Finance diary, February: Managing premises costs when partners retire
Raising finance to pay off a retiring partner for their stake in the practice is increasingly tricky. Accountant Bob Senior advises on the options
Practices are finding that many young doctors do not want to become partners. Consequently, the list of candidates to replace a retiring partner is likely to be much shorter than it was five or 10 years ago. Some practices may decide not to replace a retiring partner, opting to recruit a salaried doctor instead. However, a salaried doctor will not introduce working capital. If the remaining partners have to pay out a retired partner’s capital account, they will have to come up with the money themselves.
Traditionally, GPs needing to pay money into the practice have turned to their bank for help. In the past banks have been happy to lend at low interest rates and possibly on an interest-only basis. But while banks still regard GPs as a safe bet, terms are not as good as they were. Raising finance to pay off a retired partner won’t be as easy or cheap. Allow plenty of time to negotiate
Practices that own their surgeries are particularly affected. Even if a young GP is keen to be a partner, they may not want to buy in. This has led some practices to allow prospective partners six or 12 months to decide whether to buy in. While this approach is understandable it can lead to a slippery slope.
An example I have seen recently is a three-partner practice that owns its surgery. The senior partner retired and the replacement decided not to buy in. The other two property-owning partners took new bank loans to buy out the retired GP. Then the next senior partner retired and another young partner was recruited, who again decided not to buy in. The final property-owning partner then had to take another bank loan.
This GP now owns the complete surgery and receives all the notional rent. But the new bank loans could only be arranged on a repayment basis. Although the notional rent covers the interest, it does not cover repayment. The partner therefore has to fund these from drawings, so the amount he can take home has fallen dramatically.
The lesson is that if a practice is a property-owning partnership it should avoid a situation where new partners are given the option not to buy in. Otherwise the remaining partners could be storing up considerable problems for the future.
Bob Senior is chair of the Association of Independent Specialist Medical Accountants and the head of medical services at RSM Tenon