Practice Mergers

Tough economic times, coupled with the unpredictable consequences of health care reform, are prompting a growing number of small practices to consider protecting themselves by merging into larger entities.

While dermatology remains one of the last bastions of individual private medical practice, mergers offer significant advantages in stabilization of income and diversification of services. However, careful planning is essential.

It is certainly tempting for two honest and friendly parties to seal a merger with a simple handshake, but the bottom line is no one can ever be sure how things will work out. So, for peace of mind (if nothing else), a written agreement is in everyone's best interest, and the cost will be reasonable if lawyers are kept under control.

While every merger is unique, here are some general guidelines:

Management. An agreement will need to be reached on who will manage the new practice, and what percentage vote will be needed to approve group decisions. Typically the majority rules, but you may wish to specify important decisions that will require unanimous approval, such as purchasing expensive equipment, borrowing money, or adding new partners.

Retirement plans. Will you keep existing retirement plans or merge them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You'll probably need some legal guidance to insure assets from each existing plan can be transferred into the new plan without tax issues.

Compensation. You will need to agree on a compensation formula. Will everyone be paid only for what they do individually or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn't drop to zero when you take time off.

Incorporation. If both practices are incorporated, there are two basic options for forming a single entity. The first option is to merge corporation A with corporation B. Corporation A ceases to exist, and its medical practice becomes a part of corporation B, the so-called "surviving entity."

Corporation B assumes all assets and liabilities of both old corporations, and the shareholders of  corporation A exchange shares of its stock for shares of corporation B (with adjustments for inequalities in stock value).
The second option is to start a completely new corporation, which I'll call corporation C. Corporations A and B dissolve, and distribute their equipment and charts to their shareholders, who then transfer the assets to corporation C.

Option two is popular, but I am not a fan. It is billed as an opportunity to start fresh, shielding everyone from exposure to malpractice suits and other liabilities. However, the reality is, anyone looking to sue either old corporation will simply sue corporation C as the so-called "successor" corporation, on the grounds that it has assumed responsibility for its predecessors' liabilities.

You will also need new provider numbers, which may impede cash flow for months. Plus, the IRS treats corporate liquidations, even for merger purposes, as sales of assets, and taxes them.

I personally favor outright merger of the corporations; it is tax neutral, and while it may theoretically be less satisfactory liability-wise, you can minimize risk by examining financial and legal records, and by identifying any glaring flaws in charting or coding. Your lawyers can add verbiage known as "hold harmless" clauses to the merger agreement, indemnifying each party against the others' liabilities. This area, especially, is where you need experienced, competent legal advice.

Equalization of assets. Another common sticking point is known as "equalization." This happens when each party brings an equal amount of assets to the table, but that is hardly ever the case. One party may contribute more equipment, for example, and the others are often asked to make up the difference with something else, usually cash.

An alternative is to agree that any inequalities will be compensated at the other end, in the form of buy-out value; that is, physicians contributing more assets would receive larger buy-outs when they leave or retire than those contributing less.

Non-compete provisions. These are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buy-out penalty. An unhappy partner can leave and compete, but at the cost of a substantially reduced buy-out. This permits competition, but discourages it, and compensates the remaining partners.

These are only some of the pivotal business and legal issues that can never be settled with a handshake. A little planning and negotiation can prevent grief, regret, and legal expenses in the future.

Tough economic times, coupled with the unpredictable consequences of health care reform, are prompting a growing number of small practices to consider protecting themselves by merging into larger entities.

While dermatology remains one of the last bastions of individual private medical practice, mergers offer significant advantages in stabilization of income and diversification of services. However, careful planning is essential.

It is certainly tempting for two honest and friendly parties to seal a merger with a simple handshake, but the bottom line is no one can ever be sure how things will work out. So, for peace of mind (if nothing else), a written agreement is in everyone's best interest, and the cost will be reasonable if lawyers are kept under control.

While every merger is unique, here are some general guidelines:

Management. An agreement will need to be reached on who will manage the new practice, and what percentage vote will be needed to approve group decisions. Typically the majority rules, but you may wish to specify important decisions that will require unanimous approval, such as purchasing expensive equipment, borrowing money, or adding new partners.

Retirement plans. Will you keep existing retirement plans or merge them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You'll probably need some legal guidance to insure assets from each existing plan can be transferred into the new plan without tax issues.

Compensation. You will need to agree on a compensation formula. Will everyone be paid only for what they do individually or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn't drop to zero when you take time off.

Incorporation. If both practices are incorporated, there are two basic options for forming a single entity. The first option is to merge corporation A with corporation B. Corporation A ceases to exist, and its medical practice becomes a part of corporation B, the so-called "surviving entity."

Corporation B assumes all assets and liabilities of both old corporations, and the shareholders of  corporation A exchange shares of its stock for shares of corporation B (with adjustments for inequalities in stock value).
The second option is to start a completely new corporation, which I'll call corporation C. Corporations A and B dissolve, and distribute their equipment and charts to their shareholders, who then transfer the assets to corporation C.

Option two is popular, but I am not a fan. It is billed as an opportunity to start fresh, shielding everyone from exposure to malpractice suits and other liabilities. However, the reality is, anyone looking to sue either old corporation will simply sue corporation C as the so-called "successor" corporation, on the grounds that it has assumed responsibility for its predecessors' liabilities.

You will also need new provider numbers, which may impede cash flow for months. Plus, the IRS treats corporate liquidations, even for merger purposes, as sales of assets, and taxes them.

I personally favor outright merger of the corporations; it is tax neutral, and while it may theoretically be less satisfactory liability-wise, you can minimize risk by examining financial and legal records, and by identifying any glaring flaws in charting or coding. Your lawyers can add verbiage known as "hold harmless" clauses to the merger agreement, indemnifying each party against the others' liabilities. This area, especially, is where you need experienced, competent legal advice.

Equalization of assets. Another common sticking point is known as "equalization." This happens when each party brings an equal amount of assets to the table, but that is hardly ever the case. One party may contribute more equipment, for example, and the others are often asked to make up the difference with something else, usually cash.

An alternative is to agree that any inequalities will be compensated at the other end, in the form of buy-out value; that is, physicians contributing more assets would receive larger buy-outs when they leave or retire than those contributing less.

Non-compete provisions. These are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buy-out penalty. An unhappy partner can leave and compete, but at the cost of a substantially reduced buy-out. This permits competition, but discourages it, and compensates the remaining partners.

These are only some of the pivotal business and legal issues that can never be settled with a handshake. A little planning and negotiation can prevent grief, regret, and legal expenses in the future.

Tough economic times, coupled with the unpredictable consequences of health care reform, are prompting a growing number of small practices to consider protecting themselves by merging into larger entities.

While dermatology remains one of the last bastions of individual private medical practice, mergers offer significant advantages in stabilization of income and diversification of services. However, careful planning is essential.

It is certainly tempting for two honest and friendly parties to seal a merger with a simple handshake, but the bottom line is no one can ever be sure how things will work out. So, for peace of mind (if nothing else), a written agreement is in everyone's best interest, and the cost will be reasonable if lawyers are kept under control.

While every merger is unique, here are some general guidelines:

Management. An agreement will need to be reached on who will manage the new practice, and what percentage vote will be needed to approve group decisions. Typically the majority rules, but you may wish to specify important decisions that will require unanimous approval, such as purchasing expensive equipment, borrowing money, or adding new partners.

Retirement plans. Will you keep existing retirement plans or merge them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You'll probably need some legal guidance to insure assets from each existing plan can be transferred into the new plan without tax issues.

Compensation. You will need to agree on a compensation formula. Will everyone be paid only for what they do individually or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn't drop to zero when you take time off.

Incorporation. If both practices are incorporated, there are two basic options for forming a single entity. The first option is to merge corporation A with corporation B. Corporation A ceases to exist, and its medical practice becomes a part of corporation B, the so-called "surviving entity."

Corporation B assumes all assets and liabilities of both old corporations, and the shareholders of  corporation A exchange shares of its stock for shares of corporation B (with adjustments for inequalities in stock value).
The second option is to start a completely new corporation, which I'll call corporation C. Corporations A and B dissolve, and distribute their equipment and charts to their shareholders, who then transfer the assets to corporation C.

Option two is popular, but I am not a fan. It is billed as an opportunity to start fresh, shielding everyone from exposure to malpractice suits and other liabilities. However, the reality is, anyone looking to sue either old corporation will simply sue corporation C as the so-called "successor" corporation, on the grounds that it has assumed responsibility for its predecessors' liabilities.

You will also need new provider numbers, which may impede cash flow for months. Plus, the IRS treats corporate liquidations, even for merger purposes, as sales of assets, and taxes them.

I personally favor outright merger of the corporations; it is tax neutral, and while it may theoretically be less satisfactory liability-wise, you can minimize risk by examining financial and legal records, and by identifying any glaring flaws in charting or coding. Your lawyers can add verbiage known as "hold harmless" clauses to the merger agreement, indemnifying each party against the others' liabilities. This area, especially, is where you need experienced, competent legal advice.

Equalization of assets. Another common sticking point is known as "equalization." This happens when each party brings an equal amount of assets to the table, but that is hardly ever the case. One party may contribute more equipment, for example, and the others are often asked to make up the difference with something else, usually cash.

An alternative is to agree that any inequalities will be compensated at the other end, in the form of buy-out value; that is, physicians contributing more assets would receive larger buy-outs when they leave or retire than those contributing less.

Non-compete provisions. These are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buy-out penalty. An unhappy partner can leave and compete, but at the cost of a substantially reduced buy-out. This permits competition, but discourages it, and compensates the remaining partners.

These are only some of the pivotal business and legal issues that can never be settled with a handshake. A little planning and negotiation can prevent grief, regret, and legal expenses in the future.