Do you own a medical practice, and you are considering bringing on a business partner? There can be many advantages to expanding your practice, like easing your workload, offering extra services to patients or growing profit. However, owning a business with another one or more people can be a big undertaking from a financial and professional perspective.
You need to ensure you are taking into account the broader ramifications of owning and running a business with somebody. This is where a co-ownership agreement is essential.
A co-ownership agreement is a legal agreement which governs the business proprietors' relationship. It may vary in size from a simple 2-page letter to a 50-page contract, signed and witnessed by all of the relevant parties.
Co-ownership agreements protect ownership interests and records the rights and entitlements of each party. The agreement can help to lessen the risk of dispute in the running of the practice by setting out agreed processes for dealing with contentious issues.
A co-ownership agreement can be varied by consent, so the owner are not forever locked into the arrangement, and can amend it over time as the needs of the practice, and the owners change.
An effective co-ownership arrangement will incorporate rules for:
- Profit share plans.
- Cash distributions (cash being different to profit).
- Decision-making processes, including tiebreakers.
- Employment of staff and the commitment of others.
- Expulsion for improper behaviour or horrible performance.
- Hours spent in the practice.
- Absence from the training because of leave or ailment.
- What will happen if they want to go on parental leave?
- Prohibitive covenants on exiting the practice.
- An owner quitting the practice.
- Another owner joining the practice.
- Mediation and arbitration processes.
- Capital expenditure arrangements.
- Owner meetings and decision making.
A common situation that arises is that an owner declares their intention to leave the practice, and the rest of the partners are left wondering what their next step should be with no clear exit strategy. The practice has no co-ownership agreement in place, and, at that point, lawyers are engaged (rather than when everyone is on the same page at the outset).
A well-drafted co-ownership agreement can, in addition to other things, outline what ought to happen when an owner leaves the practice. This might incorporate a set notice period (eg. 90 days), which can be shortened by consent, a valuation method for calculating entitlements, and a process for replacing the leaving practitioner. It should incorporate any prohibitive agreements, for example, exclusion zones, restraints and other limitations, when the business relationship ends.
Some of the critical areas that owners should cover off when one of them is looking to leave the business:
What is to happen to care of the existing owner’s patients or clients? Maintaining continuity of care and managing patient records is key.
At the end of a business relationship, disputes regularly focus on the leaving party’s financial entitlements.
Many practices work on verbal or “handshake” agreements, however, when you don't have anything in writing assessing value of an exiting owner’s interest and any other funds that they might be entitled to from the business can be a particularly difficult and expensive area to navigate.
Restrictive covenants that limit where leaving doctors can set up another practice (e.g., not inside 5 km of the current practice location) are worthwhile and enforceable where there is good and valuable consideration paid for the departing doctors’ ownership interest.
Is a written co-ownership agreement necessary?
The answer is undoubtedly 'yes'. Without a written agreement, the business ownership relationship will essentially be run with little foresight for the issues that could arise in the management of the practice and succession for its owners.
A well-composed co-ownership agreement drafted by an appropriate legal practitioner is essential to lay out a practical framework for running the practice and the relationship between the owners. Setting up the agreement can be tedious and perhaps “not a priority”, but getting it wrong (or, worse still, no agreement at all) can lead to expensive, time consuming and complex issues in the future,
such as the forced sale of the business and the redundancy of staff. In doing so, each owner could head off in a different direction and set up a rival business, since there will be no restrictive covenants to prevent them from competing.
An appropriately drafted co-ownership agreement won't stop partners from falling out with one another; however, it will explain their commitments to one another and to the business and help to resolve disagreements between them with a clear process if these issues cannot be resolved.
At Burke & Associates lawyers our medical lawyers and healthcare lawyers have the experience and expertise to provide the best advice for medical practitioners, practice managers and allied healthcare professionals.
If you would like to discuss any aspect relating to this article or your medical practice, please do not hesitate to contact one of our medical lawyers on +61 3 9822 8588 or via email here.
Insight written by Bianka Duzelovski