Due Diligence by Potential New Partners
Joining an MPG partnership can be a very positive and rewarding experience; however, like any serious relationship, it should not be entered into lightly or without doing some homework. Midwives who are considering joining a partnership can mitigate potential risks through good business practices and due diligence to be sure that it is an informed decision.
Due diligence involves reviewing relevant practice documents and asking lots of questions to ensure you understand the structure and function of the partnership. Partners may reasonably ask that the answers be kept confidential and may ask for a signed confidentiality agreement; even so, potential new partners have the ability to seek advice from an accountant or lawyer and to ask questions of existing partners.
Financial Due Diligence
A partnership can impact a partner’s personal finances. A creditor who cannot get the money owed from the practice could sue one partner personally. While new partners are not personally responsible for debt incurred before they joined the partnership, as a potential partner, you want to be sure of the partnership’s stability before you join as you will share the burden of resolving any outstanding legal or financial disputes.
Potential questions to ask:
- What kind of relationship does the practice have with its TPA?
- Review the Funding Agreement, the practice’s most recent budget submission, and the TPA-approved budget for at least the last couple of years with the other partners.
- Ask about the relationship between the practice and the TPA. Have there been any audits, concerns about expenditures or points of conflict? If so, ask to review any relevant correspondence from the TPA about these issues.
- If the clinic space is owned by the partners, do new partners buy into that ownership?
- If so, seek independent legal advice on how to structure this investment and ensure there is a clear legal agreement on how partners divide out their share of the investment when leaving the partnership.
- If the clinic space is leased, what does the future of the lease look like?
- How long does the lease bind the landlord and the practice?
- How will future rent increases be determined?
- If any major repairs or renovations are needed, how will they be financed and who is responsible?
- What is the practice’s responsibility as the tenant if they leave the rental space?
- Are there any outstanding disputes with the landlord?
- Who owns the contents of the clinic?
- In the absence of any agreements to the contrary, the contents of the clinic such as equipment, furniture and improvements made during renovations belong to the partnership. Any exceptions should be described in written agreements (e.g., some commercial leases state that built-in items belong to the landlord or need to be demolished at the end of the lease).
- As a new partner, you assume responsibility for lease agreements on equipment which can include phone systems and major pieces of office equipment.
- How is the practice’s relationship with contractors, suppliers, employees, midwives or partners?
- Ask for information about any outstanding financial or legal disputes.
- Review any correspondence related to claims or notices of outstanding payments or violations of contract, legislation or standards received by the practice.
- Does the partnership have any loans or lines of credit, including advances from the TPA? If yes, what are the terms and repayment plans?
- The need to fund the practice until payment is received from the TPA may require the partnership to request advances from the TPA and/or use bank loans, lines of credit or loans from individual partners to the partnership. Renovations or repairs may also have been financed by loans.
- Might partners be expected to take out loans/lines of credit to support cash flow needs, renovations or repairs?
- How does the practice ensure that income meets or exceeds expenses month to month and year to year?
- Review operational budgets to see where the practice is planning to spend its money.
- Review monthly income statements (i.e., profit and loss statements) for the past year. Is there a realistic estimation of income and expenses?
- Review the practice’s balance sheet, which shows the value of the assets, liabilities and any retained earnings (profit kept in the practice by the partners, also called equity) or accumulated losses. This is where you will see if the practice has short-term debts like balances owed to suppliers, or longer term debts like loans.
- Review agreements about any outstanding loans or advances.
- Review financial statements prepared, reviewed or audited by an accountant for the past two years.
- Review the practice’s business insurance policy and limits.
- The Funding Agreement and most commercial leases require the practice to maintain business insurance (which is separate from professional liability insurance) and set minimum coverage levels. Are there specific questions a potential partner should be thinking of? E.g. is it adequate?
- How up-to-date is the practice with business registration and tax requirements?
- The partners are responsible for withholding taxes, EI and CPP contributions from employee salaries and paying these and the required employer contributions to the government. To do this, the partnership must be registered and have a business number. When partners join, they should be added to the business registration. When they leave, they should be deleted. Ensure the business registration for the practice is up-to-date.
- Ensure all remittances to the Canada Revenue Agency (for CPP, EI and income tax for employees) up-to-date.
- What kind of financial position are the other partners in?
- Before extending credit to the practice, creditors may assess the credit worthiness of individual partners; and a midwife will cease to be a partner/director if they declare personal bankruptcy. Additionally, personal creditors may look to assets owned by a midwife within the partnership for repayment of personal loans. As a result, it is reasonable for both the midwife being considered for partnership and the current partners to share credit check information before become partners and on a regular schedule (e.g., annually). Partners may also ask each other to tell the others if they anticipate any major changes that could negatively impact their personal finances (e.g., taking on large debt through purchases or marriage, significant loss of household income or separation or divorce from a spouse).
Partnerships in Ontario are governed by the Partnership Act, which sets out the rights and responsibilities of partners. In some key areas such as termination of partnership and decision-making within the partnership, the Act allows for the partnership to create an agreement that specifies the process which will be followed. In the absence of a Partnership Agreement, the Partnership Act dictates all of the rules governing the partnership. The AOM has guidance on developing an agreement and a template Partnership Agreement, which can be adopted or adapted by practice groups.
Potential questions to ask:
- Are there written partnership contracts and contracts with non-partner midwives and employees?
- Written contracts, job descriptions and policies can provide a means of reviewing the work environment and compliance with legal requirements. The AOM has developed a template Partnership Agreement, template independent contractor agreements, and template employment agreements.
- How does the partnership function?
- Are all partners equal? How are decisions made and profits/losses distributed?
- What structures are in place to ensure good communication is maintained?
- How are disputes resolved?
- How are partners added or removed?
- What roles will we each play (be as specific about this as possible)?
- What does the partnership agreement say? Get legal advice before signing the contract. Lawyers may not be familiar with midwifery partnership. Ask other midwives or the AOM for leads on lawyers who have experience working with midwifery practices. Compare the partnership agreement to the AOM’s template and consider what is and isn’t addressed.
Values, Principles and Goals
Close alignment between personal values, principles and goals and those of the practice group helps ensure a healthy, happy and stable working relationship. Some foundational principles are enshrined in national or provincial laws, such as zero tolerance for discrimination, harassment and violence. Other principles such as professional conduct, continuity of care and respect for informed choice are standards of the midwifery profession. Practice vision statements and protocols may describe how these foundational principles will be protected and the process to be followed when they are violated. It is even more important to have written protocols and agreements to describe things that are values, principles and goals of the practice group but are not necessarily dictated by statute or standards.
Potential questions to ask:
- What will this practice group look like in one year? In five years?
- Plans may include staying small, growing, or splitting into satellites. Practices may value having lots of students or very few. There may be plans to target specific client populations or focus on a particular part of the catchment area. Do the goals of the partnership meet your goals?
- What values are most important in the way the practice shares responsibility, work, power and reward?
- Whether the answer to this question seems fair and reasonable can be highly subjective. Protocols for a specific aspect of running a midwifery practice, scheduling holidays for example, may base allocation of time off on fixed rotations, lotteries, seniority, rewards for uncompensated work, family situations or other needs. Everyone would agree that a fair system is needed, but definitions of fair will vary.
- Are these values negotiable? Discuss frankly with prospective partners how decisions about responsibility, work, power and reward are made. What aspects of the current values and protocols do they consider always open for discussion or likely to change over time, and what is considered fundamental and unlikely to change?
- Which models of care, case load variations (full time, part time) and choices around time off will be accommodated in this practice?
- What kind of culture is fostered in the practice? How is that culture invested in?
- Creating a healthy practice culture always involves conscious effort to forge a common understanding of behaviors and communication that are respectful of everyone and acceptable in the workplace. The interpretation and implementation of these principles may be different in different settings. In most cases, positive interpersonal interactions and adherence to a mutually agreed upon standards of procedural fairness are important elements of a healthy culture. Creating and maintaining a healthy practice culture requires an investment of time, and sometimes resources such as outside facilitators or consultants.