Succession planning is important for orthopedic surgeons to maximize returns from their practice as they head on to greener pastures. If a good plan isn't in place, surgeons risk soiling a good relationship with their partners and losing a great deal of money.
"I've seen a lot of physicians build up a practice and didn't think it through far enough in advance about their retirement, so they don't get a whole lot out of selling their practice," says Karl E. Byrd, CFP. Here, four medical and business experts discuss the key concepts for succession planning and how practices and physicians can ensure a smooth transition.
1. Starting to plan early. Ideally, orthopedic practices will have a succession plan written from inception and every surgeon who becomes a partner agrees to the plan at that time. However, this doesn't hold true in many cases, especially for small groups or single physician practices. If a plan wasn't created at the onset, orthopedic surgeons should begin succession planning at least five years before they plan on retiring because the transition can easily take two or more years to complete.
"In my experience, physicians are often unprepared for the final moment when they move on," says Glenn Molin, DC, MBA, a senior business intermediary at CI Harvest in Columbia, Md. "Hopefully, their financials are in order and they have a team in place that was there from the onset enabling them to create a practice that runs like a business because there will be issues and consideration with taxes, Stark laws and liability. If you deal with it early upfront and allow the plan to be fluid and flexible, it will be much easier when the transition occurs because you'll know exactly what you need."
The succession process includes several steps:
• Writing an agreement for succession planning between the surgeon and the practice
• Locating a successor for the practice
• Performing valuation of the practice
• Initiating and completing the financial transaction
• Transitioning patients to the new surgeon
Surgeons can either look internally or externally for the surgeon who will succeed them. If the practice is large enough, the senior partner can recruit a junior partner to take on the shares after retirement. If the group will need to recruit another physician to buy-in to the practice, looking externally might be the best option. Often, surgeons coming right out of medical school and training are the most available for recruitment, but they aren't in the best position to fully purchase shares of the senior physician's practice, which can lead to financing issues.
"If you look at Apple, they had succession planning in place so even though they lost their founder, they could still operate," says Wayne J. Miller, Esq., a healthcare transaction and regulatory attorney and founding partner of Compliance Law Group in Los Angeles, Calif. "It works the same way in medical practices and particularly in orthopedics because that's still a field where there is a physician shortage. The problem is there is a lot of need for new orthopedists, but not a lot of experienced owner physicians for retiring surgeons to sell their practice to. The thought about 'what is going to happen if we aren't here' is an exercise that senior surgeons need to get involved in as soon as they can."
2. Finding the right time to retire. In larger orthopedic groups, predetermining a plan for professional growth allows surgeons to rise within the ranks and eventually retire; they begin as employees and gradually become partner and then senior partner. In this situation, the practice often specifies how long a surgeon can stay in each role and when it will be appropriate to retire.
"If the highest level is a senior partner, and surgeons can only be a senior partner for a certain number of years, it won't come as a surprise to anyone when they reach the age of retirement," says Mr. Miller. In these situations, the practice often has junior partners poised to take the position of senior partners, and the transition is smoother because the succeeding surgeon is already familiar with the practice.
"In this situation, everyone is clear as to what the procedure is and they understand what will be expected when a senior partner is going to leave," says Mr. Miller. "It takes a lot of fight out of the process. However, even with these procedures in place, you still have to look at the process and terms periodically and see if it still makes sense. If you have a lot of changeover in partners, particularly if there are a number of younger partners, make sure the method isn't too heavily weighted toward the mature partners."
In some cases, senior surgeons may prepare to leave the rigors of practice management behind and spend their last few years employed by a hospital. In this instance, it's important that surgeons recognize any non-compete laws in their contract and understand how their state enforces non-compete rules, says Mr. Miller.
3. Performing valuation of the practice. Before selling the practice, the retiring surgeon must have a third party conduct a practice valuation. Make sure the valuation company is experienced in the medical world and will be able to understand the unique challenges associated with the medical practice. Additional layers of value and complication are added to the process if the surgeon owns or rents real estate and equipment associated with the practice.
"In one sense, you look at the real property, like the medical building, and value what it would cost to replace it if it burnt down," says Mr. Byrd. "On the other hand, you might have a piece of diagnostic equipment. On the books, it may have zero value, but when you go to replace it, it has value."
Mr. Byrd also cautions practices to keep a large sum in their corporation to save up in anticipation of purchasing a departing shareholder's interest. "In a lot of practices, the mode of operations is to pay salaries and bonuses to the physicians and zero to the corporation, which doesn't leave a lot of money for covering a physician's shares once they retire," he says. "This is a significant planning error because you end up with unfunded liabilities. The practice is either funded by the cash flow or borrowed money, which means you have the principle and interest payment which will reduce cash flow."
Valuation of the practice is extremely important and shouldn't wait until a surgeon is ready to retire before being conducted. Mr. Byrd says the practice should be reviewed annually, through the formal or informal appraisal process, to make sure the buy/sell agreement and operating agreement are still applicable in light of any changes to the practice.
"If you put a process in place, it ensures the value is received for the withdrawing partner," says Mr. Byrd. "It also determines the appropriate buy-in price for the new person buying into the practice. Practices are dynamic; you might start with four physicians and keep on adding. Each situation is different, but smaller practices need to think about how they are going to get value out of their practices when they retire and start thinking about four or five years before then."
4. Selling the practice. Surgeons who want to sell their shares in a practice must devise a plan for making sure the transaction is smooth and amicable. This can be tricky because retiring surgeons want to make sure they receive their fair compensation for the practice they've built without completely bankrupting the practice for their partners. There are several ways this transaction could play out, including cashing in the shares for a lump sum payment or paying a percentage down and agreeing upon incremental payments of the additional sum over several years.
If succeeding surgeons aren't in a position to purchase the entire shares upfront, they need to work with a bank to finance the practice. If financing isn't available, and it may not be in today's economy, the seller can ask for as much as possible upfront and hold a note on the rest of the shares. Mr. Molin says the seller would want to gain as much as possible upfront and hold the note for the shortest amount of time possible.
Other options are also available. "If a bank isn't available to finance the sale, the surgeons might want to take out a life insurance policy to fund a buy out due to death or disability," says Mr. Miller. "They might also structure a payout over a long period of time or agree on a value for the practice that reflects the current market. This may be a little less than what the older surgeon would like but regulatory constraints require the practice to pay an amount commensurate with fair market value."
It may be prudent to bring in a third party moderator for the transaction to ensure appropriate communication between both parties. If you aren't selling the practice to an external surgeon but rather are conducting an internal transaction, you will need a medical attorney to help you deal with Stark issues and a tax attorney or accountant to write or review the language in the deal, says Mr. Molin.
5. Naming new leaders. Depending on the practice or group situation, there are several ways to identify a successor for a retiring surgeon. Like other small businesses, some surgeons might be able to sell their family practice to a son or daughter trained in orthopedics or spine surgery. If family members aren't available, recruiting a surgeon fresh out of training or promoting a junior surgeon to senior-level might be a more feasible option.
For larger groups that may have their pick of junior surgeons to fill a senior surgeon's shoes, making the right promotion can be tricky. Look at the practice to realize where the gaps in leadership or success are and identify the person or type of person who would best fulfill those needs. An ideal leader would have both business experience and an outstanding clinical reputation.
"When you are selecting or promoting a surgeon from within, there is education that takes place in helping them understand the differences between being an individual contributor and moving them into a leader of the practice," says Scott Kiefer, vice president of PI Worldwide Member firm, the Oliver Group, a company focused on providing solutions to manage change including succession planning.. "There are differences between having patients and making sure their needs are met and meeting with staff members to make sure their needs are met."
Mr. Kiefer suggests a few key steps to make sure the transition into a leadership position is smooth and positive:
• Give the new leader access to an executive coach to develop new leadership skills
• Provide a forum for feedback from staff and patients
• Enact operational changes to encourage a slow incorporation of new responsibilities
• Have the exiting owner or senior partner sponsor the new leader into that role
"It's a fundamental mindset shift when a surgeon goes from being an individual contributor to leader of the pack," says Mr. Kiefer. "If there is a large group of owners, this should be a facilitated transition to minimize egos when sponsoring a new leader into that role."
6. Recruiting successors. In a medium or large group practice, surgeons most likely have a junior surgeon in mind who will step into the leadership role vacated by a retiring surgeon. However, the group still needs to sustain patient volume and may consider recruiting a new junior surgeon from outside the practice. This new surgeon would purchase shares of the group practice but fill the gap by the promoted surgeon.
"We can measure the operating style or personality of the leader of an organization as well as the staff members of the organization and figure out how to move forward," says Mr. Kiefer. "Practice physicians might be highly technically competent, but they may not necessarily have great relationships with patients or good bedside manner, so there is a high staff turnover. By looking at what gaps exist in the current staff, you can be very intentional about bringing in a qualified physician who has more empathy and stronger need to build relationships with patients, or vice versa, depending on what the position requires. If the physicians are lacking processes and business standards, they should find someone who is process-minded and business oriented."
If the practice is having trouble recruiting orthopedic surgeons to the region — as is the case in many rural areas — local hospitals may be able to lend a hand. It's in the hospital's best interest to have enough specialists available to treat patients in its service area and the hospital could provide a recruitment loan or another type of financial support to recruit a physician from outside the area, says Mr. Miller.
"It may be that the physician group doesn't need to use only its own funding for recruitment because the local hospital could conceivably provide a loan as another financing source for the group," Mr. Miller says. "There are obligations that come with that, but from the physician's perspective, it's another way to finance the succession plan."
7. Dealing with old debt and surgeon contracts. When physicians are ready to retire and leave their practice, there are several financial considerations associated with even the most successful practices. If the practice owns real estate or leases building space, both retiring and acquiring surgeons must be aware of whether the departing physician will continue to be response for any debt or lease obligations. "A person who is leaving might be partial owner or might be guaranteeing payment of the practice lease," says Mr. Miller. "You have to deal with the issue of whether the retiring surgeon is released from being a guarantor anymore and whether the surgeon can remain an owner of the property."
In addition to real estate, retiring surgeons may have taken on capital loans or lines of credit they are personally liable for during their career. "In this instance, the practice or group should talk about whether the retiring surgeons will have to pay that back immediately and how they will pay for it," says Mr. Miller. "You have to determine based on the loan documents whether the doctor can be released from a loan if that's the intent of the group."
For managed care contracts, the practice or group must consider providing for termination or change in status when physicians leave the practice. "You want to make sure that if a surgeon leaves this isn't going to jeopardize ongoing provider relationships," says Mr. Miller.
8. Transitioning patients to a new partner. Taking care of relationships with providers during this transition is important, but surgeons and practices also need to be mindful of slowly introducing patients to the new surgeon as well. Patients may not want to accept the new physician at first, especially if they have a long relationship with the retiring surgeon or if the new surgeon is fairly young.
"Undoubtedly, if you are replacing a senior partner with someone young, there might be resistance, especially if patients have seen the senior physician for a long time," says Mr. Miller. Having the support of the retiring surgeon is really helpful for the new surgeon to build a patient base and foster a positive relationship within the community. New surgeons can also give presentations and appear at group events so medical professionals and patients become more familiar with them.
"To help with this transition, have the surgeon who is leaving introduce the succeeding surgeon to the patients," says Mr. Miller. "Also bring the successors into situations where they can meet with referral sources so the referring parties start to feel comfortable with the successor. In some cases, you might want to make an actual attempt to start having the departing doctors' patients rotate in to see the successor."
Related Articles on Orthopedic Practices:
Baby Boomers are Coming: 8 Solutions to Looming Challenges for Orthopedic Surgeons
Building Stronger Patient Relationships: 7 Points From Orthopedic Surgeons Who Have Been in Their Shoes
Joint Preservation as the Future of Orthopedics: 5 Things to Know From Dr. Eric Strauss
"I've seen a lot of physicians build up a practice and didn't think it through far enough in advance about their retirement, so they don't get a whole lot out of selling their practice," says Karl E. Byrd, CFP. Here, four medical and business experts discuss the key concepts for succession planning and how practices and physicians can ensure a smooth transition.
1. Starting to plan early. Ideally, orthopedic practices will have a succession plan written from inception and every surgeon who becomes a partner agrees to the plan at that time. However, this doesn't hold true in many cases, especially for small groups or single physician practices. If a plan wasn't created at the onset, orthopedic surgeons should begin succession planning at least five years before they plan on retiring because the transition can easily take two or more years to complete.
"In my experience, physicians are often unprepared for the final moment when they move on," says Glenn Molin, DC, MBA, a senior business intermediary at CI Harvest in Columbia, Md. "Hopefully, their financials are in order and they have a team in place that was there from the onset enabling them to create a practice that runs like a business because there will be issues and consideration with taxes, Stark laws and liability. If you deal with it early upfront and allow the plan to be fluid and flexible, it will be much easier when the transition occurs because you'll know exactly what you need."
The succession process includes several steps:
• Writing an agreement for succession planning between the surgeon and the practice
• Locating a successor for the practice
• Performing valuation of the practice
• Initiating and completing the financial transaction
• Transitioning patients to the new surgeon
Surgeons can either look internally or externally for the surgeon who will succeed them. If the practice is large enough, the senior partner can recruit a junior partner to take on the shares after retirement. If the group will need to recruit another physician to buy-in to the practice, looking externally might be the best option. Often, surgeons coming right out of medical school and training are the most available for recruitment, but they aren't in the best position to fully purchase shares of the senior physician's practice, which can lead to financing issues.
"If you look at Apple, they had succession planning in place so even though they lost their founder, they could still operate," says Wayne J. Miller, Esq., a healthcare transaction and regulatory attorney and founding partner of Compliance Law Group in Los Angeles, Calif. "It works the same way in medical practices and particularly in orthopedics because that's still a field where there is a physician shortage. The problem is there is a lot of need for new orthopedists, but not a lot of experienced owner physicians for retiring surgeons to sell their practice to. The thought about 'what is going to happen if we aren't here' is an exercise that senior surgeons need to get involved in as soon as they can."
2. Finding the right time to retire. In larger orthopedic groups, predetermining a plan for professional growth allows surgeons to rise within the ranks and eventually retire; they begin as employees and gradually become partner and then senior partner. In this situation, the practice often specifies how long a surgeon can stay in each role and when it will be appropriate to retire.
"If the highest level is a senior partner, and surgeons can only be a senior partner for a certain number of years, it won't come as a surprise to anyone when they reach the age of retirement," says Mr. Miller. In these situations, the practice often has junior partners poised to take the position of senior partners, and the transition is smoother because the succeeding surgeon is already familiar with the practice.
"In this situation, everyone is clear as to what the procedure is and they understand what will be expected when a senior partner is going to leave," says Mr. Miller. "It takes a lot of fight out of the process. However, even with these procedures in place, you still have to look at the process and terms periodically and see if it still makes sense. If you have a lot of changeover in partners, particularly if there are a number of younger partners, make sure the method isn't too heavily weighted toward the mature partners."
In some cases, senior surgeons may prepare to leave the rigors of practice management behind and spend their last few years employed by a hospital. In this instance, it's important that surgeons recognize any non-compete laws in their contract and understand how their state enforces non-compete rules, says Mr. Miller.
3. Performing valuation of the practice. Before selling the practice, the retiring surgeon must have a third party conduct a practice valuation. Make sure the valuation company is experienced in the medical world and will be able to understand the unique challenges associated with the medical practice. Additional layers of value and complication are added to the process if the surgeon owns or rents real estate and equipment associated with the practice.
"In one sense, you look at the real property, like the medical building, and value what it would cost to replace it if it burnt down," says Mr. Byrd. "On the other hand, you might have a piece of diagnostic equipment. On the books, it may have zero value, but when you go to replace it, it has value."
Mr. Byrd also cautions practices to keep a large sum in their corporation to save up in anticipation of purchasing a departing shareholder's interest. "In a lot of practices, the mode of operations is to pay salaries and bonuses to the physicians and zero to the corporation, which doesn't leave a lot of money for covering a physician's shares once they retire," he says. "This is a significant planning error because you end up with unfunded liabilities. The practice is either funded by the cash flow or borrowed money, which means you have the principle and interest payment which will reduce cash flow."
Valuation of the practice is extremely important and shouldn't wait until a surgeon is ready to retire before being conducted. Mr. Byrd says the practice should be reviewed annually, through the formal or informal appraisal process, to make sure the buy/sell agreement and operating agreement are still applicable in light of any changes to the practice.
"If you put a process in place, it ensures the value is received for the withdrawing partner," says Mr. Byrd. "It also determines the appropriate buy-in price for the new person buying into the practice. Practices are dynamic; you might start with four physicians and keep on adding. Each situation is different, but smaller practices need to think about how they are going to get value out of their practices when they retire and start thinking about four or five years before then."
4. Selling the practice. Surgeons who want to sell their shares in a practice must devise a plan for making sure the transaction is smooth and amicable. This can be tricky because retiring surgeons want to make sure they receive their fair compensation for the practice they've built without completely bankrupting the practice for their partners. There are several ways this transaction could play out, including cashing in the shares for a lump sum payment or paying a percentage down and agreeing upon incremental payments of the additional sum over several years.
If succeeding surgeons aren't in a position to purchase the entire shares upfront, they need to work with a bank to finance the practice. If financing isn't available, and it may not be in today's economy, the seller can ask for as much as possible upfront and hold a note on the rest of the shares. Mr. Molin says the seller would want to gain as much as possible upfront and hold the note for the shortest amount of time possible.
Other options are also available. "If a bank isn't available to finance the sale, the surgeons might want to take out a life insurance policy to fund a buy out due to death or disability," says Mr. Miller. "They might also structure a payout over a long period of time or agree on a value for the practice that reflects the current market. This may be a little less than what the older surgeon would like but regulatory constraints require the practice to pay an amount commensurate with fair market value."
It may be prudent to bring in a third party moderator for the transaction to ensure appropriate communication between both parties. If you aren't selling the practice to an external surgeon but rather are conducting an internal transaction, you will need a medical attorney to help you deal with Stark issues and a tax attorney or accountant to write or review the language in the deal, says Mr. Molin.
5. Naming new leaders. Depending on the practice or group situation, there are several ways to identify a successor for a retiring surgeon. Like other small businesses, some surgeons might be able to sell their family practice to a son or daughter trained in orthopedics or spine surgery. If family members aren't available, recruiting a surgeon fresh out of training or promoting a junior surgeon to senior-level might be a more feasible option.
For larger groups that may have their pick of junior surgeons to fill a senior surgeon's shoes, making the right promotion can be tricky. Look at the practice to realize where the gaps in leadership or success are and identify the person or type of person who would best fulfill those needs. An ideal leader would have both business experience and an outstanding clinical reputation.
"When you are selecting or promoting a surgeon from within, there is education that takes place in helping them understand the differences between being an individual contributor and moving them into a leader of the practice," says Scott Kiefer, vice president of PI Worldwide Member firm, the Oliver Group, a company focused on providing solutions to manage change including succession planning.. "There are differences between having patients and making sure their needs are met and meeting with staff members to make sure their needs are met."
Mr. Kiefer suggests a few key steps to make sure the transition into a leadership position is smooth and positive:
• Give the new leader access to an executive coach to develop new leadership skills
• Provide a forum for feedback from staff and patients
• Enact operational changes to encourage a slow incorporation of new responsibilities
• Have the exiting owner or senior partner sponsor the new leader into that role
"It's a fundamental mindset shift when a surgeon goes from being an individual contributor to leader of the pack," says Mr. Kiefer. "If there is a large group of owners, this should be a facilitated transition to minimize egos when sponsoring a new leader into that role."
6. Recruiting successors. In a medium or large group practice, surgeons most likely have a junior surgeon in mind who will step into the leadership role vacated by a retiring surgeon. However, the group still needs to sustain patient volume and may consider recruiting a new junior surgeon from outside the practice. This new surgeon would purchase shares of the group practice but fill the gap by the promoted surgeon.
"We can measure the operating style or personality of the leader of an organization as well as the staff members of the organization and figure out how to move forward," says Mr. Kiefer. "Practice physicians might be highly technically competent, but they may not necessarily have great relationships with patients or good bedside manner, so there is a high staff turnover. By looking at what gaps exist in the current staff, you can be very intentional about bringing in a qualified physician who has more empathy and stronger need to build relationships with patients, or vice versa, depending on what the position requires. If the physicians are lacking processes and business standards, they should find someone who is process-minded and business oriented."
If the practice is having trouble recruiting orthopedic surgeons to the region — as is the case in many rural areas — local hospitals may be able to lend a hand. It's in the hospital's best interest to have enough specialists available to treat patients in its service area and the hospital could provide a recruitment loan or another type of financial support to recruit a physician from outside the area, says Mr. Miller.
"It may be that the physician group doesn't need to use only its own funding for recruitment because the local hospital could conceivably provide a loan as another financing source for the group," Mr. Miller says. "There are obligations that come with that, but from the physician's perspective, it's another way to finance the succession plan."
7. Dealing with old debt and surgeon contracts. When physicians are ready to retire and leave their practice, there are several financial considerations associated with even the most successful practices. If the practice owns real estate or leases building space, both retiring and acquiring surgeons must be aware of whether the departing physician will continue to be response for any debt or lease obligations. "A person who is leaving might be partial owner or might be guaranteeing payment of the practice lease," says Mr. Miller. "You have to deal with the issue of whether the retiring surgeon is released from being a guarantor anymore and whether the surgeon can remain an owner of the property."
In addition to real estate, retiring surgeons may have taken on capital loans or lines of credit they are personally liable for during their career. "In this instance, the practice or group should talk about whether the retiring surgeons will have to pay that back immediately and how they will pay for it," says Mr. Miller. "You have to determine based on the loan documents whether the doctor can be released from a loan if that's the intent of the group."
For managed care contracts, the practice or group must consider providing for termination or change in status when physicians leave the practice. "You want to make sure that if a surgeon leaves this isn't going to jeopardize ongoing provider relationships," says Mr. Miller.
8. Transitioning patients to a new partner. Taking care of relationships with providers during this transition is important, but surgeons and practices also need to be mindful of slowly introducing patients to the new surgeon as well. Patients may not want to accept the new physician at first, especially if they have a long relationship with the retiring surgeon or if the new surgeon is fairly young.
"Undoubtedly, if you are replacing a senior partner with someone young, there might be resistance, especially if patients have seen the senior physician for a long time," says Mr. Miller. Having the support of the retiring surgeon is really helpful for the new surgeon to build a patient base and foster a positive relationship within the community. New surgeons can also give presentations and appear at group events so medical professionals and patients become more familiar with them.
"To help with this transition, have the surgeon who is leaving introduce the succeeding surgeon to the patients," says Mr. Miller. "Also bring the successors into situations where they can meet with referral sources so the referring parties start to feel comfortable with the successor. In some cases, you might want to make an actual attempt to start having the departing doctors' patients rotate in to see the successor."
Related Articles on Orthopedic Practices:
Baby Boomers are Coming: 8 Solutions to Looming Challenges for Orthopedic Surgeons
Building Stronger Patient Relationships: 7 Points From Orthopedic Surgeons Who Have Been in Their Shoes
Joint Preservation as the Future of Orthopedics: 5 Things to Know From Dr. Eric Strauss