COMMENTARY

Employment and Buyout Agreements

Joseph S. Eastern, MD

Disclosures

June 23, 2022

A recent series of columns on practice merger options generated a multitude of questions regarding merger, employment, and buyout agreements. The most common question was, "Do I really need to go to the trouble and expense of negotiating them?" If you have more than one physician in your group, you absolutely do need written contracts for a variety of reasons, but mostly to avoid conflicts later on. The proverbial "handshake agreement" is worthless in a major business dispute; everyone loses in such situations except the lawyers and accountants.

Mergers and buy-ins were covered at some length in my two previous columns. If the arrangement is to be one of employer and employees rather than a merger of equal partners, you will need an employment agreement to cover duties, requirements, expectations, and benefits. They define how each practitioner/employee will be paid, along with paid time off, health insurance, expense allowances, and malpractice coverage, among other basics. The more that is spelled out in the employment agreement, the fewer disagreements you are likely to have down the road.

Many employment contracts include a "termination without cause" clause, which benefits both the practice and the practitioners. It allows a practice to terminate a new associate if it feels a mistake has been made, even if he or she has done nothing wrong. On the other hand, the newcomer has the option to terminate if a better offer arises, their spouse hates the area, or for any other reason.

Buyouts should be addressed in advance as well. Several recent correspondents told me they didn't see the necessity of writing a buyout agreement, because they plan to eventually sell their practice, rendering any buyout conditions moot. But what happens if an associate dies, becomes permanently disabled, or abruptly decides to leave the practice? If you haven't prepared for such eventualities, you could find yourself receiving a demand from your ex-partner (or surviving spouse) for immediate payment of that partner's portion of the practice's value. And your valuation of the practice is likely to be severely at odds with the other party's. Meanwhile, remaining partners must cover all the practice's expenses and deal with an increased patient load.

A buyout agreement avoids these problems by planning for such eventualities in advance. You must agree on how a buyout amount will be valued. As I've said in previous columns, I strongly advise using a formula, not a fixed amount. If a buyout is based on 15- or 20-year-old reimbursements, the buyout will have no relationship to what the partners are currently being paid. Likewise, any buyout calculated at "appraised value" is a problem, because the buyout amount remains a mystery until an appraisal is performed. If the appraised value ends up being too high, the remaining owners may refuse to pay it. Have an actuary create a formula, so that a buyout figure can be calculated at any time. This area, especially, is where you need experienced, competent legal advice.

To avoid surprises, any buyout should require ample notice (6-12 months is common) to allow time to rearrange finances and recruit a new provider. Vesting schedules, similar to those used in retirement plans, are also popular. If a partner leaves before a prescribed time period has elapsed – say, 20 years – the buyout is proportionally reduced.

Buyouts can also be useful when dealing with noncompete agreements, which are notoriously difficult (and expensive) to enforce. One solution is a buyout penalty; a departing partner can compete with his or her former practice, but at the cost of a substantially reduced buyout. This permits competition, but discourages it, and compensates the targeted practice.

Buyouts are also a potential solution to some buy-in issues. A new associate entering an established practice may not be able to contribute assets equal to existing partners' stakes and may lack the cash necessary to make up the difference. One alternative is to agree that any inequalities will be compensated at the other end in buyout value. Those partners contributing more assets will receive larger buyouts than those contributing less.

As I've said many times, these are not negotiations to undertake on your own. Enlist the aid of a consultant or attorney (or both) with ample medical practice experience.

Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

This article originally appeared on MDedge.com, part of the Medscape Professional Network.

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