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Why Your Pay Formula Is Critical to a Healthy Optometric Partnership

12/3/2018

Partnerships can be powerful drivers of growth, combining the energy, expertise and capital of multiple doctor owners to create a bigger practice than the sum of its owners individual abilities and contributions.

For all the benefits, partnerships come with their own sets of challenges.  One of the biggest sources of conflict between partners is the fairness of pay.

Is it really all about the Benjamins?

It might seem petty that money should come between business partners, but remember that owners own their practices for three reasons: the income potential, control over how they practice, and the equity they build in the business that they can eventually sell.

Of the three, partners have absolutely given ground on two: control IS going to be shared and they only own PART of the business.  And while partners won’t earn as much as they could as sole owners, they can still have a similar premium of high-income with time flexibility as the practice grows.

Pay Formulas as Conflict Resolution

Part of laying out your compensation formula is talking through the roles each partner will play, each partners contribution to the practice.  Of OD owners, this breaks down into three parts:

  1. Revenue Generation (patient care)
  2. Management / Practice Growth
  3. Strategy and Investment

Most partnership agreements require partners to make a minimum contribution to the practice, but in theory a practice could have an OD who is merely a shareholder and does no patient care or management.

KISS

I’ve seen a number of very ‘thoughtful’ compensation formulas, which are usually so complicated that they create more headaches than solutions.  In terms of measuring any OD’s contribution to the business, there’s only one number that matters: Collected Gross Revenues.

Collected Gross Revenues encompasses all the inputs of the practice: customer service, marketing, optical sales, medical billing, patient flow, A/R management, all of them.  And as owners, the second most important number is Cash Flow.

My Preferred Partner Pay Structure

Here’s my baseline formula for partner compensation:

  1. Owners are paid 20% of the Gross Collected Revenue they produce.

 

In a low-net practice, the percent may need to be adjusted down so the practice doesn’t contractually pay more than the cash it generates.

 

  1. IF one partner takes time away from patient care to manage the business – allowing the other(s) to focus on patient care – that partner is paid 2%-4% of the total Gross Collected Revenue of the practice for being the rainmaker.

 

In large practices ($3M+ in gross collected revenue) this might have to be adjusted down.

 

  1. At regular intervals, distributions are made after all the bills and loans are paid, based on the cash the practice has generated in excess of its needed cash reserves. Distributions are split according to each partner’s equity percentage.

This way of divvying up partner pay has a number of advantages.

First, by focusing on revenues it focuses partners on what matters.  Time spent on the practice is nice and patient volume is important, but unless activities translate into revenues, they don’t really matter.  Before anyone gets too upset: culture does affect revenues.

Second, by paying on percentages it naturally flexes and adjusts as partners work more or less, smarter or less efficiently.  Want to drop a day of patient care?  That’s fine, and if you can generate the same revenue in less time, you can even preserve your income in the process.

Thirdly, it recognizes that ownership matters.  If a partner gets in a car accident and can’t work, her equity stake ensures that so long as the practice has positive cash flow, she will be paid something for her investment.

Fourth, it should discipline owners to take their income based on cash flow.

And this leads to a final point: owners should take regular salaries that are half to two-thirds or their expected income.  Always leave margin for error.   But then, take as much cash from the practice as possible.

Partner pay matters because it lays out expectations for each partners roles and responsibilities both at the outset of the partnership and as roles and workloads change over time.  It matters because a partner who doesn’t feel he or she is being paid fairly for their contributions to the business is going to be unhappy, leading to conflict.  And finally, it matters because it forces owners to make decisions with an eye on the impact to the practice’s cash flow.

Want help with your partnership?  I’m always here to help.  Email me at nhayes@idoc.net or set up a call at www.meetme.so/NathanHayes

Finance

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AUTHOR

IDOC Optometry - Color Bar
Nathan Hayes

Nathan Hayes

Nathan serves as IDOC’s Practice Finance Consultant and developed the unique 3-Year Growth Plan, as a benchmarking, planning and decision-making tool for ODs. He also writes and lectures on various practice management topics. Nathan graduated from Vanderbilt University in three years, with a degree in Spanish and a minor in mathematics. After graduating, he spent a year working abroad. During that time, he worked for two firms in San Jose, Costa Rica. He interned with Grupo Juridico de San Jose, working in environmental policy to protect a threatened parcel of land, then he worked as a project manager for a US-owned precision machining shop, Olympic Precision Machining. Nathan then spent 6 months working with street children and orphans in Mexico. Before getting into the healthcare industry, he was an Assistant Store Manager and completed the Corporate Training Program with Haverty's Furniture Company in Atlanta, GA. Nathan serves on the advisory board for the Hayes Center for Practice Excellence at the Southern College of Optometry.