Chiropractic + Naturopathic Doctor

Features Collaboration Profession
Merging Professional Practices, Part 2


October 27, 2011
By Lloyd Manning

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In Part 1, I talked about the synergistic considerations of merging chiropractic practices, suggested some potential disadvantages of doing so, and began to discuss the steps you might take if you’re considering a merger with another DC.

In Part 1, I talked about the synergistic considerations of merging chiropractic practices, suggested some potential disadvantages of doing so, and began to discuss the steps you might take if you’re considering a merger with another DC.

A successful merger takes time and money to put into motion. Six to 18 months is the normal time frame for constructing a merger. When you start paying lawyers, accountants, appraisers, and facilitators, it can be quite expensive. Accordingly, there must be commitment. The larger the number of participants, the more complicated the process will be.

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You will require a good accountant, a lawyer, a business analyst who is qualified to value professional practices, and depending on the number of prospective partners, perhaps a facilitator to get everyone to agree and tie it all together. Don’t rush into it. Many mergers that have the potential to be successful do not happen because the participants lack sufficient guidance, or the patience, to plow through and resolve the many decisions that must be made, or feel uncertain regarding whether the end product is worth the upfront cost. Do not be too disappointed if some of the pending merger partners fall out along the way.

TYPE OF ORGANIZATION
Your accountant and lawyer – with whom you should consult prior to acting on any of my suggestions, as I am neither – will give more in-depth and better advice applicable to your situation. My recommendation is that each chiropractor incorporate him/herself as a professional corporation and that the merged practice be an unincorporated partnership of their respective professional corporations.

An alternative route is for the senior chiropractor, i.e, the one with the most valuable practice, to incorporate a holding company and have all other participants to the merger vend in their respective equities for shares in this corporation. Those shares can be issued to the individual chiropractors or to their respective professional practices.

I believe the first choice to be preferable in that the newly formed partnership, having no history of its own, does not inherit any of the sins of the participants. Each partner remains responsible for his/her own income tax and anything connected with the past conductance of his/her practice.

A third alternative is to form a Limited Partnership with the senior partner acting as the General Partner and all others as Limited Partners. This could work where there is a wide divergence between the vended-in value of the senior partner’s practice and that of all others, or where the value of some is far different than that of others.

An ideal situation to strive for is to equalize the vended-in contribution of each individual partner. However, most times, this is not possible. The first draw on the profit earned by the partnership should be to provide a stated return on the vended-in interest of each. For example, if Chiropractor A sold say $100,000 in-practice assets to the group, he/she would be entitled to, say, a 5.0 per cent return or $5,000 annually, and if B only provided $50,000, that chiropractor would take home $2,500, and so forth. This would be in addition to the compensation formulae later discussed. Where the vended-in interests are unequal, it is important that the voting privileges be the same for each partner.

Assuming that the merger will be an unincorporated partnership of the merged practices of the chiropractor’s professional corporations, it is recommended that the partnership own or lease all furniture, fixtures and equipment. This could be from a holding company formed by the partners. Not all partners need to be shareholders in the asset-holding corporation.

Each partner should carry his/her own malpractice insurance but there should be an overriding policy covering all in the event of a joint suit against the partnership or a tort committed by a staff member who is not a chiropractor.

The partnership should sign and assume joint responsibility for the premises lease, and be responsible for payment of all accounts, including staff wages, that are for the benefit of all. It is important to set up all business arrangements on the same basis as you would if dealing with a third party.

Capital and tangible assets and the chiropractic practices should be kept separate from each other.

ALLOCATING THE PROFIT
In the matter of dividing income and expenses, fixed and capital costs should be equally divided between the partners regardless of differing billings with variable expenses being a per cent of the total expenses based on each of the partner’s individual billings. As all surplus income is distributed to the partners, there is no income tax to be concerned about. Since the collections of each chiropractor will be different, the take-home pay will also be different. However, this formula may be overly simple for the larger professional practice, particularly when the interests and professional expertise vended-in are of differing quality. That is to say a senior chiropractor may be entitled to a greater pro rata share of the spoils than one of junior status. Chiropractor A may bring in more patients for distribution among the others than do Chiropractors B to Z. He or she may expect extra compensation for this. And, there is the earlier mentioned problem of compensation for management of the firm if one of the partners handles this function.

The important point is that, in an article such as this, it is neither possible nor practical to point out the myriad ways that the partners’ remuneration could work in all cases. The professionals involved in the merger need to discuss, and, with the assistance of their facilitator or team leader, negotiate a compensation package agreeable to all.

IT’S A BUSINESS ARRANGEMENT
In any merger, it is always well to remember that you never know who you get for a partner until you have been in bed with this person for some time. What seems to be great today may not be ideal this time next year. Circumstances and interests change. It is important at the outset to agree on rules for opting out by a partner in circumstances such as retirement; withdrawal for medical reasons; voluntary withdrawal, where a partner wants to move on, or just out; involuntary exits, where a partner is wanted out by the others; or the winding up of the practice, which would mean the distribution of the assets.

In any business arrangement, the legalese and the agreements as to who does what and how each is compensated can be negotiated, agreed upon, and rendered to writing. However, no legal document can ever take into consideration relationships – how well the partners get along with each other now, and how well will they get along in the future. Yet compatibility, each with the others, is the most important part of making it all work. You and I may concur that we are both the world’s best in our chosen profession, but when we work as a team, if we are consistently at loggerheads, or if we are jealous of each other, or do not like each other, it is all for naught and soon to fail. The potential for competition and dissension among the joint practice partners must be eliminated or at least reduced to a minimum.

Mergers and joint ventures could be advantageous to the participants, change borderline professional practices into successful ones, and through the efficiency of size and cost savings, produce many benefits for the partners and enhanced services for their patients.

Still, mergers must be properly set up and judiciously managed. Most often they are an act of faith. You get as you give. Quid pro quo.