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Business Partnerships

Approximately 16 per cent of independent optometric businesses in Australia are run as a business partnership1. Final year optometry students from UNSW look at the pros and cons of this increasingly popular style of running a business.

With growing corporatisation of the optometric market, it is becoming increasingly more difficult for an individual to start up their own independent practice.

A business partnership, where two or more individuals legally own the business, is becoming a popular option as it frees up some of the financial pressures and provides greater autonomy.

Before looking to set up any business partnership it is important for all parties involved in the potential partnership to seek professional advice from their own accountant and / or lawyer, independent of the other.

with the growing corporatisation of the optometric market, it is becoming increasingly more difficult for an individual to start up their own independent practice.

Advantages of a Partnership

There are many advantages of a business partnership. These include, but aren’t limited to:

Sharing Costs

Losses are shared equally and partners receive a 50 per cent capital gains tax discount when lodging their personal tax returns. 2,3

Shared Workload

Each partner has a personal responsibility to ensure the success of the business as each partner will ultimately benefit when the business does well.

If more than one partner is an optometrist, a roster system will allow for longer business operating hours, without increasing personal workload. 2

Strengths

Sharing workload provides more time for each partner to explore areas of interest e.g. contact lenses, behavioural optometry and pathology. By widening their scope of expertise an optometrist will bring greater diversity and uniqueness to the operation of a practice. 4

Better Service

If two or more optometrists are on the same shift there will be more appointment slots available for patients. When faced with a difficult diagnosis, a practitioner can consult their colleagues for a second opinion rather than sending the patient off with a referral, saving everyone time and money.4

Flexibility

As a partner in the business, an optometrist has more control and flexibility over hours of work, income distribution and expenses, than working as an employee in a corporate environment.3

Exit Strategy

If a practice is owned by a sole trader, encouraging a graduate or young optometrist to buy a share of the business provides a tangible exit strategy for someone looking at retirement.

Establishment

A business partnership can be set up by optometrists who want to work together or an optometrist can go into partnership with an optical dispenser, practice manager or an orthoptist.

The first stage is the selection of a compatible partner. A thorough evaluation of a prospective partner’s personality, stress tolerance, and their decision-making abilities will help to prevent future disagreements. One of the keys here is to look for ease of communication and consolidation. 3 Moreover, besides these attributes, a potential business partner’s skills and experience should complement yours in order to expand the scope of expertise of the practice.

Once each party has decided to pursue the partnership, a formal written agreement should be drawn up to prevent future disputes, clearly outlining how the practice will be managed.

Name and Location

This will decide whether the names of the partners are used as the business trading name or if the practice is given its own unique identity. The advantage of a unique identity as a trading name is that it makes it easier for partners to sell the business down the track or introduce a new partner.4 The demographics and accessibility of the practice location should also be considered.

Partner Contributions

Most partnerships are an equal split. However, there may be instances where one partner, who has brought more into the business initially (such as a premises, equipment, intellectual property, marketing expertise, etc) feels entitled to a greater share in the business. It is important to establish the ownership percentage of each partner at the start in cases other than an equal split or another partner buying into a practice.5

Finances

One of the greatest causes of conflict of any business partnership is the handling of the finances. It is important from the outset to work out how and who pays the bills, how profits should be split (generally based on each partner’s percentage of ownership of the business) and whether there are personal loans that need to be paid back.

Leave and Allowances

Sickness and disabilities are often unforeseen. Aspects addressed should include compensation, the cost of a substitute practitioner, and ultimately what should trigger the start of a buy-out.

Insurance

There are a whole raft of insurances each business partner should consider in consultation with their accountant such as indemnity insurance, workers compensation, life and disability insurance and income protection insurance.7

Office Policies and Procedures

These outline how responsibilities should be shared e.g. task delegation and the management of staff.

Exit Strategy

If one partner decides to leave it is important from the start to decide how assets, patient records and other property of the practice are to be divided amongst partners.5

Disagreements

Before you get into a disagreement, outline the plan of action on how seemingly irresolvable disputes will be handled when they are encountered.

Partnership agreements should be renewed every one or two years to ensure that it is up to date. During these reviews, partners should discuss any changes required that might prevent future disputes.

While the Optometrists Association Australia (OAA) is a valuable source for advice or assistance regarding the business and legal side of things, it is helpful to hire a team of advisors including business consultants, financial planners, accountants and lawyers to provide assistance with concerns that partners may be unfamiliar with.

Possible Problems and Their Solutions

Before you decide to look at venturing into a partnership, it is important to also consider some of the downsides of this business model.

Finances

Each partner is equally liable for the debt incurred by the business, even if these expenses were not agreed upon, irrespective of their profit share and responsibility for any debt. 2,3

If starting a greenfield practice, initial trading losses in the first few years may mean that partners need to undertake locum work in order to generate enough income to continue running the business. This may be a more difficult arrangement if some partners were not optometrists.

Disputes over expenses and the viability of a practice not being lucrative enough are common causes of partnership breakdown. If disputes can not be resolved the partners may decide to dissolve the union and pursue their own individual business interests.4

Control and Responsibilities

A sole trader who has entered into a new business partnership will need to accept loss of individual control over the running of the business and sharing patient care. 3

There can be an unequal distribution of work load, particularly if one partner only wants to do consultations. By default, this will force the other partner to assume more control and responsibility for the business. 2,8,9

Work Ethics and Personalities

Different personalities can work well together, but if there are disagreements in the practice management or personal goals these differences can be difficult to reconcile. 2,3,8,10

If a partner spends most of their time out of the practice doing extra-curricular activities (conferences, community initiatives, etc.) or on holidays, the other partner(s) could become resentful and dissatisfied if they are required to spend more time running the business for less than equitable distribution of the profits.

Communication

Many of the previously discussed issues stem from a breakdown in communication.

When business partners leave unspoken disagreements they can build dissatisfaction which could lead to resentment. This will result in the partnership no longer functioning successfully.

Disputes and Termination

Weekly meetings can alleviate these tensions and areas of conflict. However, if these disputes aren’t resolved a mediator such as a business consultant familiar with the operation of partnerships, an accountant, financial advisor or a lawyer, could be called in to mediate a resolution or offer a third opinion. 2, 3, 11

Termination

According to the Partnership Act 1892 (NSW),6 partnerships can be terminated if illegal activity is conducted where the continuation of the business would be unlawful; or if one partner becomes bankrupt; or one partner suffers as a result of one partner’s individual debt or if a partner passes away.

A person can also withdraw from a partnership at any time on notice and demand a ‘refund’ of their capital contribution.

A partner can apply to a court to dissolve the partnership if the other partner is permanently no longer capable of their responsibilities due to an unsound mind or if the other partner is knowingly breaching the partnership agreement. 2,12

If dissolving the partnership is the only solution, the practice can be sold to another party with the assets used first to repay creditors, then distributed to the partners based on their share holding of the company. 2, 12

One partner may also sell their share to the other partner(s) for a price that was previously agreed upon, or as valued by a third party or sell their share to a new partner.11, 12, 13

Conclusion

Going into a business partnership gives a person a share in the business profits, shared responsibilities, opportunities to develop ideas with a likeminded person and greater flexibility. This can allow each person to spend more time developing their individual skills and abilities and ultimately result in a better quality lifestyle.

There are no guarantees of success as disputes and issues may arise, but if partners set up agreements at the start and undertake the correct procedures to ensure fair and effective communication between partners there is greater potential for success of the business.

Ms. Megan Tu, Ms. Angela Siu and Ms. Melanie Li are optometry students in their fifth and final year of a Bachelor of Optometry & Bachelor of Science at the University of New South Wales (expected graduation 2011). This is their first published work.

References

1. Loh, S. 2010, [email] (Personal communication, 1 September 2010).

2. Miller JR. 7 Steps to a Winning Partnership Agreement. Review of Optometry [serial online]. 2008 November [cited 2010 July 28]; 145(11). Available from: http://www.revoptom.com/content/d/cornea/c/14968/

3. Lloyd TSBbusiness.com [homepage on the Internet]. London: Lloyds TSB Commercial; c2010 [cited 2010 Jul 28]. Setting up business as a partnership. Available from: http://www.lloydstsbbusiness.com/support/businessguides/partnership.asp

4. Bennet I. Optometric practice management. 2nd ed. Amsterdam; Boston: Butterworth-Heinemann; 2003.

5. Classe JG, Thal LS, Kamen RD, Rounds RS. Business Aspects of Optometry: Association of practice Management Educators, 2nd ed. Boston: Butterworth-Heinemann, 2004. p 64-65.

6. Partnership Act 1892 (NSW). Available from: http://www.legislation.nsw.gov.au/viewtop/inforce/act+12+1892+FIRST+0+N/

7. Kiely P, McHenry O. Starting a practice. Optometric Association of Australia, 2003. p 23.

8. Runninger J. Why Partners Part. Optometric Management [serial online]. 2002 Jan [cited 2010 Jul 27]. Available from: http://www.optometric.com/article.aspx?article=70344

9.Runninger J. Another look at why partners part. Optometric Management [serial online]. 2002 Feb [cited 2010 Jul 27]. Available from: http://www.optometric.com/article.aspx?article=70365

10. Kattouf RS. How to create a partnership. Optometric Management [serial online]. 2006 Jan [cited 2010 Jul 27]. Available from:

http://www.optometric.com/article.aspx?article=&loc=articles\2006\january\0106018.htm

11. Innovation.gov.au [homepage on the Internet]. Canberra: Australian Government: Department of Innovation, Industry, Science and Research; c2008 [updated 2008 Feb 14; cited 2010 Aug]. Available from: http://www.innovation.gov.au/General/OSB-MarketsSection/Pages/DisputeResolutionPartnerships.aspx

12 Spry S. Business exiting strategies [monograph on the Internet]. Laurieton: Small Business Support Network; c2004 [cited 2010 Aug 6]. Available from: http://www.ozsmallbiz.net/business-exit-strategies/

13.Laurence BK. Plan ahead for changes in Partnership Ownership [monograph on the Internet]. Berkeley: Nolo; 1999 [cited 2010 Aug 7]. Available from: http://www.nolo.com/legal-encyclopedia/article-30249.html