Working After The Sale of Your Medical Practice
One of the most important considerations in the sale of a medical practice is that of attrition.
Beyond just getting a sales contract signed, the seller also needs to do everything in their power to keep the value of the practice intact moving forward so that the buyer realizes the full potential of the practice.
This is especially essential if the seller is being paid overtime in installments. If, once the buyer takes over, a few months down the line, the number of patient visits begins to drop, it won’t just be dispiriting for the buyer; it may actually make it difficult for them to meet their commitment of paying for the remainder of the practice.
One way to remedy concerns over attrition, as well as potentially deal with many other issues, is to have the seller stay on in the practice for a while. This could be transitional (temporary); as a consultant; as an employee; or as an independent contractor.
Any or all of these could be employed in some combination, and should be determined by the buyer and seller of the medical practice before the sales contract is signed. We'll go over these options in greater detail further later on in this post.
First, let's evaluate the pluses and minuses of having the original owner stay on or take off early.
Advantages To The Seller Staying On
From the seller’s perspective, there are several reasons why you may wish to continue being a part of the business for some time, even when you no longer own it:
- To keep you as part of the business until you get all of your installment payments, making sure the practice keeps running at least as smoothly as it was when you owned it.
- It may make it much easier for your patients and staff to get used to the new reality of different ownership to know you haven’t completely abandoned ship.
- To provide you with income after you no longer own the practice.
- It may even serve some emotional needs, stemming feelings of loss and purposelessness you may have otherwise had if you just up and left after years of service in your practice.
Advantages For The Buyer When The Seller Stays
The buyer of a medical practice may also see some advantages to having a seller stay on, even if only temporary. These advantages may include:
- Helping to reduce attrition as patients transition from one lead practitioner to another.
- Learning more about the day-to-day intricacies of running the business. While a short period of transition can be helpful in learning how a business runs, a longer period will expose all kinds of stuff that may not have otherwise come up.
- It can provide you with income after you no longer own the practice.
On The Contrary: Reasons To Split Early
There are also situations where the new ownership and the seller may wish to part ways early on:
- When a medical practice has not had a great reputation and the new owner wishes to make clear that the practice is now under new management and headed in a new direction.
- The seller is a burned-out medical practitioner and is already pretty checked-out from the practice.
- The seller is retiring and/or is moving out of town.
- Buyer is an employee or someone who was otherwise already involved in the practice before buying it, and already is familiar to patients and knows how the systems run in the office.
Options For Staying On: Forms It Can Take
If the seller is looking at staying on board for a while, there are several forms this may take. They may include:
- Working as an employee
- Working as an independent contractor
- Staying on without pay
Let’s take a look at each.
Working As An Employee After Selling Your Medical Practice
If the buyer and the seller of a medical practice agree that the seller will stay on as an employee for a given length of time, we recommend that the stipulations of that work are included in the sales contract of the practice. These stipulations would include:
- The number of hours per week (full-time or part-time)
- If payment is by the hour or salaried
- What, if any, benefits will be included (healthcare, 401(k), sick leave, vacation, etc.)
- How long the employment will last (it could be specified, or at will)
- Specifics about what job duties are included
- How the employment can end. Can either party terminate it with a certain amount of written notice? (If it can end at any time with or without notice, this is called “at will” employment.)
- You may also choose an employment contract based on performance. For example, if the practitioner is staying on and keeps their volume as it has been up until the time the sales contract was signed, that’s one rate. If they increase their patient load and/or otherwise grow the business over a certain period of time, they may get a bonus or be otherwise incentivized.
Working As An Independent Contractor After Selling Your Medical Practice
It’s possible that the buyer may wish to have the seller or seller’s employees stay on for a limited amount of time, or come on as a consultant/advisor here and there, and in this case it may be preferable to have them come on as independent contractors. An independent contractor in a medical practice is expected to be paid on a project-to-project basis, either by the hour or by flat-fee per project.
A practice could also agree to pay an independent contractor for a given number of hours per week for a given length of time (say, 30 hours per week for 3 months). In contrast to employees, independent contractors are not given health insurance or other benefits, nor are taxes taken out of the payments made to the contractor. It is the responsibility of the contractor to report to the IRS all payments made, and account for their own tax burden.
Because the IRS looks closely at independent contractor agreements, it’s important to have the agreement written into your sales contract cover very specific topics, including:
- How much will be paid, and how often
- The length of employment
- How it can be ended. In writing, with a certain amount of notice?
- Dispute resolution. Will you use mediation or arbitration? The contract we generate here at Sellingapractice.com usually include mediation and arbitration provisions.
- Who will own any products or intellectual property the contractor creates while employed. Did you create a new treatment technique while an independent contractor? If it’s not specified that you get to keep the intellectual property rights to that technique, you may be (un)pleasantly surprised to find that the practice for whom you were working now own that technique.
- The duties/services expected to be performed by the contractor.
- A statement that the contractor is not an employee, but rather an independent contractor, and is expected to pay their own federal, state, and local taxes.
Independent contractors should be asked by the practice to sign an IRS W-9 form at the outset of their employment. This form allows the practice to file a 1099 form in January following each year of employment to show the IRS how much money was paid to the contractor. A link to the form may be found on the IRS website or by clicking here.
The IRS is very keen to have people be employees rather than independent contractors, and they often look very closely at independent contractor situations. If an independent contractor is being paid regularly for much of a year, the IRS may believe this person should instead be an employee, and either side may get audited.
Staying On Without Pay
When we represent sellers, we often suggest that the seller stay on for a month or two to help the buyer transition over, without pay. This is a negotiating point and obvious benefit to the seller, which we call a “runway” to success for the buyer. In fact, we may add to this that the buyer’s first payment on an installment plan not be until a couple of months after the signing of the sales contract just to sweeten the pot for the buyer. These kinds of agreements should also be written in the sales contract, specifying which duties will be expected of the seller, and for how long.
The legal differentiation between being an employee and being an independent contractor
A business with employees is expected to pay withholding (income tax), Social Security, Worker’s Compensation, and other taxes that are taken out of the employee’s paycheck. An employee may also get additional benefits such as healthcare, paid time off, and retirement benefits.
A medical practice using an independent contractor is expected to be paid on a project-to-project basis, either by the hour or by flat-fee per project.
A business could also agree to pay an independent contractor for a given number of hours per week for a given length of time (say, 30 hours per week for 3 months). In contrast to employees, independent contractors are not given health insurance or other benefits, nor are taxes taken out of the payments made to the contractor. It is the responsibility of the contractor to report to the IRS all payments made, and account for their own tax burden.
Independent contractors should be asked to sign an IRS W-9 form at the outset of their employment. This form allows the practice to file a 1099 form in January following each year of employment to show the IRS how much money was paid to the contractor.
Regardless what kind of employment the buyer and seller of a medical practice agree to, we highly recommend consulting an attorney that specializes in employment law to consult on this part of the process (and the contract). Employment law is quite a deep specialty, and there’s good reason (read: audits and lawsuits) to be sure your intentions are legally sound before and while committing them to paper.
A Note on Non-Competition Agreements in Medical Practice Sales
We’ve found that most successful practices are anchored by one or more exceptional practitioners who are quite well loved by their patients. In fact, a big part of the value of the medical practice being sold may lay in the goodwill generated by the history of those practitioners.
So once these practitioners are no longer part of the practice, what’s to prevent them from just moving nearby and opening another practice?
This is where a Non-Competition Agreement comes in. If the anchor providers are not planning on retiring or moving a good distance away from the practice, a buyer will want to protect their investment by being sure current and future patients stay with the practice.
If your seller is planning to continue working after the sale, with or without the buyer, we highly recommend adding a “Covenant Not To Compete” into the sales agreement. For greater detail on Non-Competes here, check out our post on them here.
In the final analysis, deciding whether or not a seller stays with the business as an employee, independent contractor, at-will employee, and/or working for free is a big decision. Much rides on the way these agreements are put into a sales contract, both from a liability perspective and the view of the IRS.
We specialize in helping practices of all sizes separate the signal from the noise. Let us help you. Arrange a free call by reaching out to us today.
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