Sharing fame and blame
By Larry Jensen, MBA
Bringing a partner into your practice can be the best of times, or it can be the worst of times.
The old adage of “an ounce of prevention is worth a pound of cure” is very applicable to the planning and discussions required in forming a partnership. Much can be controlled if proper planning and forethought is put into place before the partnership begins.
One of the first questions you should ask before adding a partner is, “Is there a compelling reason to bring on a partner?” and then ask if that reason compels both partners.
On the plus side
A number of good reasons exist as to why you should bring on a partner. One of the top reasons is the additional skill set. If one partner is skilled at marketing and the other is a numbers person, it can be greatly beneficial to the partnership when each partner operates within their skill set.
(Note: In this article, the word “partnership” refers to the relationship between individuals — not to the legal or tax entity form of an organization, such as a partnership or corporation.)
Another top reason would be the business companionship and support. The demands of business can become isolating and burdensome, but a partner can be there to pick you up and talk you through difficult times, or take up your patient load if you need time off or to take a vacation. Many owners nearing retirement find that taking on a partner who can eventually purchase their interest in the practice is a benefit and the best exit strategy.
You also benefit from the additional personal and business contacts each of you bring to the practice, as well as more alternatives in business decision-making by the shared common experience of both partners.
There is no greater sense of fulfillment than seeing your vision brought to fruition — and two or more people sharing and working to fulfill that vision can accomplish it in less time and with less effort.
But with vision can also come risk and maybe the financial risks of the practice are more than you are comfortable accepting. A partnership allows both of you to share in that risk.
On the down side
You may be asking yourself: Why are there not more partnerships? In truth, there is a leveraging effect in having a partner.
The problem is this leverage, if improperly channeled, can work against you and problems can multiply with the addition of a partner.
One reason partnerships fail is that anytime two people work together long enough, disagreements will arise. The partnership is only as strong as the partners’ ability to navigate through these disagreements and emerge stronger on the other side.
This is one reason that defining the shared vision is so important at the onset. If focus is shifted onto accomplishing the vision, disagreements can be resolved. If the disagreement becomes bigger than the vision, the partnership can fail.
As two people work together, they may also experience personal conflict. Partners must possess the ability to resolve those personal conflicts and avoid outbursts of anger and emotion as
Strong partnerships leave room for opposing views and negotiation, but you must keep in mind that time has a way of changing a person’s level of commitment. Children, marriage, retirement horizon, financial security, personal beliefs, and values all may have an influence on the level of commitment of the partners.
The ability to communicate and navigate through these changes will determine the strength of the partnership. No two people will always agree on everything; however, if your underlying values are significantly different, the partnership may be in trouble.
You also want to make sure you have each partner’s roles and responsibilities established before entering into an agreement, and ensure those roles are thought through, discussed, put in writing, and respected by all partners.
The partnership agreement
Some tough decisions need to be addressed, well thought out, and agreed upon before ever entering into a partnership agreement — including each partner’s roles, responsibilities, and exit strategies.
A number of points or questions your partnership agreement should cover include:
• How will you structure time off?
• Under what situations may one partner obligate the other?
• Will the partnership or the partners own or rent the office space?
• Will the partnership own assets used by the partners outside of their normal business setting?
• How much money will be taken out of the partnership? Timing of these distributions will need to be discussed.
• How much money will be kept in the partnership? How will the owners be paid for this use of capital?
• Who will make the banking arrangements and who can obligate the partnership and/or other partner(s)?
• Will you have in-house accounting staff? Who will direct them? Who will choose your CPA? Will you have regular meetings to discuss financial results?
• Since money will be taken out of the partnership to compensate the partners, provision for estimated tax payments will be part of the drawing on account.
• What procedures must be followed if a partner plans on retiring? Who will be eligible to purchase their partnership interest?
• In the unfortunate event of a partner’s death, will the partnership continue? How will the surviving spouse and/or heirs be treated?
• Will the partnership fund a retirement plan for the partners?
• What happens if a partner is disabled, long-term and short-term?
• When will they be paid for their interest? What if no one is willing to purchase the partner’s interest?
• How will the partnership be valued in the exchange of a partnership interest?
• What can the partners do in the unfortunate situation of needing to remove a partner?
• What is the procedure if there is an unresolved dispute? Can legal action be avoided?
• What if spouses suddenly want to be involved in managing the partnership? Are spouses or children allowed to work for the partnership? Who will decide how much they are paid? Who will decide to terminate employment if necessary?
There may be additional issues to address, but this list should begin to make you aware of all of the critical issues that need to be included in any partnership arrangement.
Finding an attorney with experience in establishing partnerships can be extremely valuable and well worth the cost and effort involved.
Larry Jensen is, MBA, is the accounting manager for Hooper Cornell, P.L.L.C., a CPA firm located in Boise, Idaho, specializing in healthcare services. He can be reached at 208-344-2527, firstname.lastname@example.org, or through www.hoopercornell.com.