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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

Readers' comments (4)

  • Thanks for this, as a recently qualified GP (August 2011) and new GP Partner this is the sort of information that is not readily available, or taught during vocational training. It's very helpful, thanks.

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  • Very informative as to how being an owning partner affects the practice finances

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  • On the other hand if the remaining partner/partners want to sell to a third party there are a number of companies and indeed doctors willing to buy the premises from them. The notional rent can be quite attractive to buyers.
    Also a retiring partner may be quite happy to take his share of the rent as a suppliment to his pension as the returns are for better than any investments in the current climate and he still keeps his capital.

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  • Is there anything stopping a retiring partner from holding onto their share? This can make it unattractive to a new partner if not given the opportunity to buy in...

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