Printer-friendly format

New business owners will find out quickly that they must manage a multitude of tedious details.

Some are more important than others, but all must be handled if a business is to survive in our treacherous business world. Managing one's medical practice demands facing more issues than managing a restaurant or a landscape business does.

Payroll is the thorn in the side of every owner. However, without payroll, retention of employees becomes a major problem. Maintenance of buildings and equipment, maintenance of electronics, maintenance of, well, everything can be overwhelming at times.

Finding a medical practice categorized as a financial success means finding a juggling owner. An area that is often overlooked, even by the most talented jugglers, is exit strategies. When owners exit their practice, they usually do so in one of three ways: retirement, death, or disability.

The vast majority of practice owners plan in one way or another for retirement. Whether they sell their practice or use their own assets in the form of traditional IRAs, profit sharing plans, SIMPLE Plans, SEP Plans, or non-qualified deferred compensation plans, practice owners count on retirement being their method of walking out the door. Therefore, most owners actively manage their retirement plans.

No business owner wants to consider leaving his or her practice because of death or disability. Even though the topic can seem quite morbid, most practitioners will prepare their practice for some type of succession in the case of death. Life insurance is held by many responsible practice owners, and it is often seen as a necessity of exit strategies. Many people believe that you need life insurance if your family or your practice is going to survive if you die.

It is much less common for owners to plan for their potential disabilities. Why? Oddly enough, statistical data supports that individuals are two times more likely to become disabled during their working years than they are to die. Every hour during the year, on average, 2,329 people become disabled, leaving approximately one-fifth of all Americans suffering from a disability. When that disability does occur, it will last on average for three years, according to the 1985 Commissioner's Table. Furthermore, as healthcare continues to improve, patients are living longer with disabilities.

How then can business owners prepare themselves for the risk of becoming disabled? Many companies that provide personal disability insurance will also offer what is referred to as business overhead insurance and disability buyout insurance. The purpose of the former is to fill in the gap while a breadwinner of the firm is out due to disability. It is a reimbursement pool designed to pay normal expenses up to a certain cap – for example, the disabled's compensation, rent, utility costs, maintenance, installment payments on loans, and professional dues. This repayment option becomes paramount and an absolute necessity in a practice where there are a handful of doctors or specialists that split costs and are equally responsible for the firm's revenues.

This type of risk management is not meant to go on into perpetuity. By design, its function is to maintain a manageable working environment and proportionately offset lost revenues until the practitioner returns or a new partner is found. In the most severe cases where recovery is not possible and the physician is forced to retire due to disability, a buyout provision should exist. This is a simple matter of the aforementioned disability buyout insurance.

Should one of the owners become disabled and not return to work, this type of insurance issues the funds used to buy out the portion of the firm the disabled person owns. Some owners will set aside their own money to protect them from this unpredictable event. However, the practice may be better served by using liquid cash for daily operations. It can be less expensive to defer the risk of disability to someone else.

Managing the operations of a medical practice encompasses many facets of business planning, and the tasks become more daunting as the business grows. Many physicians face an ongoing battle to balance the constant learning and pace of medicine with the all inclusive stresses of being a savvy business owner. Exit strategies are only one of many issues today's practice owner will encounter.



Jason Herrington and Tal Goldsby are financial advisors at Shoemaker Financial, an independently owned and operated firm in Germantown.

January 2007

Tags:

None