With an increasingly competitive private medical market, NHS contract work being outsourced into the private sector and more awareness of sharing overheads, it is hardly surprising that many doctors are looking to form groups with their colleagues. It is widely accepted that a group of doctors working together can enjoy a competitive advantage over their standalone peers. The advantages can broadly be broken down into two categories – economies of scale and capacity utilisation.
The vast majority of doctors who form a group will ensure that a Partnership Agreement is in place. The Partnership Agreement is the spine of the business and should be referred to when exceptional decisions are being made, disagreements occur, new partners are to join etc.
Given the importance of the Partnership Agreement, it is surprising that so many new groups simply take a standardised agreement, sign it and assume that the terms are in place for a successful business venture. Of course a standard agreement usually covers many of the key areas affecting a business, i.e. profit sharing, partner retirement, partner expulsion, however the vast majority do not address matters specific to medical groups. Below are specific issues which are often omitted from medical Partnership Agreements:
Confirmation of costs that the partners charge against group profits and how they will be treated when sharing group profits.
For example, if Partner A’s medical indemnity insurance is £10,000 per annum whilst Partner B’s is £1,000, is it fair that the total indemnity expense is evenly shared amongst all partners? There are terms that can be written into a Partnership Agreement which ensures that each partner receives a fair and equitable profit share based on their contribution to overall costs.
Confirmation of how partners’ equalisation payments are arranged.
For example, at the business year end Partner A was owed £20,000 from the partnership due to having made a handful of large personal payments on behalf of the group. Partner B had not made so many private payments on behalf of the group and as a result was owed only £1,000. In order to ensure an equitable situation, it is important that the Partnership Agreement clearly states the level of ‘credit’ that each partner must maintain whilst they are active in the group. In the example above, assuming that the agreement required an ongoing credit balance of £5,000 per partner, Partner A would be paid £15,000 from the partnership whilst Partner B would inject £4,000. Moving into the new tax year, the business would be financed equally by all partners as stipulated within the agreement.
Confirmation of how existing partners will be rewarded when new partners join the group.
For example, Partners A, B, C and D formed a group medical practice (Group Docs LLP) in 2014. The partners developed good relationships with GP’s, implemented an excellent website, employed good secretaries and as a result the business flourished. Group Docs LLP had become a well known and highly respected medical group with a sustainable income stream.
During 2016, the partners were approached by Doctor E, a recently qualified consultant looking to develop his own private practice. Doctor E recognised the fact that Group Docs LLP were an established and successful business and believed that by becoming a partner, he would benefit from the structure that had already proved successful. The existing partners agreed that Doctor E could bring an extra dimension to the business and valued him as a useful addition to the team.
Despite the existing partners’ appreciation of Doctor E’s abilities they were concerned that by introducing him into the group, they would effectively be giving away some of the brand value that they had worked so hard to develop.
At this stage, the Partnership Agreement should be referred to as guidance for introducing a new partner and in particular, how goodwill is recognised. An appropriately written Partnership Agreement may stipulate that at the time of the new partner joining, the goodwill of the business should be calculated with reference to past business profits. When a value is placed on the goodwill, it is credited to the capital accounts of the existing partners giving each of them the opportunity to draw upon tax efficient group profits. Let us not forget that when goodwill is recognised, the first c. £11k is exempt from tax. From the perspective of the founder partners, this is likely to be an attractive opportunity.
The above is by no means an exhaustive list of Partnership Agreement items. Please contact Sharpe Medical if you wish to discuss this further.