Planning for a Business Break-up from Day One
By Connor D. Jackson
Whether you already co-own a practice or are considering opening a new one, it’s crucial to have an exit strategy.
In a perfect world, practice co-owners’ goals, lifestyles, and priorities are perpetually aligned. In reality, many practice owners decide to dissolve their partnership, and even the most amicable of separations can be tough if you haven’t laid the groundwork.
What steps should you take today to plan for the worst-case scenario?
OPERATING AGREEMENT OR GOVERNING DOCUMENTS
If your practice operates as an LLC, then you (should) have what’s called an Operating Agreement. An operating agreement is part of the “corporate formation” process when you begin your business. This document is analogous to your practice’s constitution—it describes the rights and responsibilities of the members. (Quick tip: LLCs have members, not owners.) If you operate as a different type of business structure, you should have an equivalent version of this governing document (e.g., bylaws for a corporation).
An operating agreement should be drafted carefully with clear, tight, and consistent language and terminology. If written with a careful hand, this can be the starting and stopping point in determining how to end your partnership. Because of this, it’s crucial to hire an attorney who is well-versed in healthcare transactions to draft your operating agreement when you open your practice. While your accountant may offer to create your LLC or corporation, this is strongly discouraged. Some states have even penalized accountants who create corporate entities for the unlicensed practice of law, underscoring the legal import of the process.1
Many physical therapy practices begin small and then expand rapidly. When growth is unexpected, paperwork tends to be pushed to the backburner. If this sounds like your practice, now is the time to evaluate and clean up your corporate documents.
NON-COMPETITION OR NON-SOLICITATION AGREEMENTS
Business partners often include non-competition or non-solicitation agreements in their operating agreement. These are different from those that would be included in an employee’s employment contract. When included in your operating agreement, they are drafted to describe the permissible and prohibited conduct for business partners who leave the practice. If the practice is dissolved completely, then they often apply to all business partners.
A non-competition agreement describes the partners’ agreement to not compete with the practice during their ownership and if they leave. This might prohibit them from opening a competing practice within a certain number of miles for a certain length of time.
A non-solicitation agreement says that, if they leave the practice, the business partners agree to not solicit the practice’s patients to come to their new practices. There is an important difference between soliciting a patient and continuing to treat a patient who seeks you out. Health care practices are operated differently than other businesses and are held to different standards. To avoid committing an ethical violation for patient abandonment, a business partner may feel compelled to provide their contact information to existing patients (or the patient may locate the provider on their own through Google), thus empowering them with the choice as to where they will continue care.
INTELLECTUAL PROPERTY OWNERSHIP
The operating agreement should also identify who owns the practice’s intellectual property. This may include copyrighted or trademarked logos, names, blog articles, or educational program materials.
In most situations, the practice itself (i.e., the LLC or corporation) owns the practice’s intellectual property. The practice may even own the intellectual property created by one of the owners during the time that the practice existed. The logic behind this is that the practice’s resources are often relied upon in the creation of intellectual property, so it’s the practice that should reap the benefits of these protections.
If you don’t have documents in place to guide you through a practice dissolution, one common next step is to seek out mediation. Mediation is a collaborative process where both parties—you and your practice co-owner—sit down with a neutral third-party mediator (often a retired judge) to negotiate the terms of the practice’s dissolution. The most important thing you can bring to this meeting? Reasonable expectations. It’s often said that a successful mediation leaves both parties feeling dissatisfied. And while that’s not necessarily true, it’s a reminder that a third-party negotiated compromise can be uncomfortable.
Once you decide on the terms of a business partner’s departure or the practice’s dissolution, the parties will likely sign a separation agreement. This will address things like:
- Distribution of funds in the bank account and payment of outstanding debts
- Responsibility for the practice’s lease, and whether anyone will be removed from the lease (This requires coordination with the practice’s landlord.)
- The departing provider’s access to patient records, and the practice’s preservation of complete patient records (This is important in case the practice is audited by an insurance company or the government.)
- Access to email addresses, insurance billing portals, and other electronic systems which both parties may have a legitimate need to access during any transitional period
- A payment plan schedule, and the penalties for not making agreed-upon payments, if the departing provider will be receiving a larger sum of money
- Non-competition or non-solicitation terms that were not included in the operating agreement or which have been modified through the separation process
- Tail coverage under the practice’s liability insurance for possible claims arising from the provider’s time at the practice
The easiest time to plan your business’s break-up is when you create it. Waiting until there’s an actual disagreement or separation will require more attorneys (often one for each partner, plus one for the practice itself), and it will be exponentially more expensive than if the documents had been created properly at the onset. Also remember that corporate documents may need to be updated and refined as the practice grows and new partners are added.
1Ungerlaw PC. The Risks Associated With CPAs Handling Incorporations and the Unauthorized Practice Of Law. eMinutes Blog. https://eminutes.com/cpa-risks. Published December 12, 2015.
Connor Jackson is a founding partner of Jackson LLP Healthcare Lawyers, where he focuses his practice on the business side of health care law. Connor is licensed in New York, Illinois, Texas, Michgan, and Wisconsin. He can be reached at Connor@JacksonLLP.com.