To begin this topic, let’s look at this typical example: Dr Tan is a medical doctor who has been practicing at his own clinic for the past 10 years. In recent years, he has been thinking about expanding his practice. He is thinking of getting doctors in the same area of specialty as himself to work together at his clinic. On the other hand, he also harbours the thought of getting doctors who are in related fields. In this way, he can expand the scope of services he can offer.
At the same time, Dr Tan is also thinking of planning for the succession of his practice. He thinks that he will probably continue to practice for the next 5 to 10 years if everything goes smoothly.
However, he is not sure as to how he should structure his working relationship with his new associates. Should it be an employer-employee structure, or should he just charge rental to the new associate for the clinic space? Maybe he can work on cost sharing, or perhaps remuneration based on a certain percentage of fees collected?
The above are situations that occur very often among medical doctors. It is very common for medical doctors to look into expansion of their clinic practice by roping in other medical doctors to work together, whether they are practicing in the same or different fields.
What should a medical doctor look out for when planning for his clinic expansion and succession eventually?
Let us first look at the different types of working structures.
Employer-Employee
This is one of the simplest forms of working relationship. New doctors are being employed and they are placed on a payroll. This allows the employer to have a bigger say over the control and management of the clinic. The full profit derived by the employee belongs to the employer. Such remuneration basis often attracts associates from the government sector and hospitals. Business expansion and succession may take place with proper planning.
On the other hand, the upside of the clinic business may be limited as there may not be any sense of ownership by the employee. The relationship often does not last long or will not attract quality and business-minded associates. It is not certain if the employer will make extra profit from the associates.
Rental Charge On Use Of Clinic
For this structure, the doctor as a landlord charges a rental for the clinic space, often for the room and common areas. The doctor is assured of a recurring income from the rental. Business expansion and succession may take place with proper planning in advance.
The associate may end up working independently. The doctor renting the clinic space may view himself as an independent practice from the other doctor who rented him the space. In this way, there may not be much synergy. Proper operating procedure must be put in place to ensure that there is no dispute over walk-in patients with no referral.
Cost Sharing
The associate pays based on a pre-determined percentage of the actual cost incurred in running the practice. Again, this structure increases the income of the existing doctor as the cost charged to his income will be reduced. Business expansion and succession may take place with proper planning.
The downside of such basis often results in conflict over the cost incurred, whether the cost is necessary or a preference to certain doctor. The basis of sharing the medications and staff is often the root of dispute.
Percentage Of Fee
The associate is paid a pre-determined percentage of the professional fee charged and a reduced pre-determined percentage of the profit derived from medication or procedures performed. This basis is common for practices with huge capital expenditure. Again, such basis often attract associates from the government sector and hospitals, as well as associates who are not happy at their current workplace. Business expansion and succession may take place with proper planning.
The relationship often does not last long. The associate will request for higher percentage of fees when their patient base increases. Proper operating procedures must be put in place for walk-in patients.
To conclude what I have just shared, different working structures have their pros and cons. It ultimately depends on what end-result the doctor would like to achieve and his area of specialty.
With this plan of roping in more doctors to the clinic setup or hiring more doctors, usually it signifies the intention of the doctor in looking into Succession Planning for their business. Doctors, in particular, spend the bulk of their time looking after patients and often neglect the importance of planning for their practice and their families.
In brief, Business Succession Planning ensures that families get the fair value of the practice. It also ensures that the remaining working partners/shareholders continue the business without any interruption.
Benefits of Business Succession
Regardless of the type of business setup of the medical practice, it is important to have a contractual business succession plan agreed by all the doctors. A contractual business succession plan will offset the major disadvantages associated with the different types of business setup and it provides the following benefits to the various parties involved:
“Retiring” Doctor
- ensure that he or his family receives the fair value of his shares in the business that he has invested over the years; and
- ensure that there is a ready buyer with the necessary funds to buy over his shares in the business.
“Remaining” Owner
- ensure that “retiring” owner’s interest will not be sold to third party; and
- ensure that there are ready funds to purchase the interest of the “retiring” owner.
Practice
- enable the practice to continue without any disruption; and
- enhance the confidence of the staff and the patients.
With a business succession plan put in place to provide the funds necessary to buy over the interest of the “retiring” owner, a “win-win-win” situation is created for the “retiring” owner, the “remaining” owner and even the practice.
If you are a medical practitioner or planning to embark on a career as one, I hope this information puts you in good stead for an enriching and fulfilling journey!
Sincerely yours,
Stephen
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