"Buyout Valuation Models" – that is‚ the agreed upon multiple or formula used to calculate compensation to be paid to either you or one of your physician partners as a result of retirement or‚ even‚ just moving on from a practice – serve as a major source of litigation for physicians and medical groups. Traditionally‚ (a) valuation formula's are based on an objective metric‚ i.e.‚ prior years gross receipts / gross billings or cash flow‚ and (b) that is then multiplied by a fixed valuation‚ i.e.‚ two times gross receipts / gross billings‚ etc…
In the past‚ this basic buy-out valuation model worked or‚ at least‚ did not trigger much litigation as medical practices thrived and continued to generate increased revenues‚ billings and cash flow. That is‚ this basic valuation model did not cause much objection by the remaining physicians as revenue growth and profits continued to accelerate. However‚ in today's economic environment for physicians where increased billings do not necessarily equate with increased "net income / cash flow" and top-line revenue growth is not guaranteed‚ a static business valuation model that relies on a fixed multiple – without measuring actual cash flow‚ collections and growth – have led to an imbalance burdening the remaining physicians. In turn this has led to extensive physician partnership litigation involving lams for breach of contract and liquidation of a medical practices.
There are THREE SIGNIFICANT POINTS that physicians should consider:
(1) [EXISTING PHYSICIAN PARTNERSHIPS – NO DISPUTE] If you are not presently faced with a dispute‚ take some time now to sit down with your partners and evaluate exist strategies and valuation models. Consider that you must adopt a multi–dimensional valuation model that accounts for fluctuation in cash flows and profitability.
(2) [EXITING PARTNER] – If you are exiting a medical partnership and you are faced with valuation issues and disputes‚ you rights will depend extensively on the terms of your agreement. However‚ balance is key and you must also understand and discuss with your attorney a strategy that does not over play your negotiating position (see (3) below).
(3) [REMAINING PARTNERS] – If you are left with the potential of buying out a retiring or exiting physician partner on terms that you believe to be no longer fair or applicable‚ you will be required to overcome the terms of your agreement. However‚ you may possess "negotiation options" that go beyond any contract. These options relate to the unique reluctance of a court to interfere with the doctor patient relationship and the reality that the exiting partner will require a viable entity to fund his or her buyout.
For additional information about Physician partnership and shareholder disputes we recommend Physician Partnership‚ Shareholder and Joint Venture Disputes in New York and New Jersey and we recommend that you order a complimentary copy of Mr. Internicola's book‚ "The New York and New Jersey Partnership Dispute Guide".