Health Law Pointers - Volume XIX, No. 1

Health Law Pointers

 

Volume XIX, No. 1

January 6, 2017

 

Brought to you by Hurwitz & Fine, P.C.
Editor: Lawrence M. Ross
[email protected]

 

As a public service, we are pleased to present this issue of our health law newsletter addressing the legal concerns of health practitioners. The primary purpose of this newsletter is to provide timely educational information and commentary for our clients and subscribers. In some jurisdictions, newsletters such as this may be considered: Attorney Advertising.

 

If you know of others who may wish to subscribe to this free publication, please feel free to forward it. If you wish to subscribe or unsubscribe, please send an e-mail or call the Editor, Lawrence M. Ross, at (716) 849-8900.  Special thanks to my colleague, Nicholas Pusateri, on his contributions and assistance on this issue.

 

Benefits of a Well-Drafted Partnership Agreement

 

When practitioners initially go into business with one another, all partners are likely excited and optimistic about the prospects of a successful practice. It can be easy for new business partners to agree on almost everything and to assume that nothing will go wrong. Unfortunately, however, business and life goals change over time and disputes among partners may happen. Thus it is prudent practice that business partners (and their lawyers) think about and anticipate, to the extent possible, business disputes and provide written resolutions for such situations ahead of time. This article addresses the importance of a well-drafted partnership agreement, a document that should nip any disputes among partners in the bud by efficiently resolving disagreements, while at the same time safeguarding and protecting both the practice and each partner’s investment.

 

A partnership agreement is a written agreement between the owners of a company, ideally entered into when the company is formed (it is never too late, however, to execute a partnership agreement). If the company is a professional service corporation, the agreement is referred to as a shareholders’ agreement; if the company is a professional service limited liability company, it is an operating agreement; and if the company is a registered limited liability partnership, it is a partnership agreement. The principles below, although discussed in a partnership context, are generally applicable to professional corporations and professional limited liability companies as well.

 

Without an executed partnership agreement, the rights and obligations of the partners will be governed by New York Partnership Law, [1] Article 15 of the Business Corporation Law and other applicable statutes. The statutes provide general default rules in the absence of a partnership agreement. Generally, however, they cannot be counted on to accurately reflect the partners’ intent. A partnership agreement gives business partners more control of all aspects of the business by allowing the partners to write the rules and regulations for which they intend to be bound; business partners can spell out how the partnership will operate. This way, when business disputes arise or have the potential to arise, the process for dealing with such situations has already been agreed to by all of the partners, and the potential for a falling out and costly litigation is significantly reduced.

 

At the very least, a partnership agreement can spell out what is expected from each of the partners in terms of time, duties and financial investment. This goes a long way in avoiding disputes because the partners know, ahead of time, what is expected of each other. For example, the agreement should address what initial capital contributions are required of each partner, and whether the partners will be obligated to make additional capital contributions should the partnership need additional money. More examples of what a well-drafted partnership agreement should address are:

 

  • Who Owns the Practice
    At some point, the practice may need to add a new partner or a partner may want to sell his or her interest in the practice to another practitioner. With a well-drafted partnership agreement, the practice can plan ahead for those situations. For example, if one or more of the partners wants to add a new partner, the partnership agreement may provide for how many partner votes are necessary to approve of a new partner (simple majority, two-thirds, or unanimous). Moreover, if a partner wants to transfer his or her partnership interests to another practitioner, the partnership agreement may restrict transferability of ownership by providing, for example, the other partners and/or the business itself with a “right of first refusal”, with pre-established terms of sale.

     

  • Removal of Partners
    Over time, partners’ roles within the business or their ability or desire to practice may change. A partnership agreement can be used to address the eventuality that a partner will need to be bought out. The agreement can also address reasons or situations that will allow a majority of partners to remove another, such as when a partner becomes disruptive or lacks the capacity to participate in running the business. The agreement should also specify a method for determining the value of the departing partner’s shares, thus preventing disputes over the price of a buyout that can lead to costly litigation.

     

  • Avoiding Unwanted Dissolution and Protecting the Business
    The default rules state that, in the event of a partner’s death or personal bankruptcy, among other things, the partnership will dissolve automatically, putting all of the partners’ investments in the business at risk. A partnership agreement should address such a situation by, for example, providing for alternative options such as redemption of a deceased or insolvent partner’s shares while continuing the partnership, rather than dissolving it. The partnership agreement can also protect the business by including provisions that prevent a departing partner from sharing the practice’s confidential information or seeking employment with a competing practice. 

     

  • Sharing of Profits and Losses
    Under the default rules, all partners are deemed to share equally in the practice’s profits. But, what happens if one partner puts more time and money into the business, or a partner brings in substantially more revenue than others? A partnership agreement can address these situations by including compensation provisions that will allocate business revenues more fairly.

     

  • Managing the Practice
    New York’s Partnership Law provides that each partner has a right to manage and operate the practice. Moreover, each partner has the ability to unilaterally bind the partnership. A well-drafted partnership agreement should limit and/or divide the responsibility for management of the practice and can structure the power to make decisions among the partners in a variety of ways. The agreement can also include a reasonable means to resolve a deadlock between partners, such as resorting to an outside advisor or an arbitrator to render a decision or, in the case of a serious matter, trigger a buyout clause so that one partner may resolve the deadlock by purchasing the interests of another partner, without resorting to costly litigation.

     

    The list above is not exhaustive, but it does include potential remedies to some of the most common problems that arise when business partners do not execute a partnership agreement. Each practice requires specific and direct attention to address all of the concerns of the respective partners. If you are starting a registered limited liability partnership, limited liability company or professional corporation, or currently have interests in one but do not have an executed partnership agreement, operating agreement or shareholders’ agreement, Hurwitz & Fine’s corporate and healthcare attorneys are here to assist you in drafting such an agreement and would be happy to address any questions or concerns regarding the operation of your practice.

     

    Critical Thoughts to Keep in Mind when Selling Your Practice

     

    The decision to sell your practice is not an easy one. The decision should only be made after careful deliberation of why you are selling your practice, whether you can afford to sell your practice and how much money you want receive in exchange for it. Below are suggestions or factors to consider and some important steps to take to ensure you sell your practice in the most prudent manner and maximize two main goals: maximum profit and minimum post-closing liabilities.

     

  • Determine Your Goals
    Why are you selling your practice? Do you want to retire from the profession completely or do you simply want to practice without the regulatory and administrative burdens of running a practice? If it’s the latter, there are some additional issues to consider before entering into negotiations, especially if you wish to remain employed by the buyer. For example, how much authority will you retain post-closing? Many buyers, especially larger institutions, may want you to relinquish the day-to-day operation of the practice, even though you may wish to retain some continuing responsibilities. Moreover, how will your staff be affected? It is likely that some of your support staff positions will be eliminated to avoid duplication. What authority will you have to hire and fire staff post-closing? Furthermore, what are the terms of your employment agreement and how will you be compensated? Many larger institutional buyers are moving away from straight salary and instead are utilizing performance-based payment models, basing compensation on a variety of methods, including salary, but also cost sharing and outcomes.

     

  • Plan Early and Retain Specialized Professionals
    In preparing for a sale, practitioners ideally should begin planning well in advance of any decision to ensure an accurate valuation of the practice (discussed below) and avoid being forced to sell the practice at an unfavorable price due to current market trends. Selling practitioners should retain a team of professionals - attorneys, accountants and appraisers - that specialize in healthcare transactions. Specific expertise in healthcare transactions, as opposed to general knowledge, will help in obtaining maximum value for your practice.

     

  • Determine What You Intend to Sell
    In general, there are two methods for selling your business: asset sale or “stock” sale. Although Sellers usually prefer a “stock” sale because the buyer typically assumes all of the liabilities of the seller, unless agreed to otherwise, and because it has advantageous tax consequences, most buyers are unwilling to assume such risks. In an asset sale, the buyer assumes only the liabilities that it agrees to assume, and the remaining liabilities remain the seller’s obligations. If you choose an asset sale, determine what assets you intend to keep or that would be of little interest to potential buyers. Consider how much of the purchase price you are willing to accept upfront and make sure you understand the tax consequences resulting from the structure of the sale.

     

  • Determine Your Practice’s Value
    Selling practitioners should obtain a business appraisal before setting or agreeing to a price. The value of a medical, dental or other professional practice may be more than just its hard assets (the practice’s furniture, fixtures, equipment and supplies), such as its “goodwill.” Goodwill is the most difficult to value and is often, in the buyer’s eyes, overestimated by the selling practitioner; it includes the practice’s reputation, the trained support staff, established client base and medical records, practice history, practice location and potential revenue. Remember, however, that when evaluating the appraisal, potential buyers may place their own values on different aspects of the business.

     

  • Don’t Slow Down!
    This speaks to the value of your practice, as well. Leading up to the sale, it is reasonable to want to reduce the amount of time spent in the office. This, however, should be avoided as it can lead to a reduction in patients and staff, which will in turn affect the purchase price.

     

  • If You Own Your Practice Facility or Building, Prepare for Two Transactions
    If you own your practice building or office space, depending on how ownership is structured, you may have two sales to make: the practice and the building. This leaves you with several options to consider:
     

  • Sell your practice and lease the space
    You are now the landlord. Following the sale of the practice, you can enlist care of the property to a property management company, who would collect rents and maintain the facility.

  • Sell your practice and lease the space, but give the buyer a purchase option
    If the buyer ultimately does not purchase the space, you can continue as landlord or consider finding a buyer interested in investing in rentable space.

  • Sell your practice and sell the space
    If the practice buyer is not interested in owning the facility, consider finding another buyer interested in purchasing rentable space.

     

Our team of attorneys at Hurwitz & Fine has demonstrated experience and special interest in working with doctors and other health care providers. If you are considering selling your practice, we would be happy to discuss the potential transaction and help you prepare in the most practical and strategic way possible.

 

[1] Professional corporations are governed by the Business Corporation Law, and professional limited liability companies are governed by the Limited Liability Company Law and Article 15 of the Business Corporation Law.

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