Transitions: How Physicians (and the Practice) Should Plan for Retirement
There are of course two sides to a physician’s retirement – the physician and the practice. The physician has to ensure that he or she is psychologically ready, not to mention financially prepared. The practice continues to have responsibilities to its patients, employees, and remaining physicians. There are many factors to be considered, all of which should be planned for years in advance, not just weeks or months. We will take a look at some of the largest transition issues faced by physicians and their practices including establishing a value for a practice, building value within the practice, and when to hire a new physician to fill the role of one who is retiring.
One of the issues that are clearly important to both sides is the value of the practice. The higher the value is, the better for the retiring partner. In the short run, a lower value is more advantageous for the practice and remaining partners, since they will have to pay the retiring partner less. Medical practices are service organizations, like accounting firms, law firms, and financial planning firms, and have very little value beyond providing the owners a job and an income while they are working. Unlike a manufacturing firm, there is no tangible product to sell, no proprietary process, no patented formula. Often it is argued that the only value is that of the individual physician’s reputation – which by definition makes the practice valueless upon the physician’s retirement.
Remember, a practice that has patients who identify with only one single physician as their care provider is not nearly as valuable as a practice where the patients have a strong connection and loyalty to the entire practice. It is counter intuitive to many, but physicians who have their patients see their partners (or at least meet them) actually add value to the practice as a whole. Patient loyalty in conjunction with the name recognition and practice reputation is the sole value of the practice. Assuming there is some competition in your area, the practice will have no value if there is no positive name recognition, a poor reputation, and no patient loyalty. It is only a job for the physician and when the physician stops working, the practice will die.
Partner with your Partners
Ultimately a valuable practice is good for all partners, as even the younger partners will eventually retire and sell their ownership in the practice. So how does one establish value beyond the current year’s wage? It is no different than any other service firm—value must be established beyond the personal one on one patient-doctor relationship. At the highest level this means ensuring that your patients and referral sources see your practice not as a set of individual physicians sharing office space, but as a highly professional organization with a strong team of complementary physicians. This means that a patient should be viewed as a patient of the practice not of a single physician. The true test of this is to ask the patients directly, or through a blind survey, how they feel about seeing physicians other than their “primary” physician. If the results are not positive, a plan to introduce patients to the entire team of physicians will rectify this over time.
Bringing on a New Physician
If there is an expected transition, it is absolutely critical that a new physician is hired well before the retiring physician leaves. The practice must ensure that the new addition fits within the culture of the practice and also that the patients are comfortable with the transition. I recently had a client retire and his replacement was hired less than two months beforehand. This was not nearly enough time for a proper transition and many clients were shocked at the quickness of the change. At this point, only time will tell whether or not the patients will stay or whether they will move onto other practices. The buy-out for the retiring partner is typically not much more than a percentage of the receivables owed at the date of retirement. While our client is in fine financial shape, I would have preferred to see a much more business-like approach to the changeover.
A physician has an immense amount of preparation and training in advance of practicing medicine, and rightfully so, given the importance of the practice of medicine. Unfortunately as a group, physicians spend far too little time preparing for retirement from their practice – especially as it relates to the succession of the practice. Treat your practice like a business. After all that is precisely what it is. So focus on building value, creating a true team, and ensure that you hire before the need has already become dire.
Kevin C. Leahy, CFP®, CPA, CIMA®, is President and CEO of Connecticut Wealth Management, LLC, a registered investment advisor firm based in Farmington, Connecticut. He can be reached at (860) 470-0290 or firstname.lastname@example.org.