May 25, 2022
Don't Give Up Your Leverage
There are many lessons to be learned from the Bible, but there is one in particular that is applicable to every physician group that ever thought about buying out its JV Partner's interest. It goes something like this: Esau and Jacob were brothers. Esau, being the older brother had the birthright entitling him to a double portion of the inheritance. One day, Esau returned from hunting and found his brother cooking a mess of pottage (a stew). A famished Esau asked Jacob for “a mess of pottage.” Jacob agreed on the condition that Esau give up his birthright in exchange. Bad deal … but not unlike the physician group that enters into a new lease and THEN tries to negotiate a favorable deal to buy out its partners.
With the signing of that lease, the group substantially enhanced the value of the real estate. When subsequently trying to negotiate with its partner, the group negotiates against the inflated value that the practice itself just created. The practice emulated Esau and sold its birthright for a mess of pottage. Practices must recognize the potency of the lease value and then leverage that value to bend negotiations in its favor. Once that lease is signed, the leverage has disappeared.
Timing is Everything
It is important to understand that it is the possibility that the group may not sign a new lease which creates the leverage. The practice should be in a position to evidence a credible alternative to the JV partner, creating some degree of concern to the JV partner that the practice could find or build a replacement or move its doctors into other facilities. Additionally, the doctors need to be in a position to imply that the economic benefits that could come from the alternative(s) may reasonably outweigh the lease up risk in replacing themselves. To accomplish that, a practice needs time. It would be difficult for a JV partner to believe that a practice would consider a new facility six months before a lease expiration. A practice that starts these discussions three years from lease expiration will have better credibility with its JV partner.
CMAC Partners has had the good fortune of representing multiple clients in the negotiation of a JV partner buyout. While our expertise can help with the discussions, it is the position created by the practice itself, through its lease standing, which will substantially impact the eventual outcome. So, start early and don’t lose that leverage!