Selling practice for a lump sum

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Topic Author
Pursuitofquality
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Selling practice for a lump sum

Post by Pursuitofquality »

My partners and I have recently been approached about selling our practice. There are a lot of issues to consider related to work environment, being your own boss, etc. My main question to the board is figuring out how to compare retirement savings and what year the break even point happens. I'll list the current situation and future situation below and see if someone can help me make an intelligent comparison. I've tried several online calculators, but haven't found one that perfectly compares the two situations.

Current Situation: Salary $525,000 yearly plus $53,000 contributed to 401K

Future Situation: One time practice buyout of 1.75 million then Salary $400,000 yearly with 401K & HSA included in salary (so maybe $18,000 and $6500 placed in investments for taxable salary of $375,500). The 1.75 million would be taxed as capital gains (I'm thinking state + federal is roughly 28.8%) and then be placed by me in a taxable brokerage account with Vanguard.

Several considerations, but I'm trying to figure out how many years I would have to work in my current situation to come out ahead or break even assuming no changes in taxes or salary. I am in my early 40's and I'm just trying to consider every angle to this offer. Any advice would be appreciated.
MN Finance
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Re: Selling practice for a lump sum

Post by MN Finance »

I don't really think there's a breakeven as you're describing it because if you don't sell, you still retain ownership value and would eventually sell that someday. So in that sense it's always better to not sell. The main factor would be the future value of the business.

I would assume you would sell for non financial reasons since financially it's better to hold. Are you monetizing the business to retire early? Or are you making a lifestyle choice to get out of ownership role?
Topic Author
Pursuitofquality
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Re: Selling practice for a lump sum

Post by Pursuitofquality »

To clarify, this is a medical practice made up of several physicians including myself. One of the factors in consideration is the changing health care system including bundle payments and others factors that will more than likely decrease our annual income.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

MN Finance wrote:I don't really think there's a breakeven as you're describing it because if you don't sell, you still retain ownership value and would eventually sell that someday. So in that sense it's always better to not sell. The main factor would be the future value of the business.

I would assume you would sell for non financial reasons since financially it's better to hold. Are you monetizing the business to retire early? Or are you making a lifestyle choice to get out of ownership role?
The independent medical practice is becoming an endangered species due to insurance and government regulations. It is NOT a safe assumption that the current value will hold in the future because the only buyers will be hospitals/institutions which will have the leverage to lowball once it will no longer be feasible for another independent doctor to purchase the practice. This is not like real estate that holds its value and usually goes up with time.
MN Finance
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Re: Selling practice for a lump sum

Post by MN Finance »

I guess you can apply a discount rate to your investment of the sale proceeds and the business future value.

Your income is reduced by 170k per year, in exchange for that you get 1.75m less taxes. Your comparison would be the future value of the business less your lost income compared to the growth rate of the portfolio. That's 2 assumed rates you have to figure out (though I would ignore the business taxes since you'll eventually owe those either way.) In addition you have to estimate what your income decline might look like if don't sell.

If you answer these, then it's just a calculator
1. Portfolio growth rate assumption
2. Business growth rate assumption
3. Income changes from today if you don't sell
MN Finance
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Re: Selling practice for a lump sum

Post by MN Finance »

toofache32 wrote:
MN Finance wrote:I don't really think there's a breakeven as you're describing it because if you don't sell, you still retain ownership value and would eventually sell that someday. So in that sense it's always better to not sell. The main factor would be the future value of the business.

I would assume you would sell for non financial reasons since financially it's better to hold. Are you monetizing the business to retire early? Or are you making a lifestyle choice to get out of ownership role?
The independent medical practice is becoming an endangered species due to insurance and government regulations. It is NOT a safe assumption that the current value will hold in the future because the only buyers will be hospitals/institutions which will have the leverage to lowball once it will no longer be feasible for another independent doctor to purchase the practice. This is not like real estate that holds its value and usually goes up with time.
Ya, sure. It wasn't clear what business this was.
randomguy
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Re: Selling practice for a lump sum

Post by randomguy »

A lot of years. :)

At a high level you are giving up ~175k/yr for 1.75 million. That is 10 years with no taxes or returns. Now add in some taxes

1.75 million turns into 1.25 million
150k of salary is probably taxed at about 42%= 87k
28k of additional deferral will probably get taxed of around 30%: Call it 19k net

So now you have an income of 106k. That is 12 years.

Now lets add some return. One way of modeling this is assuming you need to spend another 106k/yr. So you take that amount out of the 1.25 million. If you are earning 4% , you are looking at 14.5 years. If you would be saving that added money, the lump sum does even better as you can defer most of the taxes til/if you start selling and compounding works better. Same thing if you up the return You could set up a spread sheet to see how your net worth goes with each option but there are a lot of choices with how you account for taxes and return estimates.

Without knowing the details of your financial situation, I think you have to take the deal. It is enough money that it dramatically reduces risks of things like you being unable to work or changes in the system. Or maybe you decide in 5 years that there is a nice job at another place that is paying your 600k/yr. Now there might be quality of life (i.e. you like being your own boss) reasons not to take the money but if something has a pay off a decade off in the future, I tend to discount it a bit.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

Great thoughts. You also need to know if the new salary of $400,000 is guaranteed and for how long. There was a hospital system in south Texas notorious for "hiring" new docs for a generous salary. They got them there and let them settle in for 1-2 years. Then they fired them and 24 hours later called them back to re-hire at a new lower salary. This is after the doctor has a house mortgage, kids are in school, wife has her friends, and it's tough to up and leave. There is a price you pay for no longer being the boss.
randomguy
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Re: Selling practice for a lump sum

Post by randomguy »

MN Finance wrote:I don't really think there's a breakeven as you're describing it because if you don't sell, you still retain ownership value and would eventually sell that someday. So in that sense it's always better to not sell. The main factor would be the future value of the business.

I would assume you would sell for non financial reasons since financially it's better to hold. Are you monetizing the business to retire early? Or are you making a lifestyle choice to get out of ownership role?
If the business goes up by 2%/yr in value and you could invest the money at 8%, you can come out ahead by selling now. And obviously business values can go down also.

Again I would sell and think of it as a big diversification move. Think of the practice as employer stock. Would you recommend someone hold 1.75 million in the company that they are employed by with hopes of the stock going up when they could sell and have a diversified portfolio? Granted the risk profile of medical practices are a bit different but small practices can be tough sells. Sometimes an expanding network makes nice offers. But often these small practices are tough to sell. For example how many doctors would be willing to pay 1.75 million buy in to get job? That is a lot higher than the ones I have seen but I am definitely not familiar with all the specialities.
avalpert
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Re: Selling practice for a lump sum

Post by avalpert »

MN Finance wrote:I would assume you would sell for non financial reasons since financially it's better to hold.
That's no more true for your small business or medical practice than it is for an individual stock you may hold. Unlike the market, the likelihood of its value declining over the long term is very real.

That said, the break-even analysis will be completely dependent on your assumptions for future performance of the business - you can make it tell you whatever you want.
qwertyjazz
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Re: Selling practice for a lump sum

Post by qwertyjazz »

In my opinion you are asking the wrong questions
Your model is easy enough with a spreadsheet or can get an accountant to do it for you assuming salary and taxes
But the other posters are getting at us the why of the various people involved which is both more important and difficult. The why helps you more determine the future.
Why is the other party buying. Is that reason going to keep you employed with them for a long time at that salary?
Why are they offering that amount? They have their own break even calculus and as you negotiate it is important to understand it.
Why are you thinking of selling? The money - concerns of the local market - fatigue at dealing with billing etc.
The first year salary in of itself does not matter in isolation.
So why is this deal on the table?
Will it be there in the future?
Why are they offering you 400k a year and will that be the same in the future? (Including possibility of increasing)

Tip O'Neal had a great line that all politics is local
So is all business
G.E. Box "All models are wrong, but some are useful."
Topic Author
Pursuitofquality
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Re: Selling practice for a lump sum

Post by Pursuitofquality »

There are many non-monetary factors that will be considered in this deal that I have not mentioned. Our current CPA would not be retained so I was basically looking at some rough numbers to weigh in on the financial side. I finally found several online calculators that have helped greatly. We are currently in a fact gathering process and are considering other companies as well. This will be a tough decision as several partners are strongly for it happening (they are nearing retirement) and several of the younger partners are very wary of how this will change our workplace moving forward. I'm firmly in the 2nd camp, the money looks good but that's about it. Thanks for all your thoughts.
randomguy
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Re: Selling practice for a lump sum

Post by randomguy »

toofache32 wrote:Great thoughts. You also need to know if the new salary of $400,000 is guaranteed and for how long. There was a hospital system in south Texas notorious for "hiring" new docs for a generous salary. They got them there and let them settle in for 1-2 years. Then they fired them and 24 hours later called them back to re-hire at a new lower salary. This is after the doctor has a house mortgage, kids are in school, wife has her friends, and it's tough to up and leave. There is a price you pay for no longer being the boss.
Can someone explain how this happens more than once? Seriously how do they every get a new doctor to sign up for them? You would have to be insane or desperate to deal with that type of employer. And in todays environment, I don't see how you could keep that a secret. Heck if I worked there and had that happen to me (and for some reason I kept the job), I sure as heck would make sure every new hire knew about it.
staythecourse
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Re: Selling practice for a lump sum

Post by staythecourse »

Question in regards to if you sell: How long is your gaurantee? What can you be fired for in the new contract? I would not even consider it unless you get something like a 5 or 10 yr. gaurantee in salary and the only way the can fire you is gross negligence.

IF the above can be gauranteed in contract then I would ask them to come back with a better number and then you will seriously discuss. If they offer 1.75million on their first offer the are posturing. See what their real number is.

Personally, unless everyone is looking to retire in the next couple of years and want an exit plan ASAP why even consider selling? You are doing great financially AND have total independence. Why sell? Has the landscape changed or changing in your area in reference to your referrals?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
mt
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Re: Selling practice for a lump sum

Post by mt »

I am a physician in a private practice group as well.

I don't think you can put a price on being your own boss. I personally would not sell.
ks289
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Re: Selling practice for a lump sum

Post by ks289 »

I agree with many of the other posters here.
This offer ($1.75M PER Partner) is massive. Not only will it take years to "break even" staying in private practice, but you are at risk for the value of your practice declining. Even worse, if your practice is truly worth this much and your partners are close to retirement, you may need to buy out some of these partners at an inflated value which you will be unable to recoup.
I'm in a similar situation in private practice and would strongly consider selling under your circumstances.
Good luck.
michaeljc70
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Re: Selling practice for a lump sum

Post by michaeljc70 »

Unlike some people that want to know if you will have a guaranteed job, I want to know if you are required to stay a specified number of years which can be common in these kinds of deals.

Given the rapid consolidation mentioned, I would definitely consider taking it. But I don't have enough information. Is $400k around the going rate if you went elsewhere?
j0nnyg1984
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Re: Selling practice for a lump sum

Post by j0nnyg1984 »

ks289 wrote:I agree with many of the other posters here.
This offer ($1.75M PER Partner) is massive. Not only will it take years to "break even" staying in private practice, but you are at risk for the value of your practice declining. Even worse, if your practice is truly worth this much and your partners are close to retirement, you may need to buy out some of these partners at an inflated value which you will be unable to recoup.
I'm in a similar situation in private practice and would strongly consider selling under your circumstances.
Good luck.
I don't know the specifics of their contract, but it seems highly unlikely that the TS would "need to buy out some of these partners" unless they wanted to. The retiring partner would be free to sell their share :confused
ks289
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Re: Selling practice for a lump sum

Post by ks289 »

j0nnyg1984 wrote:
ks289 wrote:I agree with many of the other posters here.
This offer ($1.75M PER Partner) is massive. Not only will it take years to "break even" staying in private practice, but you are at risk for the value of your practice declining. Even worse, if your practice is truly worth this much and your partners are close to retirement, you may need to buy out some of these partners at an inflated value which you will be unable to recoup.
I'm in a similar situation in private practice and would strongly consider selling under your circumstances.
Good luck.
I don't know the specifics of their contract, but it seems highly unlikely that the TS would "need to buy out some of these partners" unless they wanted to. The retiring partner would be free to sell their share :confused
In my group, the remaining partners are the ones buying the share of the practice from the retiring partner. There are no other owners involved.

I am unfamiliar with the alternative methods that exist for this process in other groups. Who (other than the remaining partners) would buy the share from the retiring partner, assuming the remainder of the group is intact?
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

We had a similar situation. Around 450k per year, 2mil lump sum per partner. We didn't do it.
There basically were 3 camps:
1. Partners <5 years to retirement: very pro buy-out, wanted the lump sum and didn't care about loss of autonomy.
2. Partners with 15+ years left to work: anti buy-out, the company would have earned their lump sum back from them, and they would have lost autonomy for 15+ years.
3. Partners with 5-15 years left to work were ambivalent.

For us, it came down to autonomy. Most of our calls to references yielded 2 facts:
1. If you continue to be produce revenue as before (meeting their models), they leave you alone and all is well, you can manage yourselves, and they'll take their cut but not get involved with FTEs.
2. For those groups that saw decreased revenues, the management company made them work harder/lowered FTEs, often with churn of MDs, all to make their revenue targets.

We had a stable relationship with our hospitals, had weathered the payor mix ebb and flows for the past 25 years, and were fine with the ugly reality of democratic self-rule. Plus we were 30+ equal partners, and not 5 mega-partners, so the $2mil lump sum wasn't worth it to us. YMMV.
MN Finance
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Re: Selling practice for a lump sum

Post by MN Finance »

What does your partnership say about selling ownership? I would assume you have first right of refusal and/or a predefined valuation and could buy out the partners who want to sell. That's probably the end result if you don't sell now and there is a spread in ages.
Topic Author
Pursuitofquality
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Re: Selling practice for a lump sum

Post by Pursuitofquality »

The payout would be tiered with anywhere from 50-80% upfront. Currently we're discussing five years, so if you left prior to the five years you would have to payback a portion of the buyout based on years remaining to complete the five years agreed upon. An example would be 80% for first year followed by 5% for each additional year until the five year obligation is met. Several of the partners feel like the changing medical reimbursement system will result in a lower salary moving forward anyway. My biggest fear is that several of the older partners will take upfront money and retire after one or two years. As mentioned above it will make it harder to attract quality MDs to replace them moving forward. There are lots of issues with this thing beyond money. The only part of this that's attractive is the :moneybag . This would speed up my ERE date by 10+ years.
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

IThere are lots of issues with this thing beyond money. The only part of this that's attractive is the :moneybag . This would speed up my ERE date by 10+ years.[/quote]

1. If you sell, could you tolerate worse working conditions for 5 years? And then the number of years until you hit financial independence?
2. What's your plan after hitting FI - leave medicine?
3. Get a list of the practices they bought, and talk to a bunch of the MDs that work there. Recent ones, and ones bought 5-10 years ago. I found other groups were very candid about their finances, work life, and morale now that they were just employees working for MegaCorp.

Part of the reason we didn't sell out 3 years ago is that our group has numerous inefficiencies which almost certainly would have been eliminated, speaking with other groups that were bought out by MegaCorp.

The biggest one is that, by and large, almost all our MDs like medicine and when they hit FI they switch to a position where they work 3-4 weekdays per week, 7a-3p or 7a-5p, still getting profit sharing/HSA/dependent care but obviously smaller salary. That is what I'd like to do in 8 years when I hit 50- no nights/weekends, just 3 weekday 7a-5p shifts per week, taking extra if bored/needed by group.

As this would almost certainly be eliminated in a buyout, I did not lobby for a buyout. MegaCorp wasn't going to pay full benefits for someone working 30 hours per week. Once I hit FI, I will still practice medicine because I really enjoy it - but I'll do it at a more reasonable workload, like another hobby in my 50s-60s rather than 40-60 hr drudgery. The happiest women and men in our group are the ones working 3-4 days per week.

The pro-buyout folks in our group were either 1) leaving medicine within 5 years, 2) always pessimistic about private practice surviving and the first to cry "the sky is falling" and we were all going to make radically less $$ whenever a new regulation hit (EMR, meaningful use, surgical home), or 3) really, really kept harping about the :moneybag above all else.

Good luck with the decision, and please update with the result if you don't mind!
Last edited by arsenalfan on Sat Oct 29, 2016 6:39 pm, edited 1 time in total.
Dottie57
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Re: Selling practice for a lump sum

Post by Dottie57 »

The 1.7 m. Is for you and not split by all the partners? Right?
Topic Author
Pursuitofquality
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Re: Selling practice for a lump sum

Post by Pursuitofquality »

Dottie57 wrote:The 1.7 m. Is for you and not split by all the partners? Right?
Yes this would be for each partner. It would be taxed as capital gains, so ballpark would be 1.3 m after taxes.

arsenalfan, thanks for your helpful thoughts. I love practicing medicine, but like you would enjoy it more with less overnight and weekend call. We still have three kids to get through college, but after that we've talked a lot about traveling and doing more medical mission work.
kiddoc
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Re: Selling practice for a lump sum

Post by kiddoc »

Financially, provided all goes according to plan, it should be a no-brainer: selling moves you closer to early financial independence as others have pointed out. However, consider the following questions:
1) Look at the employment contract they are offering very carefully in terms of termination/modification clauses, length of guarantee, productivity expectations, etc.
2) Who will manage staff and will you have input into what support you need? Working with inadequate staff or having admin not take action to tighten up a staff member lowering the office's productivity can be very frustrating as an employed physician.
3) Are you currently collecting the $525,000 + overhead from this health system or do you go to multiple places? What's your specialty? Do they have enough business in your specialty for you to collect ~600-700K?

No health system will keep paying you 400K if your collections + additional facility fees due to your practice are less than at least 1.8 to 2 times your salary. This accounts for overhead + profit. They may play along for 1-2 years but eventually they will find a way out or make your life miserable enough that you will want out. If they offer you a secure patient stream and a good contract, it sounds like a good deal.
"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
staythecourse
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Re: Selling practice for a lump sum

Post by staythecourse »

Pursuitofquality wrote:The payout would be tiered with anywhere from 50-80% upfront. Currently we're discussing five years, so if you left prior to the five years you would have to payback a portion of the buyout based on years remaining to complete the five years agreed upon. An example would be 80% for first year followed by 5% for each additional year until the five year obligation is met. Several of the partners feel like the changing medical reimbursement system will result in a lower salary moving forward anyway. My biggest fear is that several of the older partners will take upfront money and retire after one or two years. As mentioned above it will make it harder to attract quality MDs to replace them moving forward. There are lots of issues with this thing beyond money. The only part of this that's attractive is the :moneybag . This would speed up my ERE date by 10+ years.
Maybe I'm not bright, but this is a HUGE red flag. If they have you under contract as your employer (which means they can do ANYTHING they want as America has "at will" labor laws) AND they lose money as the longer you are around for those last 5 years they have to pay every partner more of that buy out I can GAURANTEE they will work you to the bone. I would expect seeing more patients per work hour, doing more call, doing more non paid community outreach stuff, gently forcing you to use the vendors they have contracts with, etc...

You run your own practice so you are already aware as of right now and likely for awhile (despite MACRA) medicine is a fee for service volume industry. So you know if they area paying off from their capital to acquire your practice they are going expecting to up the volume to start their profit ASAP.

I would certainly take this offer if I was FI with the initial sale and would be okay to quit if they likely do any of the above. Anything less then that I would say no.

BTW, the folks who think you can just cut back your hours when you hit your FI number and get best of both worlds are dreaming in an employee model. Your employer ONLY makes money if you work so even if you have hit your number doesn't really matter. This was one of the biggest reasons I went solo. I know when I hit my number I can literally practice forever as little or as much as I want. You can't do that unless your are independent. Just keep that in mind. Just because you have that plan doesn't mean anything unless your employer is willing to let you do it and to be honest I am not sure what motivation they would.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
hmw
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Re: Selling practice for a lump sum

Post by hmw »

If your group stays independent, do you have a plan to transition the older partners into retirement? Who is going to buy them out? I guess you will not find too many young docs who will be willing to pay that much to buy into the group.

My previous group was in private practice and was bought by a large health system a few years before I joined them. Their salaries all went up after becoming employees initially but didn't keep up over the years. The biggest reasons they sold were

1) they had a hard time with decreasing reimbursement and increasing cost. Their incomes were going down in private practice.
2) they had a hard time attracting new hires as a private practice.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

randomguy wrote:
toofache32 wrote:Great thoughts. You also need to know if the new salary of $400,000 is guaranteed and for how long. There was a hospital system in south Texas notorious for "hiring" new docs for a generous salary. They got them there and let them settle in for 1-2 years. Then they fired them and 24 hours later called them back to re-hire at a new lower salary. This is after the doctor has a house mortgage, kids are in school, wife has her friends, and it's tough to up and leave. There is a price you pay for no longer being the boss.
Can someone explain how this happens more than once? Seriously how do they every get a new doctor to sign up for them? You would have to be insane or desperate to deal with that type of employer. And in todays environment, I don't see how you could keep that a secret. Heck if I worked there and had that happen to me (and for some reason I kept the job), I sure as heck would make sure every new hire knew about it.
These were FP docs graduating from my institution which has a very large FP residency. Word quickly got around the program so none of these graduates signed up anymore. I'm not sure if other programs found out or even if they changed their ways.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

ks289 wrote:
j0nnyg1984 wrote:
ks289 wrote:I agree with many of the other posters here.
This offer ($1.75M PER Partner) is massive. Not only will it take years to "break even" staying in private practice, but you are at risk for the value of your practice declining. Even worse, if your practice is truly worth this much and your partners are close to retirement, you may need to buy out some of these partners at an inflated value which you will be unable to recoup.
I'm in a similar situation in private practice and would strongly consider selling under your circumstances.
Good luck.
I don't know the specifics of their contract, but it seems highly unlikely that the TS would "need to buy out some of these partners" unless they wanted to. The retiring partner would be free to sell their share :confused

In my group, the remaining partners are the ones buying the share of the practice from the retiring partner. There are no other owners involved.


I am unfamiliar with the alternative methods that exist for this process in other groups. Who (other than the remaining partners) would buy the share from the retiring partner, assuming the remainder of the group is intact?
Same here. When my oldest partner retires, the remaining 3 partners (including me) buy him out. Then we have a new doc buy in to replace him. The remaining docs get to choose who their new partner will be, NOT the retiring doc.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

kiddoc wrote: 2) Who will manage staff and will you have input into what support you need? Working with inadequate staff or having admin not take action to tighten up a staff member lowering the office's productivity can be very frustrating as an employed physician.
This is a good point. I am a doc with 2 jobs. One is private practice and the other is in a hospital system. There is definitely a difference in the staff attitudes and work ethic. This is mainly because in the hospital I am not the "boss" and they have no accountability to me.
staythecourse
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Re: Selling practice for a lump sum

Post by staythecourse »

toofache32 wrote:
kiddoc wrote: 2) Who will manage staff and will you have input into what support you need? Working with inadequate staff or having admin not take action to tighten up a staff member lowering the office's productivity can be very frustrating as an employed physician.
This is a good point. I am a doc with 2 jobs. One is private practice and the other is in a hospital system. There is definitely a difference in the staff attitudes and work ethic. This is mainly because in the hospital I am not the "boss" and they have no accountability to me.
Worse is that one usually ends up on some production model which aligns your productivity to the efficiency of the system. The issue is those helping you are paid per 40 hour work week despite them seeing 1 patient or 100 so there is no real motivation to be more efficient to help you make money by working hard for YOU to make more money via increased production.

Not having control in ANY aspect is always bad. Same in business.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
samsmith
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Re: Selling practice for a lump sum

Post by samsmith »

I don't think you have said what type of medical practice/specialty this is? Might affect my thinking.
Also, what happens after 5 years? I assume at that time you will have "earned" your entire buyout. If so, what are the rules on leaving. Is there a local non-compete? I would expect you could move away and restart in practice, but could you just re-open a private practice across the street?
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Pursuitofquality
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Re: Selling practice for a lump sum

Post by Pursuitofquality »

samsmith wrote:I don't think you have said what type of medical practice/specialty this is? Might affect my thinking.
Also, what happens after 5 years? I assume at that time you will have "earned" your entire buyout. If so, what are the rules on leaving. Is there a local non-compete? I would expect you could move away and restart in practice, but could you just re-open a private practice across the street?
Anesthesiology. We would have to sign a local non-compete. If one left before the end of the 5 year contract you would forfeit a percentage of the buyout. We have school age kids, so we would not leave until they finish high school unless absolutely necessary (my youngest is a 4th grader, so 8 more years). We would renegotiate our salary at the end of the five year contract. This deal is only attractive monetarily, all other aspects of losing ownership of our practice are negative in my mind.
toofache32
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Re: Selling practice for a lump sum

Post by toofache32 »

Pursuitofquality wrote:
samsmith wrote:I don't think you have said what type of medical practice/specialty this is? Might affect my thinking.
Also, what happens after 5 years? I assume at that time you will have "earned" your entire buyout. If so, what are the rules on leaving. Is there a local non-compete? I would expect you could move away and restart in practice, but could you just re-open a private practice across the street?
Anesthesiology. We would have to sign a local non-compete. If one left before the end of the 5 year contract you would forfeit a percentage of the buyout. We have school age kids, so we would not leave until they finish high school unless absolutely necessary (my youngest is a 4th grader, so 8 more years). We would renegotiate our salary at the end of the five year contract. This deal is only attractive monetarily, all other aspects of losing ownership of our practice are negative in my mind.
And there it is. With a non-compete and with you no longer in charge, guess who holds all the leverage. They will get their money back by offering you $250,000 or you can move to another town (non-compete).
mac808
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Re: Selling practice for a lump sum

Post by mac808 »

Pursuitofquality wrote:
samsmith wrote:I don't think you have said what type of medical practice/specialty this is? Might affect my thinking.
Also, what happens after 5 years? I assume at that time you will have "earned" your entire buyout. If so, what are the rules on leaving. Is there a local non-compete? I would expect you could move away and restart in practice, but could you just re-open a private practice across the street?
Anesthesiology. We would have to sign a local non-compete. If one left before the end of the 5 year contract you would forfeit a percentage of the buyout. We have school age kids, so we would not leave until they finish high school unless absolutely necessary (my youngest is a 4th grader, so 8 more years). We would renegotiate our salary at the end of the five year contract. This deal is only attractive monetarily, all other aspects of losing ownership of our practice are negative in my mind.
Anesthesia is one of the few specialties where buyouts can make financial sense due to the fact that national anesthesia management companies can negotiate much higher reimbursement rates than individual practices. If the AMC is getting 30% more per unit than you are currently (and from what I've seen they do get much more than most independent MDAs would believe) - plus they are able to roll up their profit to the public markets for a 20x multiple - bingo, that's the synergy. Mednax (parent co of American Anesthesia, a large AMC) is publicly traded so you can review some of the financials in their filings. The incentives in a deal like this are very different from a local hospital buying up other types of local practices.
denovo
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Re: Selling practice for a lump sum

Post by denovo »

Pursuitofquality wrote:To clarify, this is a medical practice made up of several physicians including myself. One of the factors in consideration is the changing health care system including bundle payments and others factors that will more than likely decrease our annual income.
Ask yourself this. Do you think the person buying your practice is stupid? Probably not, so bundle payments and etc are probably on his mind also when he's making the offer.
"Don't trust everything you read on the Internet"- Abraham Lincoln
staythecourse
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Re: Selling practice for a lump sum

Post by staythecourse »

toofache32 wrote:
Pursuitofquality wrote:
samsmith wrote:I don't think you have said what type of medical practice/specialty this is? Might affect my thinking.
Also, what happens after 5 years? I assume at that time you will have "earned" your entire buyout. If so, what are the rules on leaving. Is there a local non-compete? I would expect you could move away and restart in practice, but could you just re-open a private practice across the street?
Anesthesiology. We would have to sign a local non-compete. If one left before the end of the 5 year contract you would forfeit a percentage of the buyout. We have school age kids, so we would not leave until they finish high school unless absolutely necessary (my youngest is a 4th grader, so 8 more years). We would renegotiate our salary at the end of the five year contract. This deal is only attractive monetarily, all other aspects of losing ownership of our practice are negative in my mind.
And there it is. With a non-compete and with you no longer in charge, guess who holds all the leverage. They will get their money back by offering you $250,000 or you can move to another town (non-compete).
Agreed.

Makes me wonder how many times this happens before folks figure this out.

As mentioned I would do this in a heartbeat if you hit your "number" with the initial upfront money. If not don't. There is NO amount of money for one's independence.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
LarryAllen
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Re: Selling practice for a lump sum

Post by LarryAllen »

Congrats on your success.

I may be in a different line of work so YMMV but I know my practice changed considerably in my early/mid 40's. I now make more than double what I did 3 years ago. So, on the one hand, someone else being the boss is good but on other you might not have tapped into your real income potential. Maybe try to put a variable factor into your compensation if you go with the deal.

Also, be sure to consider malpractice tail insurance exit protection if you decide to leave. In my business it's extremely hard to get individual tail coverage as the insurance sticks with the business not the individual professional... but the liability sticks with the individual to the best of my understanding. So someone else would be in control of decisions on the insurance if you change your mind and decide to retire in a few years. You might talk to a different malpractice carrier/broker about options in your business. Perhaps too a lawyer specializing in exit strategies and risk management. Know your options!

Good luck to you!
Count of Notre Dame
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Re: Selling practice for a lump sum

Post by Count of Notre Dame »

arsenalfan wrote:I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
Were these offers multiples of gross income or some other metric?
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PhysicianOnFIRE
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Re: Selling practice for a lump sum

Post by PhysicianOnFIRE »

Another anesthesiologist here. I think I would take the deal if I were in your shoes. You mentioned it moving up your early retirement date, and it would do that, indeed. Think of it as getting paid $1.75M bonus plus $2M salary over the next 5 years. That's $750k per year with favorable taxation since nearly half is at your capital gains rate. After 5 years, you're free to do what you want, including retire or take a different job (outside of the non-compete area).

I used to think I wouldn't retire until my kids were done with school. Then I realized I could afford to retire much sooner than that. Now, I plan to be done before they hit middle school and we'll have some family adventures which will likely include some "roadschooling" / "worldschooling."

:beer
-PoF
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

Count of Notre Dame wrote:
arsenalfan wrote:I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
Were these offers multiples of gross income or some other metric?
EBITA multiple. I hear great stories from friends at INOVA Fairfax & Atlanta of the early days of Mednax/American Anesthesiology of XYZ buyouts, where it was 15x EBITA. Coupled with the pyramid partnerships (ie top 5 took 80% of buyout, etc etc) and it was very lucrative for the senior partners. For us, even the 10x EBITA was meh, spread across 30 equal partners. One of the few curses of being in a 100% democractic group. On the upside, easy to hire!
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gasdoc
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Re: Selling practice for a lump sum

Post by gasdoc »

I practice in one of these mega-groups, after initially being in a private practice group. My income has increased slightly, but maybe it would have outside of the mega-group? The downside is that the corporate people seem to be incompetent in terms of really understanding what we do. They recruit without looking at those intangibles like "fit" that we used to spend so much time on when we owned the group. Whereas we really got to know candidates we wanted to hire, the mega-group seems to just fill the vacancy, seemingly without even checking references. We have had over 40 docs come and go in the last 8 years, in a practice that had very little turnover prior to the "takeover." We use nurse anesthetists, and the quality of the anesthetists that we medically supervise has fallen off dramatically. The management group seems to be pushing out the experienced anesthetists in favor of newer anesthetists that come in at a lower pay scale. So, whereas the MD's seem to have stayed the same financially, the CRNA's seem to be taking a hit (and are running short staffed, which makes our job more difficult.) I wouldn't sell unless you are comfortable moving or retiring after your contracted time is up.

gasdoc
Count of Notre Dame
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Re: Selling practice for a lump sum

Post by Count of Notre Dame »

arsenalfan wrote:
Count of Notre Dame wrote:
arsenalfan wrote:I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
Were these offers multiples of gross income or some other metric?
EBITA multiple. I hear great stories from friends at INOVA Fairfax & Atlanta of the early days of Mednax/American Anesthesiology of XYZ buyouts, where it was 15x EBITA. Coupled with the pyramid partnerships (ie top 5 took 80% of buyout, etc etc) and it was very lucrative for the senior partners. For us, even the 10x EBITA was meh, spread across 30 equal partners. One of the few curses of being in a 100% democractic group. On the upside, easy to hire!
Have you ever heard of any buyouts without a lump sum? To me, unless I'm buying fixed assets, what I'm really paying for is the referral base and the physicians to come work for me. Why not structure the deal to pay them guaranteed salaries at higher amounts than what they currently make, in lieu of a one-time payout?
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

Count of Notre Dame wrote:
arsenalfan wrote:
Count of Notre Dame wrote:
arsenalfan wrote:I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
Were these offers multiples of gross income or some other metric?
EBITA multiple. I hear great stories from friends at INOVA Fairfax & Atlanta of the early days of Mednax/American Anesthesiology of XYZ buyouts, where it was 15x EBITA. Coupled with the pyramid partnerships (ie top 5 took 80% of buyout, etc etc) and it was very lucrative for the senior partners. For us, even the 10x EBITA was meh, spread across 30 equal partners. One of the few curses of being in a 100% democractic group. On the upside, easy to hire!
Have you ever heard of any buyouts without a lump sum? To me, unless I'm buying fixed assets, what I'm really paying for is the referral base and the physicians to come work for me. Why not structure the deal to pay them guaranteed salaries at higher amounts than what they currently make, in lieu of a one-time payout?
Nope. They're buying ebita - anesthesiologists have no referral base, they are purely a service. I guess the surgeon is the customer /referral base in private practice, but it depends on where you practice. Usually groups are stable and have covered the same hospital(s) and ASCd for many years/decades, but have universal gripes of not liking negotiating the business side of medicine.

Why would I sell my practice without a lump sum benefit? Usually practices sell because of this lure, along with not having to negotiate with hospitals/insurers/do internal HR and handle billing. And many are pyramid partnerships so the big 5 partners get $$$ - usually they're senior and punching out soon anyhow.

Conversely, my understanding is VC buys doc firms to squeeze the lemon. Pure biz model, No way I'm paying you more...a lump sum upfront to entice the senior/voting partners to sell, earn it back over 5 years, then work the machine. Upfront I Replace HR, centralize billing and contracts, and go for efficiencies. Bye bye part timers, loyalty to anyone not efficient, or any fealty to anything but the bottom line. Not all bad - maybe some legacy deadwood is jettisoned. I know one group that implemented a re-evaluation at 65. And hey If you maintain fiscal goals you're untouched mostly by the corporation, but if you are short, look out - "running lean" with "six sigma ninjas" asking why you cancelled the case, can't go 4:1 crna supervision, and have less MD FTEs and take more call. Caveat emptor.
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gasdoc
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Re: Selling practice for a lump sum

Post by gasdoc »

arsenalfan wrote:
Count of Notre Dame wrote:
arsenalfan wrote:
Count of Notre Dame wrote:
arsenalfan wrote:I forgot...
SHOP AROUND! If you're for sale, see who else is buying.

We were solicited out of nowhere, causing much internal discussion.

Then we called 3-4 national firms, announcing we were considering a buyout.

Presto, 2 more offers, one of which had an 10x earnings multiple - I think the others were 7x and 8x.
Were these offers multiples of gross income or some other metric?
EBITA multiple. I hear great stories from friends at INOVA Fairfax & Atlanta of the early days of Mednax/American Anesthesiology of XYZ buyouts, where it was 15x EBITA. Coupled with the pyramid partnerships (ie top 5 took 80% of buyout, etc etc) and it was very lucrative for the senior partners. For us, even the 10x EBITA was meh, spread across 30 equal partners. One of the few curses of being in a 100% democractic group. On the upside, easy to hire!
Have you ever heard of any buyouts without a lump sum? To me, unless I'm buying fixed assets, what I'm really paying for is the referral base and the physicians to come work for me. Why not structure the deal to pay them guaranteed salaries at higher amounts than what they currently make, in lieu of a one-time payout?
Nope. They're buying ebita - anesthesiologists have no referral base, they are purely a service. I guess the surgeon is the customer /referral base in private practice, but it depends on where you practice.

Why would I sell my practice without a lump sum benefit? Usually practices sell because of this lure, along with not having to negotiator with hospitals/insurers/do internal HR and billing. And they're pyramid partnerships so the big partners get $$$ - usually they're senior and punching out soon anyhow.

Conversely, my understanding is VC buys doc firms to squeeze the lemon. No way I'm paying you more...a lump sum upfront to entice the senior/voting partners to sell, earn it back over 5 years, then work the machine. Upfront I Replace HR, centralize billing and contracts, and go for efficiencies. Bye bye part timers, loyalty to anyone, or any fealty to anything but the bottom line. Not all bad - maybe some legacy deadwood is jettisoned. And hey If you maintain fiscal goals you're untouched mostly by the corporation, but if you are short, look out - "running lean" with "six sigma ninjas" asking why you cancelled the case, can't go 4:1 crna supervision, and have less MD FTEs and take more call. Caveat emptor.
Arsenalfan, are you one of the forty plus anesthesiologists that have come through my place in the last eight years? :oops:

gasdoc
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

Ha! Nope, just after heavily researching anesthesia group buy-outs 3-4 years ago and calling friends in 5-6 big groups across the US, the story is pretty much the same everywhere. They were all American Anesthesiology buyouts FWIW.

We did pass on a few MDs who weren't a good "fit" for our group - perhaps they circulated through your NAPA/AA/TeamHealth/MegaCorp Anesthesia USA facilities? I am sad to hear they don't focus on recruiting as much - that makes for a less collegial atmosphere I suspect. There are some weird anesthesiologists out there, most you can identify from their CVs where they jump practices annually. I appreciate your candid posting - makes me very glad we didn't sell out - our buyout offers came at a vulnerable time for our group, the only dip in our AR for the past 35 years. Now we're back humming along.

To the OP, don't get me wrong - I have a lot of friends from residency who went on to get AA buyouts and are doing great because they were high in the tiered partner scheme and hence got beaucoup bucks - my impression is AA doesn't buy financially dubious practices, and they've continued to meet/exceed fiscal targets, so they've been left with relative autonomy. I think this is your group?
arsenalfan
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Re: Selling practice for a lump sum

Post by arsenalfan »

Pursuitofquality wrote:
Dottie57 wrote:The 1.7 m. Is for you and not split by all the partners? Right?
Yes this would be for each partner. It would be taxed as capital gains, so ballpark would be 1.3 m after taxes.

arsenalfan, thanks for your helpful thoughts. I love practicing medicine, but like you would enjoy it more with less overnight and weekend call. We still have three kids to get through college, but after that we've talked a lot about traveling and doing more medical mission work.
Y
Not to be Debbie downer but you are at risk of working same or more in buyout. They are buying future revenue stream and want that as stable as possible. Many of the above posts are off the mark - they WANT stability in the MD labor pool and want you cranking same/more RVUs. They're counting on earning more per RVU with their better negotiated contracts, and also churning new employees (see gasdoc) and centralizing admin (bye bye current CPA, legal, hr and billing setup). That bonus December check that zeroes out the accounts? Bye bye it will go to them (granted maybe it's not so big for you perhaps).

http://www.anesthesiallc.com/careers/18 ... difference
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gasdoc
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Re: Selling practice for a lump sum

Post by gasdoc »

arsenalfan wrote:
Pursuitofquality wrote:
Dottie57 wrote:The 1.7 m. Is for you and not split by all the partners? Right?
Yes this would be for each partner. It would be taxed as capital gains, so ballpark would be 1.3 m after taxes.

arsenalfan, thanks for your helpful thoughts. I love practicing medicine, but like you would enjoy it more with less overnight and weekend call. We still have three kids to get through college, but after that we've talked a lot about traveling and doing more medical mission work.
Y
Not to be Debbie downer but you are at risk of working same or more in buyout. They are buying future revenue stream and want that as stable as possible. Many of the above posts are off the mark - they WANT stability in the MD labor pool and want you cranking same/more RVUs. They're counting on earning more per RVU with their better negotiated contracts, and also churning new employees (see gasdoc) and centralizing admin (bye bye current CPA, legal, hr and billing setup). That bonus December check that zeroes out the accounts? Bye bye it will go to them (granted maybe it's not so big for you perhaps).

http://www.anesthesiallc.com/careers/18 ... difference
Arsenalfan,
Your post just reminded me of another huge change when we went from our own group to the mega-corp. All of the billing and recruiting and tax help we had used tried to make us happy to keep their contracts with us. They treated us with respect, were kind, worked around our schedule, were helpful when we needed additional information, etc. When we had credentialing paperwork or contract papers to fill out, they came to us with little "sign here" flags, pre-filled out. After the change, the mega-corp people lost all incentives to care about us and our well-being. They treated the hospital administration the way our people used to treat us, because the hospital became the contract holder to them. The new people would not work around our schedules- when they were in town, we had to drop what we were doing, meet with them between patients, or miss them completely. All those papers we used to hate to have to sign, well- now we had to fill them out completely with the same information over and over. Like I said in an earlier post- don't sell unless you are prepared to move/retire in the next five years.

gasdoc
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