a viable buyer to the remaining partners for their consideration. The viable buyer must meet all the requirements previously specified in the partnership agreements. The remaining doctors can either accept the proposed buyer or cast a veto. To prevent the veto from being abused, it can only be used a predetermined number of times, after which the departing partner can sell their interests without input from the remaining partners.

Looking beyond the terms of partnership agreements, there are several key ingredients in a viable exit and transition plan. Some of these ingredients require estimates and assumptions, such as how long you will remain healthy enough to practice. Unexpected life events aside, start with your best estimate as to when you want to leave your practice. This can be determined in terms of age, personal net worth, the sale value of the practice, or any other determinant you choose. Remember, sales seldom happen overnight, so you likely will need to begin seeking buyers and start transitions well before you reach your target.

Another ingredient in exit planning involves determining how you will exit. As a Healthcare Entrepreneur, you retain the right to simply shutter your business and walk away (after attending to financial obligations and the continuity of care for your patients). However, this is not really a Healthcare Entrepreneurial option. As a Healthcare Entrepreneur, you have built a saleable business, the benefits of which should be reaped. At the bottom line, a Healthcare Entrepreneurial exit plan always ends with a sale. A well-formed exit plan includes the pros, cons, and strategies associated with each of the types of buyers you imagine your business might attract. For example, planning to sell to a junior associate requires different strategies than planning to sell to a buyer you just met.

There is much that needs to be transferred when a professional departs from a practice. Responsibility for patients tops the list. As a Healthcare Entrepreneur, you also have a corpus of knowledge and experience that should be passed on to whoever takes your place. This includes your business’s unique features, leadership skills, and, in many cases, “tricks of the trade” that are not taught in school. A thorough exit and transition plan includes an ever-updated list of what needs to be transferred and how the transfer will take place.

Transitions take time, so detailed timetables should be in place for everything in the plan. Consider the difference between a plan that simply says the Healthcare Entrepreneur will move to part-time practice five years prior to retiring versus the plan that specifies a 20% annual reduction in hours worked each year for the five years prior to retirement. The odds of success are better for the latter plan.

TIP: Although it can be argued that retirement planning is not the same as exit planning, it is recommended that Healthcare Entrepreneurs think long and hard about how they will spend their retirement and then field test their plans before they retire.

Excerpted from _Lucrative Practices: The Comprehensive Handbook for Healthcare Executives , b_y Michael B. Spellman, Ph.D.