How to deal with incoming/outgoing partners

Changes among the partners is a common feature of general practice. In an ideal world succession planning is a regular item on the agenda for partnership meetings so an impending retirement shouldn’t come as a surprise. But even with good planning changes can still occur with short notice. These are some of the areas to cover, including how the practice accounts need to be managed.

Partnership agreement

Ensure you have an up-to-date partnership deed setting out how much notice a partner needs to give of his or her retirement, and also setting out the time period within which the practice needs to pay back their capital. There may be different time periods for property capital and working capital.

The partnership deed should also set out whether the retiring partner will be paid interest on their capital between the retirement date and the settlement date, and/or whether the retiring partner will continue to be entitled to their share of the notional rent from the property.

There may also be restrictions in the partnership deed preventing a partner retiring within a short period following a previous retirement of another partner.

Property

It will usually be necessary to have any property assets revalued when a partner retires. The partnership deed will need to be clear whether the properties are to be valued on the assumption that they continue to be used as a GP surgery, or on an alternative use basis.

 Where will the money come from?

The money to pay a retiring partner will need to come from a combination of:

• partners (existing or new)
• external lender (usually a bank).

Historically, a retiring partner was usually replaced by an incoming partner, and in this situation the capital due to the retiring partner was funded by the incoming partner. If your practice is fortunate enough to have found a replacement partner this should still work well. However, given the shortage of GPs seeking partnership, there is no guarantee of a new partner being found to introduce funds.

Bank

If the partners are unwilling or unable to invest further capital from their personal savings then an external lender will need to be approached. Banks continue to see the GP sector as very low risk and are keen to lend. You might just ask them to lend the money you need to pay the former partner, or it might be an opportunity for a broader review of the finance needs of the practice.

Timing

Even where a replacement partner is being appointed, consider the timing of when the retiring partner is due to receive their capital and when the new partner will have to introduce their capital. The retiring partner may be due their capital within three months of retirement, but the new partner may only have to introduce capital at the end of a probationary period which could be longer. In these circumstances you should discuss with your bank whether an increased overdraft facility or a temporary loan is required.

Current account balances – the investment in the working capital

In addition to any property the retiring partner will have invested in the working capital and this is usually shown in the partner’s current account within the practice accounts.

This amount needs to be accurately calculated by reference to the accounts. The calculations need to consider any possible liabilities – for example pension contribution shortfalls or seniority clawbacks – that may be paid by the practice on the partner’s behalf after they have left.

The partnership agreement will set out when a leaving partner is entitled to be paid out and cashflow needs to be carefully planned to deal with this.

Incoming partners need to build up an investment in the working capital. Most will not have a capital sum to invest on day one so the partner will need to build up their investment over an agreed timescale through a combination of reduced drawings or leaving their share of any end of year payouts in the practice. As with cashflow, the timing needs to be planned carefully.

Administration and pension

You should not underestimate the administration required in relation to partner changes. This will involve updating performers list records, CQC registrations, pension records and so on. Each country in the UK will operate its own system.

If you have missed the previous parts, you can catch up here on the Practice Index blog

Written by the Association of Independent Specialist Medical Accountants (AISMA)