Due diligence before becoming a shareholder in a medical practice

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Gemini
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Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Sat Jul 09, 2016 11:05 am

I am being offered an opportunity to become a shareholder in a large medical practice with multiple docs and mid-level practitioners. I have consulted a local healthcare attorney to review the shareholder agreement.

What else should I be doing?

Is it reasonable to hire an accountant to go over the finances or does that not look good? I am concerned hiring an accountant may be too aggressive? Am I entitled to look at finances going backwards if I am being offered shareholder in the present? what kind of info will an accountant want if I hire one? I am still having trouble clearly understanding clearly what overhead is and how my compensation will be calculated moving forward.

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Hayden
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Hayden » Sat Jul 09, 2016 11:46 am

Gemini wrote: I am still having trouble clearly understanding clearly what overhead is and how my compensation will be calculated moving forward.
I would not enter into an agreement without a clear understanding of how my compensation would be calculated. They should be able to answer that question for you to your satisfaction.

Does the practice have audited financial statements? If so, you should get copies of those.

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ram
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Re: Due diligence before becoming a shareholder in a medical practice

Post by ram » Sat Jul 09, 2016 12:18 pm

Are you an employee at present who is being 'elevated' to a shareholder.
Or will you be joining as a shareholder. If that is the case then you may want to ask if you can be an employee for a year or two before considering the shareholder position. Most people should be agreeable to it. Actually that is the usual practice. (the usual buy vs rent argument applies here)
Make sure you understand the compensation formula before you join.
Ram

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PeteyDink
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Re: Due diligence before becoming a shareholder in a medical practice

Post by PeteyDink » Sat Jul 09, 2016 12:34 pm

If you have a financial stake in the company, then you should have full access to all financial documents. There is nothing too "aggressive" or forward about this. They may, in fact, welcome additional eyes to see where more profit can be made, expenses can be trimmed, etc. As a shareholder, you own part of the company and deserve access to determine financial status, business viability, profit forecasts, etc. What if they went bankrupt a few years ago and weren't telling new shareholders?

How your overhead and compensation is calculated should be clearly written in your contract. If you don't understand it, you need your accountant to help.

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Sat Jul 09, 2016 3:26 pm

Hayden wrote:
Gemini wrote: I am still having trouble clearly understanding clearly what overhead is and how my compensation will be calculated moving forward.
I would not enter into an agreement without a clear understanding of how my compensation would be calculated. They should be able to answer that question for you to your satisfaction.

Does the practice have audited financial statements? If so, you should get copies of those.

Maybe I just didn't understand - but I thought overhead was one thing and then there is additions to the overhead - confusing - all in all, it decreases my income significantly and I don't quite understand it well. Spoke w/ CEO but not enough clarity.

I can ask about audited financial statements. Do they have to be audited or are just regular statements okay?

Will this be considered a red flag if I am asking all this? Don't want to start raising flags. Is this information common? Do all potential partners ask for this?


ram wrote:Are you an employee at present who is being 'elevated' to a shareholder.
Or will you be joining as a shareholder. If that is the case then you may want to ask if you can be an employee for a year or two before considering the shareholder position. Most people should be agreeable to it. Actually that is the usual practice. (the usual buy vs rent argument applies here)
Make sure you understand the compensation formula before you join.
Yes - current employee being elevated, and I thought my income would increase, but, from what I understand, it won't be and it is a bit confusing. Compensation is laid out clearly, but many variables come into play - biggest being overhead and its computations.

PeteyDink wrote:If you have a financial stake in the company, then you should have full access to all financial documents. There is nothing too "aggressive" or forward about this. They may, in fact, welcome additional eyes to see where more profit can be made, expenses can be trimmed, etc. As a shareholder, you own part of the company and deserve access to determine financial status, business viability, profit forecasts, etc. What if they went bankrupt a few years ago and weren't telling new shareholders?

How your overhead and compensation is calculated should be clearly written in your contract. If you don't understand it, you need your accountant to help.
Well I don't have a stake yet, but I am being offered it. Is it okay to request financial documents from the past i.e. two years back? I would also like to know what each of the other shareholders are being paid and how, but I have not asked for fear of raising flags and being tuned down and being told no as this is information from the past when I wasn't there.

When I asked about overhead, I was told it is "expenses" - duh! CEO is a talker and has a way of putting spin on things so they are hard to decipher

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dm200
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Re: Due diligence before becoming a shareholder in a medical practice

Post by dm200 » Sat Jul 09, 2016 4:05 pm

Can you discuss the details of how this is working out for those who have been in similar situations in this practice a few years ago - and see how things worked out when they became a shareholder in the practice?

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Sat Jul 09, 2016 4:32 pm

dm200 wrote:Can you discuss the details of how this is working out for those who have been in similar situations in this practice a few years ago - and see how things worked out when they became a shareholder in the practice?
The practice has been around many, many decades. They Have had very little turnover. A few partners retired not too long ago. Previous hire before me was a few years ago - everyone has been there at least a decade. The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.

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goodenyou
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Re: Due diligence before becoming a shareholder in a medical practice

Post by goodenyou » Sat Jul 09, 2016 4:48 pm

Gemini wrote:
The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.
This should make you seriously pause, or possibly run away from the deal. Doctors should not be ignorant of finances nor have blind trust in their colleagues. It never ends well that way. In this day and age, the value of a "buy-in" to medical partnerships appear to have declining value. Succession planning in not what it used to be. I would never buy-in today to any practice. After 20 years of partnership aggravation and where medicine is and is going today, I would not "invest" in a partnership. Being mobile is a huge benefit. Be sure you understand any joint and several liability, and your obligation to buying out aging partners. Many older doctors will be jumping ship more frequently and at a younger age in the very near future. I would not want to be in the position of waiting for my future buy-out. You may be left holding the proverbial bag. Keep your eyes open and don't have nostalgia for the future.
Last edited by goodenyou on Sat Jul 09, 2016 5:06 pm, edited 1 time in total.
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PeteyDink
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Re: Due diligence before becoming a shareholder in a medical practice

Post by PeteyDink » Sat Jul 09, 2016 5:06 pm

Gemini wrote:
The practice has been around many, many decades. They Have had very little turnover. A few partners retired not too long ago. Previous hire before me was a few years ago - everyone has been there at least a decade. The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.
Without knowing much about the specifics of your career path and life:

Knowing that the main partners have been there a long time, they will try to net as much (reasonable) profit off your medical work as possible, at least from a business viability perspective. By shareholder, will you have a percentage stake in the companies yearly earnings, having voting rights with the organization, considered an owner or partner?

If you have to pay overhead, what is it based on: flat percentage off or or by the month or monthly/yearly fee? ~55% is the typical overhead (changes depending on region obviously) for a private medical practice based off yearly business income minus expenses. This percentage scales down with more people though, so at 10 total providers the owners net more income from the business compared to a few providers (in theory, depending on practice region/specialty, etc.). I would never give up more than 50% of what I bring in for overhead, especially in a shared office environment. Even so, 50% is definitely reasonable and appropriate in many situations, particularly for someone at the beginning of their medical career before partnership.

It scares me a bit that they seem a bit shifty on the specifics. They should be 100% transparent towards any money that is owed by or taken from you. Anyone can get burned by otherwise well meaning people who are just maximizing what they can do within the rules.

Are they offering you any benefits? If you are going to be a shareholder, all of your insurance should be paid by the company, and they should have a functioning generous retirement plan.

The problem with being an employee is than you don't have 100% control of your work environment. The problem with being a contractor is the loss of benefits given to employees. There is no problem with being an owner because you have both. Until someone sues you. :twisted: :twisted:

GreenGrowTheDollars
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Re: Due diligence before becoming a shareholder in a medical practice

Post by GreenGrowTheDollars » Sat Jul 09, 2016 5:06 pm

I'd invest in some review by an CPA not providing services to the firm who could help you understand the financial statements and the payouts, and where the money is going. You should absolutely get financial statements -- I'd ask for 5 years of statements.

If your compensation isn't going to increase, why? You take on a lot more risk as a partner, so where is the reward?
How are practice buyouts structured? What happens if the practice is purchased by a hospital system?
If you have a number of older partners who will be retiring in a few years, where are the funds to pay out their ownership shares?
How is any real estate owned?

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dm200
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Re: Due diligence before becoming a shareholder in a medical practice

Post by dm200 » Sat Jul 09, 2016 6:01 pm

1. Not in any medical field, but I learned a VERY EXPENSIVE way the meaning of "joint and several" liability. It means that YOU may be responsible for ALL of a debt or obligation that you believe is shared by many others (both organizations and individuals). Be careful of "personal guarantees".

2. A few years ago, my wife and I were patients in a group medical practice (both primary care and several specialties). Our understanding was that there were a few primary or owners (physicians) of the practice, but we knew no other details. There seemed to be a lot of turnover of the other Primary care physicians (Internal medicine, as I recall). There was, at some point, apparently, a bankruptcy of the practice (or similar) and it "came back" with a similar (but different) name for the practice.

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Re: Due diligence before becoming a shareholder in a medical practice

Post by samsmith » Sat Jul 09, 2016 6:11 pm

You should be able to get a very clear understanding on how overhead is calculated and how it is distributed/assigned to each doctor.
There is no "right" way. There are many different formulas. The formula / methodology that your group is using should be clearly explained. Also are all the partners / shareholders equal or are some more equal than others. At a minimum, if they cant explain how overhead works in a manner that you can understand, I would be concerned. Trying to understand this basic concept should not be a reason that a reputable group would rescind a partnership offer.

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climber2020
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Re: Due diligence before becoming a shareholder in a medical practice

Post by climber2020 » Sat Jul 09, 2016 6:12 pm

At first glance, this "opportunity" doesn't sound right. You absolutely need to have complete access to the books and have your own independent accountant look at everything. If any of the owners take offense to this, then that is not normal and you should walk away. You should also hire your own person to value the practice to make sure it is priced properly.

When I looked into partnership, I reviewed the balance sheet, income statements (P&L) dating back several years, federal income tax statements and all schedules dating back several years, and a variety of other documents. I very quickly realized that I would be making less money as a partner after buy-in expenses (for some ridiculous amount of time like 15 years) compared to working as an employee, so I declined. No way I would have known that without all the financial statements.

The reality is that we are in a slowly declining industry. Practice values are dropping, and the old doctors in their 70s who are pricing their practices like it's still 1980 are having a hard time finding buyers who are willing to pay even a fraction of the asking price (common situation where I live). Don't be the last person holding the bag.

kenner
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Re: Due diligence before becoming a shareholder in a medical practice

Post by kenner » Sat Jul 09, 2016 6:31 pm

Excellent input from forum members.

Since you have consulted with a local healthcare attorney, hopefully you will receive further insight from the legal standpoint, perhaps including some "local knowledge".

Best wishes.

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Sat Jul 09, 2016 8:01 pm

goodenyou wrote:
Gemini wrote:
The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.
This should make you seriously pause, or possibly run away from the deal. Doctors should not be ignorant of finances nor have blind trust in their colleagues. It never ends well that way. In this day and age, the value of a "buy-in" to medical partnerships appear to have declining value. Succession planning in not what it used to be. I would never buy-in today to any practice. After 20 years of partnership aggravation and where medicine is and is going today, I would not "invest" in a partnership. Being mobile is a huge benefit. Be sure you understand any joint and several liability, and your obligation to buying out aging partners. Many older doctors will be jumping ship more frequently and at a younger age in the very near future. I would not want to be in the position of waiting for my future buy-out. You may be left holding the proverbial bag. Keep your eyes open and don't have nostalgia for the future.
Well, the "buy-in" is not anything huge. There is a buy-out, but I am assuming that will apply to me as well 20 years from now.


PeteyDink wrote:
Without knowing much about the specifics of your career path and life:

Knowing that the main partners have been there a long time, they will try to net as much (reasonable) profit off your medical work as possible, at least from a business viability perspective. By shareholder, will you have a percentage stake in the companies yearly earnings, having voting rights with the organization, considered an owner or partner?


Well income and shareholder status are separate entities. Initially, one is an employee and paid a salary. If offered partnership/shareholder status, he/she is eligible to participate in their department's earnings, but the not the earnings from the ancillaries, such as labwork, etc. The department's earnings are progressively shared until all the partners in that department are equally sharing. In order to share the income from the ancillaries, their is another waiting period. Being a shareholder, makes one an equal owner/partner with voting rights as everyone else and one is considered an owner.

If you have to pay overhead, what is it based on: flat percentage off or or by the month or monthly/yearly fee? ~55% is the typical overhead (changes depending on region obviously) for a private medical practice based off yearly business income minus expenses. This percentage scales down with more people though, so at 10 total providers the owners net more income from the business compared to a few providers (in theory, depending on practice region/specialty, etc.). I would never give up more than 50% of what I bring in for overhead, especially in a shared office environment. Even so, 50% is definitely reasonable and appropriate in many situations, particularly for someone at the beginning of their medical career before partnership.


Not sure what overhead is based on, but it is way north of 55%. This is what is confusing me.

It scares me a bit that they seem a bit shifty on the specifics. They should be 100% transparent towards any money that is owed by or taken from you. Anyone can get burned by otherwise well meaning people who are just maximizing what they can do within the rules.

Not sure if they are being shifty or I am just not getting it. I am just curious on how to approach this without coming as an ass and asking for everything

Are they offering you any benefits? If you are going to be a shareholder, all of your insurance should be paid by the company, and they should have a functioning generous retirement plan.

yes, insurance picked up by company - health and malpractice. no generous retriemt - i max out and they add about 7K

The problem with being an employee is than you don't have 100% control of your work environment. The problem with being a contractor is the loss of benefits given to employees. There is no problem with being an owner because you have both. Until someone sues you. :twisted: :twisted:

GreenGrowTheDollars wrote:I'd invest in some review by an CPA not providing services to the firm who could help you understand the financial statements and the payouts, and where the money is going. You should absolutely get financial statements -- I'd ask for 5 years of statements.

If your compensation isn't going to increase, why? You take on a lot more risk as a partner, so where is the reward?
How are practice buyouts structured? What happens if the practice is purchased by a hospital system?
If you have a number of older partners who will be retiring in a few years, where are the funds to pay out their ownership shares?
How is any real estate owned?
Curious, but how much would a CPA charge for something like this (not that I would refuse- just wanted to know a ballpark)?

How do I ask for financial statements in a politically correct way? Don't want to come off as a dbag.
From what I understand, compensation is not increasing b/c overhead is high and my salary is already at what an incoming partner would make for my department w/o ancillary income sharing.
There is a buyout formula in place so any retiring partner's funds will come out in a structured way.
Do not know if practice bought by hospital.
Real estate is owned in separate LLC and being a shareholder, one can have the option to buy in.

ks289
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Re: Due diligence before becoming a shareholder in a medical practice

Post by ks289 » Sat Jul 09, 2016 8:40 pm

1. The attorney will be better positioned to give you specific advice after reviewing the partnership agreement. Your specific circumstances are likely completely different from many of the docs on this forum including my single specialty group. A healthcare attorney will have seen way more of these things including perhaps even your practice.
2. Yes I would hire an accountant to review the practice's finances and buy in. This is the perfect way to look like a team player while doing your due diligence. Just say the accountant (or attorney) is requesting to review the books, tax returns, etc. it really should be standard practice for them anyway for any new partner.
3. Agree with the other posters regarding having a complete understanding of overhead, sharing of revenues, compensation, etc before making any commitment. I think large (especially multispecialty) groups are notoriously complicated in their structure because providers are likely quite different in particular in utilization of overhead and generation of revenue both directly and downstream.
Good luck.

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climber2020
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Re: Due diligence before becoming a shareholder in a medical practice

Post by climber2020 » Sat Jul 09, 2016 9:48 pm

Gemini wrote:
How do I ask for financial statements in a politically correct way? Don't want to come off as a dbag.
"Hi there! I'd like all the financial statements from the last 5 years. Here is a list of what I'll need."
Gemini wrote:From what I understand, compensation is not increasing b/c overhead is high and my salary is already at what an incoming partner would make for my department w/o ancillary income sharing.
If this is true, you have no incentive to buy in. The whole purpose of partnership is a significant increase in pay. Why take additional risk for no benefit? Remain an employee, get paid the same amount of dollars, and when things go south you can leave with no strings attached and join another practice that is properly run.

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Sat Jul 09, 2016 10:10 pm

dm200 wrote:1. Not in any medical field, but I learned a VERY EXPENSIVE way the meaning of "joint and several" liability. It means that YOU may be responsible for ALL of a debt or obligation that you believe is shared by many others (both organizations and individuals). Be careful of "personal guarantees".

2. A few years ago, my wife and I were patients in a group medical practice (both primary care and several specialties). Our understanding was that there were a few primary or owners (physicians) of the practice, but we knew no other details. There seemed to be a lot of turnover of the other Primary care physicians (Internal medicine, as I recall). There was, at some point, apparently, a bankruptcy of the practice (or similar) and it "came back" with a similar (but different) name for the practice.
I will inquire about joint and several liability.

samsmith wrote:You should be able to get a very clear understanding on how overhead is calculated and how it is distributed/assigned to each doctor.
There is no "right" way. There are many different formulas. The formula / methodology that your group is using should be clearly explained. Also are all the partners / shareholders equal or are some more equal than others. At a minimum, if they cant explain how overhead works in a manner that you can understand, I would be concerned. Trying to understand this basic concept should not be a reason that a reputable group would rescind a partnership offer.
I realize there is no right way - but I just don't understand why it is so high and I am not certain if it is accurate, as I have no way to confirm. All the partners are same - but all partners don't get compensated the same and this varies by departments/earnings, etc.
Yes, I agree with you about rescinding, but just makes a bit nervous poking the bear.
climber2020 wrote:At first glance, this "opportunity" doesn't sound right. You absolutely need to have complete access to the books and have your own independent accountant look at everything. If any of the owners take offense to this, then that is not normal and you should walk away. You should also hire your own person to value the practice to make sure it is priced properly.

I suppose I can get access, but I am not sure if I am "allowed" and I have never asked explicitly. Should I put the accountant in touch with the CEO? Or would it better if I played the middle man and just relayed to CEO what the accountant asked me to get? I believe the accountant I have also does valuations. Would the accountant able to verify the said overhead applies to EVERYONE in the group? Will the practice share info on how much each partner is being paid?

When I looked into partnership, I reviewed the balance sheet, income statements (P&L) dating back several years, federal income tax statements and all schedules dating back several years, and a variety of other documents. I very quickly realized that I would be making less money as a partner after buy-in expenses (for some ridiculous amount of time like 15 years) compared to working as an employee, so I declined. No way I would have known that without all the financial statements.

Any idea crudely on what to look for?

The reality is that we are in a slowly declining industry. Practice values are dropping, and the old doctors in their 70s who are pricing their practices like it's still 1980 are having a hard time finding buyers who are willing to pay even a fraction of the asking price (common situation where I live). Don't be the last person holding the bag.

kenner wrote:Excellent input from forum members.

Since you have consulted with a local healthcare attorney, hopefully you will receive further insight from the legal standpoint, perhaps including some "local knowledge".

Best wishes.
Yes, waiting to hear back - the attorney is very thorough but expensive. Let's see what he comes back with. I doubt he would get into the nitty gritty of the expenses/overhead as the shareholder agreement I sent him is very broad and does not mention compensation formulas at all.

ks289 wrote:1. The attorney will be better positioned to give you specific advice after reviewing the partnership agreement. Your specific circumstances are likely completely different from many of the docs on this forum including my single specialty group. A healthcare attorney will have seen way more of these things including perhaps even your practice.

Agreed, but the partnership agreement does not go into specifics about compensation or overhead, etc.
2. Yes I would hire an accountant to review the practice's finances and buy in. This is the perfect way to look like a team player while doing your due diligence. Just say the accountant (or attorney) is requesting to review the books, tax returns, etc. it really should be standard practice for them anyway for any new partner.

Noted. I will ask soon, but I have not been offered this a of yet.
3. Agree with the other posters regarding having a complete understanding of overhead, sharing of revenues, compensation, etc before making any commitment. I think large (especially multispecialty) groups are notoriously complicated in their structure because providers are likely quite different in particular in utilization of overhead and generation of revenue both directly and downstream.
Good luck.

samsmith
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Re: Due diligence before becoming a shareholder in a medical practice

Post by samsmith » Sat Jul 09, 2016 10:40 pm

I doubt he would get into the nitty gritty of the expenses/overhead as the shareholder agreement I sent him is very broad and does not mention compensation formulas at all.
There has to be something in writing regarding the compensation formula. It should not be this vague. While I would want to know what the current overhead percentage is, I would really want to understand the overhead methodology being used and how it varies with overall group expenses, your production, and especially things like rent (since that seems to be being paid to an entity owned by some of the MDs).

My suggestion would be to explain to the CEO that you were explaining the practice structure to your accountant and he had some questions that you couldn't answer (which is clearly the truth) and your accountant suggested it might be more efficient if called the CEO directly. Considering your concerns, I would have your accountant ask for the info as opposed to you. Just my two cents.

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Re: Due diligence before becoming a shareholder in a medical practice

Post by climber2020 » Sun Jul 10, 2016 9:20 am

Gemini wrote: I suppose I can get access, but I am not sure if I am "allowed" and I have never asked explicitly. Should I put the accountant in touch with the CEO? Or would it better if I played the middle man and just relayed to CEO what the accountant asked me to get? I believe the accountant I have also does valuations. Would the accountant able to verify the said overhead applies to EVERYONE in the group? Will the practice share info on how much each partner is being paid?
It is standard for you to have access to all of this. No one in their right mind is going to buy a business without thoroughly looking at all the financials. And don't just rely on the accountant. Look at the numbers yourself and see what you think. If you don't yet know how to look at a balance sheet or P&L statement, you may want to read some books about that so you have a general sense of what you're looking at.

Gemini wrote: Any idea crudely on what to look for?
Large amounts of bank loans that have been around for several years would be one warning sign (especially for an established practice like yours that has been around for many decades). You should also receive information regarding compensation for each of the physicians in a given year. With those numbers and the gross revenue that the practice brought in, you can calculate overhead yourself.

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LowER
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Re: Due diligence before becoming a shareholder in a medical practice

Post by LowER » Sun Jul 10, 2016 10:03 am

goodenyou wrote:
Gemini wrote:
The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.
This should make you seriously pause, or possibly run away from the deal. Doctors should not be ignorant of finances nor have blind trust in their colleagues. It never ends well that way. In this day and age, the value of a "buy-in" to medical partnerships appear to have declining value. Succession planning in not what it used to be. I would never buy-in today to any practice. After 20 years of partnership aggravation and where medicine is and is going today, I would not "invest" in a partnership. Being mobile is a huge benefit. Be sure you understand any joint and several liability, and your obligation to buying out aging partners. Many older doctors will be jumping ship more frequently and at a younger age in the very near future. I would not want to be in the position of waiting for my future buy-out. You may be left holding the proverbial bag. Keep your eyes open and don't have nostalgia for the future.
There is some outrageously great advice from goodenyou. I couldn't agree more. Based on previous posts, that paragraph arises from decades of deep and broad experience in this exact topic.

Physicians love to eat their young, especially in this progressively worsening climate that is medicine today.

Caveat emptor.

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Re: Due diligence before becoming a shareholder in a medical practice

Post by Jim Profit » Sun Jul 10, 2016 10:57 am

LowER wrote:
goodenyou wrote:
Gemini wrote:
The latest "new" partner - I spoke with him and he has the same issues as me : no clear understanding of how compensation works, why the overhead is high and why he is getting paid little. I

Edit: I just re-read that and it makes the place look bad, but it really isn't. The setup is nice and colleagues are good people. Just not enough about the finances.
This should make you seriously pause, or possibly run away from the deal. Doctors should not be ignorant of finances nor have blind trust in their colleagues. It never ends well that way. In this day and age, the value of a "buy-in" to medical partnerships appear to have declining value. Succession planning in not what it used to be. I would never buy-in today to any practice. After 20 years of partnership aggravation and where medicine is and is going today, I would not "invest" in a partnership. Being mobile is a huge benefit. Be sure you understand any joint and several liability, and your obligation to buying out aging partners. Many older doctors will be jumping ship more frequently and at a younger age in the very near future. I would not want to be in the position of waiting for my future buy-out. You may be left holding the proverbial bag. Keep your eyes open and don't have nostalgia for the future.
There is some outrageously great advice from goodenyou. I couldn't agree more. Based on previous posts, that paragraph arises from decades of deep and broad experience in this exact topic.

Physicians love to eat their young, especially in this progressively worsening climate that is medicine today.

Caveat emptor.
This. Sounds to me like one or more of the senior partners are planning their exit strategy, and want enough high-performing new partners/shareholders "on the hook" generating revenue going forward to support their future "significant liquidity event". They already have managed to ensnare one (the most recent new partner). Flexibility to change jobs whenever you want is worth a LOT, and these golden handcuffs they want to slap on you sound like vampiric pyrite to me.

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windhog
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Re: Due diligence before becoming a shareholder in a medical practice

Post by windhog » Sun Jul 10, 2016 2:59 pm

When reading this thread I am reminded of a truism from my own medical-group-employment past: when you have seen one income distribution plan, you have seen one income distribution plan. You seem to be quite clear that the plan under which you are being paid remains a mystery. I would urge you to figure this out before you spend any time or money on the partnership question.

Based on my own experience, overhead in the context of your group can include lots of things that a CPA would find puzzling. For example, it is quite likely that one or more of the older, inner circle of docs might be compensated for management responsibilities. Since the group has made the decision to do this, this portion of their compensation is viewed as an expense and is subtracted from the total income figure before the income distribution formula is applied. While it may be true that everyone is paid according to the formula, there may be additional compensation to certain members that will not be discussed if you fail to ask the correct question.

I can’t resist another truism, which I will paraphrase without attribution. When a man with money meets a man with experience, an exchange inevitably takes place.

Hope this helps.
Paul

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Mon Jul 11, 2016 1:50 pm

Spoke with an accountant. He would need shareholder agreement, financial statements, forecasts, budgets, pension plans summary, profit plans and shareholder agreement and possible some more docs to better get an idea and review. Cost is about $5,000. Is that normal cost? $5k is a lot of money

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climber2020
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Re: Due diligence before becoming a shareholder in a medical practice

Post by climber2020 » Mon Jul 11, 2016 2:48 pm

Gemini wrote:Spoke with an accountant. He would need shareholder agreement, financial statements, forecasts, budgets, pension plans summary, profit plans and shareholder agreement and possible some more docs to better get an idea and review. Cost is about $5,000. Is that normal cost? $5k is a lot of money
The amount I was quoted was between 3 and 4 grand, so yes, that number seems about right.

What you could do is request those documents yourself, take a look at them, and see if it's even worth hiring an accountant.

ace1400
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Re: Due diligence before becoming a shareholder in a medical practice

Post by ace1400 » Mon Jul 11, 2016 2:57 pm

You may not need $5K worth of help. I think the advice you have gotten so far is generally quite correct. Namely, if they can't explain to you your compensation formula, there is a problem. If you will be taking a pay cut to be a partner, there is a problem. The only reasons to be a partner are to have some management control and increased income. It sounds like you will have neither.

Given what you have described, I would also ask specifically about any buy-outs or "deferred compensation" owed the elder partners. You don't want to spend 5 years paying a buy-in and then discover you now have to spend another 5 years for somebody's "buy-out".

This all being said, it can be extremely rewarding financially to own a practice. If the place is well managed and fairly run, you can do dramatically better than an employed position in many fields. If you aren't, do not become a partner. The monetary value of being an owner is pretty much solely a function of your increase in compensation due to ownership. No increase in compensation equals no value to ownership (or negative value, give the downsides discussed above.)

Good luck,

Ace

GreenGrowTheDollars
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Re: Due diligence before becoming a shareholder in a medical practice

Post by GreenGrowTheDollars » Mon Jul 11, 2016 4:33 pm

Gemini wrote:Spoke with an accountant. He would need shareholder agreement, financial statements, forecasts, budgets, pension plans summary, profit plans and shareholder agreement and possible some more docs to better get an idea and review. Cost is about $5,000. Is that normal cost? $5k is a lot of money
It could be cheap education, especially if it lets you see significant downside risks that you didn't understand.

I am not sure if the amount spent on review would be deductible on your taxes if you don't end up becoming a shareholder, but it might be. That could reduce the real cost.

And none of these documents should be at all hard to get if you are considering buying into the practice. It is a perfectly normal part of due diligence, and not a statement of distrust.

kmurp
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Re: Due diligence before becoming a shareholder in a medical practice

Post by kmurp » Mon Jul 11, 2016 5:00 pm

Good advice above. Is it possible that this practice just isn't all that lucrative and in order to be competitive in hiring you, they had to bring you in at more or less a partners salary?

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dratkinson
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Re: Due diligence before becoming a shareholder in a medical practice

Post by dratkinson » Tue Jul 12, 2016 6:10 pm

Can search the White Coat Investor website for "Stupid Doctor Tricks". See if he has an opinion.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

c1over8
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Re: Due diligence before becoming a shareholder in a medical practice

Post by c1over8 » Tue Jul 12, 2016 7:12 pm

Gemini wrote:
goodenyou wrote:
Gemini wrote:
How do I ask for financial statements in a politically correct way? Don't want to come off as a dbag.
If your attorney cannot explain the compensation scheme to you, then your attorney should ask from the financials from the practice's attorney.

Are you acting as a go between for your attorney and the practice? Normally your attorney would be dealing directly with the attorney for the practice.

Gemini
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Re: Due diligence before becoming a shareholder in a medical practice

Post by Gemini » Fri Jul 22, 2016 2:05 am

Are there any good, simple books that discuss how to read/assess financial documents, or how to evaluate fhe health of a business? I will be using CPA, but also want education on these matters now and moving forward for my own edification.

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