Payout Periods, Promissory Notes & AR at Exit

She gave notice in March, saw her last patient in June, and signed the release in July. It is now November, and the question she has asked three times—when does the first payment arrive, and how much is it—has produced three different answers from two different people. Her attorney has begun writing letters. The practice is not withholding anything; it simply never decided when payment starts, what it is reduced by, or who collects the receivables her work generated. Every one of those questions is now being negotiated between parties who no longer trust each other.

The financial mechanics of an exit are the most contested provisions in most partnership agreements, and the reason is arithmetic rather than ill will. A buyout is a large obligation landing on a practice that just lost a producer, payable to a colleague who is counting on it. Both sides are right to care. The agreement’s job is to have settled the terms years before anyone knew whose exit they would price.

Start with the payout period, because expectations diverge here first. Five years in equal installments is the standard for a substantial buyout, and the reason is cash flow: the practice must replace the departing partner’s clinical production, absorb the recruiting cost of doing so, and service the buyout at the same time. A lump sum does none of that. Shorter periods work for small interests and token structures. Longer ones start to look like an unsecured loan the departing partner never agreed to make. Whatever the term, state when the clock starts—the final clinical day, the closing of the redemption, or delivery of the valuation—and state the payment frequency, because “annually” and “monthly” are materially different promises to a physician planning around them.

Then draft a real promissory note rather than a payment understanding. The note states principal, interest rate, amortization schedule, and maturity. It states whether prepayment is permitted and at what discount, if any. It states events of default and the acceleration rights that follow, which protects the departing partner from a practice that simply stops paying. It states whether the obligation is secured, and by what—many practices offer none, and saying so plainly is better than leaving the question to be argued. It states subordination to the practice’s bank debt, because the lender will require it and discovering that requirement mid-payout is an unpleasant surprise for everyone. And it states what happens on a sale of the practice: acceleration, assumption by the buyer, or payment from proceeds.

Offsets come next, and they are computed before the first installment rather than argued over during the fourth. Name every category in the agreement:

• Tail coverage premiums allocated to the departing partner.
• Unreturned advances and travel or expense draws.
• Capital account deficits.
• Outstanding partner loans, including any funded under the capital call provisions.
• Amounts owed under a clawback for post-departure audit repayments or program refunds, held back or escrowed on stated terms.

Accounts receivable is where exits get difficult in a specific way, because two defensible answers exist and practices frequently have never chosen between them. Under one convention, the buyout formula already includes the practice’s receivables, and the departing partner receives no separate runout—her share of the collectible receivables is inside the number. Under the other, common in token and self-sustaining designs, the receivables are the buyout: the departing partner leaves with her own collectible accounts receivable and nothing else, because she bought nothing on the way in. The symmetry principle decides which applies, and the way in prices the way out.

Where the receivables are paid separately, three drafting choices carry the money. Attribute receivables to the departing physician by rendering provider, so the credit follows the work rather than the biller. Define collectible without flattering the number, since aging discounts the old buckets and a gross receivables figure is not a payable one. And choose a settlement convention: pay as collected across a stated wind-down, or settle at a discount in a lump sum. The working numbers are well established—roughly 94 to 95 cents on the collected dollar, less the 5-to-6-percent cost of collecting it—and where an agreement is silent, about 95 percent of the departing partner’s own receivables collected across the following 60 to 90 days is the efficient compromise: fast enough to close the books, discounted enough to cover the billing work, and computed on her own claims so nobody argues about anyone else’s. One consequence deserves saying out loud during the exit conversation: under a runout convention, letting off the gas in the final months costs the departing partner directly.

The aggregate annual buyout cap is the provision practices skip until two partners retire in the same year. It limits total buyout payments across all departing partners to a stated percentage of collections, so simultaneous exits stretch payments rather than break the practice. Draft the queue with it: whether concurrent payees share the available pool pro rata or are paid in trigger order, and—the sentence that prevents the next fight—that the cap extends the payment term rather than forgiving any part of the obligation.

Finally, gate the payout on the transition obligations, because a buyout is the only leverage the practice will ever have. Charts completed, property and keys returned, patient notification handled on the practice’s schedule and consistent with board rules, and the covenants activated on the last clinical day. No installment before the checklist clears.

One well-drafted exit shows the whole machine running. A 20 percent partner in a five-pediatrician practice resigned to follow a spouse’s relocation. Her employment agreement supplied 120 days’ notice, a final productivity reconciliation paid within 60 days, and a PTO payout at its cap. Her buyout ran under the partnership agreement: the equity trigger fired on her final employment day, the formula value came from the annual valuation all partners had signed seven months earlier—a $2.2 million practice value, her interest $440,000—and it was paid on a five-year promissory note at stated interest, with offsets for the tail premium and a $12,000 outstanding travel advance. The entire exit was administered by the practice manager and one attorney letter. Every number came from a provision drafted years before anyone knew whose exit it would price. The methodology behind that formula value is a subject of its own; the companion textbook, Pediatric Practice Management: The Fundamentals, works the valuation in full.

Red flags. No stated payout period, so the departing partner expects a check and the practice expects a decade. No note—just an understanding about repayment. Receivables allocated by whoever happens to be processing claims after the departure. No offset mechanism, so advances and premiums are recovered by negotiation or not at all. And no aggregate cap, discovered the year two partners retire together and the practice cannot fund both.

The departure conversation is difficult enough on its own. The financial terms should already be on paper, waiting, written by people who did not yet know whose name would go on them.