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DEMYSTIFYING INTERNAL MANAGEMENT AGREEMENTS

There are two sides to a medical-practice; there is the business side and there is the active physician/patient side. Both sides must be consistently maintained and actively managed in order for the medical-practice to be a success. Unfortunately the business side of the medical practice is often dismissed as secondary or is otherwise not well crafted. This can result in problems that often prove significantly detrimental and sometimes fatal to the medical practice itself. A majority of these problems can often times be avoided with well drafted internal practice management agreements created for the medical practice at the formation. These agreements need not be complex or unduly onerous. Rather, with a minimum investment of time and careful thought, these agreements can be created cost–effectively and will allow for the orderly maintenance, operation and continuation of the business side of your medical practice.

While the substance of internal management agreements often is the same, the formal names of the agreements may change depending upon the type of entity chosen to house the medical practice. The choice of the entity in which to conduct the medical practice generally consists of a professional corporation (a PC), a professional limited liability company (a PLLC), a limited partnership (a LP), or even a professional limited liability partnership (a PLLC).

The names of the internal practice management agreements for a professional corporation generally consist of bylaws, shareholder agreement, and a buy sell agreement. For the professional limited liability company the names of the agreements consist of an operating agreement, a member’s agreement and a buy sell agreement. For the limited partnership or the professional limited partnership entities, the names of these agreements include a partnership agreement and a buy sell agreement. Not infrequently, many of these agreements may be consolidated or provisions may be contained within one document to keep the number of agreements to a minimum.

However named, the importance of these agreements is providing the basis on which decisions for the business will be made; who will have the authority to make those decisions; setting the limitations of that person or persons authority; determining how ownership in the business entity can be sold or transferred; establishing how the value of the business entity is to be determined for a sale or transfer of a physician-partner’s ownership interest; and how a sale, purchase or transfer of a physician’s interest is to be conducted upon an event of termination, death or disability.

A primary focus of these agreements is upon management decisions, in other words, who or what group of partners will be authorized to make decisions on behalf of the business; what are the limits of such authority (monetary limits, substantive or categorical); and what decisions or issues require the approval, whether unanimous or majority, of the physician-partners of the business. Having a well-structured and conceived system for this decision-making process is critical to maintaining viability and stability of the business. It will often avoid disagreements and disputes between the physician-partners that so frequently prove to be disruptive to the relations and internal operations.

Almost all medical practices will grow and develop over the course of time. The practice will add physician-partners over time and of course, physician-partners will also leave, whether as a result of termination (voluntary or involuntary) or as a result of death or disability. A critical purpose of these internal practice management agreements is to provide the mechanical basis on which a departing physician-partners ownership interest in an entity will be part repurchased, sold or transferred as well as providing the restrictions upon any sale or transfer of such interest. The absence of such agreements upon the event of either a termination or a death of a physician-partner can often times result in difficult negotiations with the departing physician-partner that may frequently be extremely disruptive to the business of the practice itself.

Of course, one of the most important aspects of these agreements will be that methodology of how the business is valued for purpose of the repurchase or sale of a physician-partners interest and how that value will be paid to the departing physician-partner. There are numerous valuation methods that can be applied to determine the value of a medical practice. It is critical to establish that method at the outset of the establishment of the practice to avoid disputes and lawsuits over that issue later in time. The mechanics of the payment to the departing partner is equally critical as few medical practices have the financial reserves necessary to “cash out” a departing physician-partner in a successful practice without requiring a cash call or contribution from those remaining.

These agreements may also establish different levels of ownership, such as class A or B stock, so as to allow the practice to admit new physicians as partners and yet establish limits on their voting authority and/or their economic interests until they have fully proven their commitment and value to the practice.

These are just a few of the critical aspects of the internal practice management agreements that will allow the business side of your medical practice to avoid disruption and permit you to focus upon patient care. With a small investment of time and focus on these agreements at the start of your practice, you can avoid operational, financial and emotional distress in the future.

By Neil W. Thomson Esq.