When a Partnership Fails

My “constant preach” is that the days of having a successful and profitable one-person chiropractic practice are over.

My “constant preach” is that the days of having a successful and profitable one-person chiropractic practice are over. Accordingly, the practising chiropractor is often well advised to enter into a co-ownership arrangement of some type. This could be done by collaborating with an employee, or by bringing in another chiropractor and forming a partnership with this person. The standard in professions, including chiropractic, is an open-ended, unincorporated partnership of two or more professional corporations.

Dissolving a partnership is a negotiating process that should include give and take to achieve a win-win for all parties. Advertisement

Although all partnerships are formed with the best of intentions and total confidence in each colleague from the other(s), few last indefinitely. Most dissolutions are amicable but some are hostile. Whichever the case, these breakups can create as much emotional distress as a marital divorce – and sometimes more. The causes for breakup are numerous. They may include practice disagreements, discrepancies in competencies, sour personal relationships, financial problems, spousal interference, declining health of a partner, retirement and so forth. When the practice is prosperous, seldom are there disputes. However, when the practice is failing, most times, each partner will blame the other(s) and severance soon becomes the best, or perhaps the only, option.
 
BEGIN WITH THE END IN MIND
Partnerships are always formed at a time when all participants think it will last forever, that they will always agree to agree and that everything will run smoothly. As this is a rarity, it is always wise, when setting up your initial joint practice ownership and working agreement, to take into consideration what will transpire in the event of dissolution.

This should encompass how the value of each partial interest will be calculated, patient retention by the originator, files and records ownership, division of capital assets and what the departing partner can take with him/her, among other issues. Every agreement should contain a written shotgun buy-sell clause that simply states that if you make an offer to buy the interest of your partner – therein stating the price, terms and conditions – he/she has so many days in which to buy your interest for the same as offered price and with the same terms and conditions. 

MAJORITY AND MINORITY INTERESTS
Although most partnership interests are equal, sometimes this does not hold true, particularly when a party buys into an established chiropractic practice. At law, a majority interest is the holding of 51 per cent of the unincorporated practice, or, if incorporated, it is 50 per cent plus one of all issued shares. A minority interest is anything less than this.

In the buy-sell negotiations, the commencement point will probably be the amount each part owner considers as “fair market value.” This suggests that a minority position should be discounted, whereas a majority interest is entitled to a premium. However, in practice, while a majority interest seldom garners a bonus, several factors may combine to make the value of a minority interest less than its proportionate share of all interests in the practice. For a majority interest, unless acquired by an insider – this being one who is already a partner, or perhaps an employee – the entire practice usually goes on the selling block. Except on a rare occasion, created by a special circumstance, only another insider ever purchases a minority interest, and then, never on the open market. Therefore, in the valuation of a minority interest, a notional market must be inferred. This presupposes an open market value when in fact no such market actually exists. In these situations, there is no compulsion to sell, or to buy, and subject to certain provisions detailed in the partnership agreement or articles of association, any restrictions on the sale of a fractional interest are not considered. Valuation is always made on a going-concern basis, which assumes continuance of the practice.

VALUING THE PARTIAL INTERESTS
Assuming unequal interests, the value of a majority or controlling interest can be equal to, more than, but never less than the pro rata percentage value of the minority interest. However, there are no definite rules, and few precedents, to establish a premium for that majority interest. Usually it is nil! In these situations, certain assumptions must be made. Any increase by including a bonus for a majority interest must be on account of subjective motives, or for some specific reason. It is not a fact of the market that can be interpreted by any prescribed set of rules, or by reference to legal precedents, few of which exist.

Whether the value of a minority interest should be discounted is slightly more problematic. The courts, and the market, recognize that a lower value is attributable to a minority holding, usually referring to a closely held corporation, yet determining an appropriate discount is most often pure guesswork. When calculating the amount, or per cent, by which the value of the minority position should be discounted, or if it should be, further consideration should be given to the per cent of the practice being acquired. The greater the per cent owned, the lower the discount, with the value of a minute percentage greatly reduced.

Most partnership breakups are amicable. Usually, valuation methods are agreed to, but if not, the shotgun clause of the buy-sell agreement is enforced. Although appraisers may suggest there should be a discount or perhaps a bonus, in actual practice, the sale of a fractional interest in professional practices is usually to an existing partner or employee at 100 per cent of value. This does not negate the fact that, since there is no open or secondary market, a notional market must be assumed.

Thus, in day-to-day practice, dissolving a partnership becomes a negotiating process, and should include some give and some take to achieve a win-win for all parties.

Lloyd Manning is a semi-retired business, commercial real estate appraiser and financial analyst. His newest book – Winning With Commercial Real Estate – The Ins and Outs of Making Money In Commercial Properties is available online from Indigo-Chapters. He can be reached at lloydmann@shaw.ca.