Tips on medical practice partnership buy-in?

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Topic Author
financial.freedom
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Tips on medical practice partnership buy-in?

Post by financial.freedom »

I'm up for partner and buying into the group practice, which is structured as C Corp. The buy-in is for professional services only (no equipment, no real estate, etc). Since the buy-in is pretty high (lower to mid six figures), the partners want to make sure it is done in a way that they do not get hit with a large tax burden.

1. For medical practice buy-in (C corp / S corp), do partners pay capital gains tax?

2. Any tips from BH community for how to best navigate the buy-in?

3. Any good resources online that I can learn more?

Thank you in advance!
obgraham
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Re: Tips on medical practice partnership buy-in?

Post by obgraham »

Speaking only for my own case: Our CCorp distributed everything at year end. So Cap Gain did not apply. The building was separate, and there it did.

But curious -- if you are not buying a share of equipment or building, what are you getting for that big buyin? Equal share of the A/R? IMHO "goodwill" is a myth, but quite profitable for senior partners.

You need to spell out what happens when you leave, either voluntarily or involuntarily.
bsteiner
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Re: Tips on medical practice partnership buy-in?

Post by bsteiner »

If you buy shares from the other shareholders, they'll have capital gain if the selling price of the shares is more than their basis.

If you contribute money to the corporation and the corporation issues new shares to you, thus diluting the others, they won't have capital gain.

Shouldn't the lawyers on both sides consider the tax consequences in deciding how to structure the transaction?
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

obgraham wrote: Tue Dec 10, 2019 4:25 pm Speaking only for my own case: Our CCorp distributed everything at year end. So Cap Gain did not apply. The building was separate, and there it did.

But curious -- if you are not buying a share of equipment or building, what are you getting for that big buyin? Equal share of the A/R? IMHO "goodwill" is a myth, but quite profitable for senior partners.

You need to spell out what happens when you leave, either voluntarily or involuntarily.
Yes, equal share of the accounts receivable (AR) for professional services.

In the contract it states all AR will be split equally among partners -- does that make it less of a myth?

Good point about spelling out what happens when I leave, voluntarily or otherwise.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

bsteiner wrote: Tue Dec 10, 2019 4:49 pm If you buy shares from the other shareholders, they'll have capital gain if the selling price of the shares is more than their basis.

If you contribute money to the corporation and the corporation issues new shares to you, thus diluting the others, they won't have capital gain.

Shouldn't the lawyers on both sides consider the tax consequences in deciding how to structure the transaction?
Which lawyer? I don't have a lawyer. They don't have a lawyer.

You think I should lawyer up for a partner buy-in?

They checked with the CPA and partners pay capital gains tax. Sounds like my buy-in would be pre tax dollars, deducted from each paycheck. And I would receive nearly equal split of AR from day one.
123
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Re: Tips on medical practice partnership buy-in?

Post by 123 »

Who owns the real estate? Or is it leased from a 3rd party? If the real estate is owned by the other partners (or even a few of them) I'd wonder why I'm not getting any of that.

What do you get if the entity dissolves? They could shut down the current entity and start a new one elsewhere with some of the same doctors. Where would that leave you?
The closest helping hand is at the end of your own arm.
123
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Re: Tips on medical practice partnership buy-in?

Post by 123 »

financial.freedom wrote: Tue Dec 10, 2019 4:54 pm ...You think I should lawyer up for a partner buy-in?..
Only if you care about getting anything for the money you're giving them. If you don't care just go ahead.
The closest helping hand is at the end of your own arm.
OnTrack2020
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Re: Tips on medical practice partnership buy-in?

Post by OnTrack2020 »

No equipment. No real estate. Does the A/R include an equal share of bad debt? You should have your own accountant/lawyer go through everything.
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Artsdoctor
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Re: Tips on medical practice partnership buy-in?

Post by Artsdoctor »

financial.freedom wrote: Tue Dec 10, 2019 4:54 pm
bsteiner wrote: Tue Dec 10, 2019 4:49 pm If you buy shares from the other shareholders, they'll have capital gain if the selling price of the shares is more than their basis.

If you contribute money to the corporation and the corporation issues new shares to you, thus diluting the others, they won't have capital gain.

Shouldn't the lawyers on both sides consider the tax consequences in deciding how to structure the transaction?
Which lawyer? I don't have a lawyer. They don't have a lawyer.

You think I should lawyer up for a partner buy-in?

They checked with the CPA and partners pay capital gains tax. Sounds like my buy-in would be pre tax dollars, deducted from each paycheck. And I would receive nearly equal split of AR from day one.
A long time ago, I learned that a partnership agreement does more than spell out the terms of agreement in forming a partnership; that's the easy part. The real value in a partnership agreement is the terms of dissolution.

Do yourself a favor and hire a contract lawyer. For one thing, you'll be able to flesh out how favorable the terms are. For another, you can't go wrong having a contract lawyer that you may refer back to in the future.

Be careful with buy-ins. There are buy-ins that essentially are "hidden" in that your paychecks will be less. You're unlikely to feel the full brunt of the buy-in that way. There are other buy-ins where they want the money out front, which can sometimes require that you take out a loan. I've never been a fan of the latter.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

123 wrote: Tue Dec 10, 2019 4:56 pm Who owns the real estate? Or is it leased from a 3rd party? If the real estate is owned by the other partners (or even a few of them) I'd wonder why I'm not getting any of that.

What do you get if the entity dissolves? They could shut down the current entity and start a new one elsewhere with some of the same doctors. Where would that leave you?
RE is leased from a third party for the outpatient centers.

The other contracts are with hospitals.

I suppose they could shut down the current entity and start anew, but I've never heard of that happening for specialty medical group in this area. Have you seen that occur before? What's does occur though, is selling the practice to a management group, that's fairly common in medicine. I'm told in that scenario I'd receive equal pay for my portion of selling the practice.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

123 wrote: Tue Dec 10, 2019 4:57 pm
financial.freedom wrote: Tue Dec 10, 2019 4:54 pm ...You think I should lawyer up for a partner buy-in?..
Only if you care about getting anything for the money you're giving them. If you don't care just go ahead.
None of the other partners hired a lawyer, seems like an unnecessary expense and may be viewed negatively. Are you in medicine?
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

OnTrack2020 wrote: Tue Dec 10, 2019 5:13 pm No equipment. No real estate. Does the A/R include an equal share of bad debt? You should have your own accountant/lawyer go through everything.
There's no debt that I'm aware of -- this is for professional service contracts. The imaging centers and hospitals are owned by other companies. We receive the reading fees for AR.
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Artsdoctor
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Re: Tips on medical practice partnership buy-in?

Post by Artsdoctor »

^ In reference to being concerned about the partners not liking you hiring a lawyer, perhaps. But that doesn't mean you shouldn't do it.

I joined my partner nearly 25 years ago and the agreement was on one piece of paper. No lawyers. Everything worked out just fine. When we brought on a third partner, we hired a contract lawyer because I started seeing break-ups in other practices which were pretty brutal. When we brought a fourth partner, the contract was a little more complicated just because there would now be 4 of us. That person turned out to have some serious psychological problems and we needed to terminate him. Fortunately, it went as smoothly as possible because the terms of the agreement were so explicit on how to leave. My senior partner had been slightly miffed when we hired a lawyer for the third partner but could not have been more relieved when the fourth partner left "by the book."

For what it's worth, just because you hire a contract lawyer to look over the contract, the partners don't have to know about it. Again, bringing people together is not the hard thing. It's the terms of dissolution that you really want to understand.
GoFish
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Re: Tips on medical practice partnership buy-in?

Post by GoFish »

I was a partner (i.e. a large shareholder) for many years in a C corp for professional (non-medical) services. It was similar in that the Corp owned no real estate and very little was on the balance sheet for fixed assets. Our value was A/R, WIP, plus the present value of discounted future profits. We did not book “goodwill” directly, but the estimates for future cash flows reflected contractual backlog and a subjective assessment of the health of the business.

We had an ESOP, so used a professional to value our enterprise every year. Both buy in and sell out were based on that yearly valuation. When you bought in, the Corp issued new shares and everyone else was diluted. No tax impacts on present shareholders resulted from buy-ins.

We weren’t clever enough to use pre-tax dollars for buy-in. I’m not sure I’m clever enough now, either.

The Corp made a market for the shares through a buyback agreement executed for every lot of stocks we sold to partners. Someday that liability is going to bite someone in the behind, I suppose, but it seemed like a good idea at the time.

I liked our setup then, and still like it. It was pretty clean and easy to understand. It got us through buying out the first 2 generations of major owners, and the company is still chugging along. The ESOP created an avenue to both avoid taxes on some of our current profits, as well as open up section 1042 “rollover” for delaying recognizing gains when shares were sold.

The real estate was owned in separate LLC’s by a subset of the Corp shareholders. There was room for mischief in rental rates, but we didn’t get carried away. But I would keep an eye on that in your situation.
michaeljc70
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Re: Tips on medical practice partnership buy-in?

Post by michaeljc70 »

financial.freedom wrote: Tue Dec 10, 2019 5:23 pm
123 wrote: Tue Dec 10, 2019 4:57 pm
financial.freedom wrote: Tue Dec 10, 2019 4:54 pm ...You think I should lawyer up for a partner buy-in?..
Only if you care about getting anything for the money you're giving them. If you don't care just go ahead.
None of the other partners hired a lawyer, seems like an unnecessary expense and may be viewed negatively. Are you in medicine?
Who wrote the contract?
BillWalters
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Re: Tips on medical practice partnership buy-in?

Post by BillWalters »

C Corp? Yikes.
Wricha
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Re: Tips on medical practice partnership buy-in?

Post by Wricha »

Might consider answering the following for better feedback
How big of a group is it? (Number of docs)
Any conversations about selling the practice?
How many years of sweat equity have you already put in and at what cost?
What is the value of the A/R per provider vs buy in?
None of the providers own real estate or equipment correct?
How likely do you think other young physicians would make a similar buy in?
Restrictive covenants? Now or after partnership?
Can you continue as employed physician?
Ancillaries associated with the practice? Lab, imaging and procedures?
Competing practices? Owed or independent?
Dominant practice in community?

Yes, by all means lawyer up that should be a given. In today’s world it would have to one very attractive group to buy into and at that price it better be the only show in town with a speciality that has the dominant hospital’s attention.
toofache32
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Re: Tips on medical practice partnership buy-in?

Post by toofache32 »

This setup sounds strange to me.
I have only bought into a practice once, but many of my former residents ask me to review their offers so I get a sense of what's out there.

What are you actually buying here? Let me give you my example. As an associate, I was paid 35% of what I collected (not produced, but COLLECTED. Production is an artificial number that has nothing to do with how much is in the bank). My practice ran at 50% overhead on average. This means that for every $100 I collected for the practice, $50 went to paying the overhead (staff salaries, supplies, rent, etc). 35% went to me. The remaining 15% went to the partners/owners. So for me to buy in as a partner, I was "buying" that 15%. So that additional 15% per year had to be GREATER than the loan amount per year for it to make sense for me to buy in.
jacoavlu
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Re: Tips on medical practice partnership buy-in?

Post by jacoavlu »

So you’re going from an employed radiologist to a shareholder.

How does your compensation change after becoming a shareholder? Same salary? Paid dividends? Added benefits? Now you’re responsible for overhead?

Do you know how the income is divided among shareholders? Who is in charge? Is it a democratic group? Does buying in get you a seat at the table?

How about the most recent new shareholder? Was their buy in same as yours?

Is anyone leaving? Is there a buy sell agreement? What does someone retiring get? What if several people retire and there are not new hires buying in?

Also, what happens if you decline?

So many questions that I would wonder if I were in your shoes. Maybe it’s a good deal. Maybe not.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Artsdoctor wrote: Tue Dec 10, 2019 5:18 pm
financial.freedom wrote: Tue Dec 10, 2019 4:54 pm
bsteiner wrote: Tue Dec 10, 2019 4:49 pm If you buy shares from the other shareholders, they'll have capital gain if the selling price of the shares is more than their basis.

If you contribute money to the corporation and the corporation issues new shares to you, thus diluting the others, they won't have capital gain.

Shouldn't the lawyers on both sides consider the tax consequences in deciding how to structure the transaction?
Which lawyer? I don't have a lawyer. They don't have a lawyer.

You think I should lawyer up for a partner buy-in?

They checked with the CPA and partners pay capital gains tax. Sounds like my buy-in would be pre tax dollars, deducted from each paycheck. And I would receive nearly equal split of AR from day one.
A long time ago, I learned that a partnership agreement does more than spell out the terms of agreement in forming a partnership; that's the easy part. The real value in a partnership agreement is the terms of dissolution.

Do yourself a favor and hire a contract lawyer. For one thing, you'll be able to flesh out how favorable the terms are. For another, you can't go wrong having a contract lawyer that you may refer back to in the future.

Be careful with buy-ins. There are buy-ins that essentially are "hidden" in that your paychecks will be less. You're unlikely to feel the full brunt of the buy-in that way. There are other buy-ins where they want the money out front, which can sometimes require that you take out a loan. I've never been a fan of the latter.
Thank you for the reply.

I'll look into getting a contract lawyer for terms of dissolution.

Yes,would mean each paycheck is less. So buy in is pretax from each paycheck until completed. But share of AR is equal from day one.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

michaeljc70 wrote: Tue Dec 10, 2019 6:28 pm
financial.freedom wrote: Tue Dec 10, 2019 5:23 pm
123 wrote: Tue Dec 10, 2019 4:57 pm
financial.freedom wrote: Tue Dec 10, 2019 4:54 pm ...You think I should lawyer up for a partner buy-in?..
Only if you care about getting anything for the money you're giving them. If you don't care just go ahead.
None of the other partners hired a lawyer, seems like an unnecessary expense and may be viewed negatively. Are you in medicine?
Who wrote the contract?
About 30 years ago when the practice first formed, there were lawyers who wrote the contracts. None of the current partners were a part of the group 30 years ago. To my knowledge, none hired a lawyer when they made partner. I can do it, but would have to be low key about it. As mentioned above, some partners might get "miffed" once they know lawyers are involved. It's been a pretty laid back group over the years and that just changes the general sentiment, would have to be approached the right way.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

BillWalters wrote: Tue Dec 10, 2019 6:31 pm C Corp? Yikes.
C Corp is bad?
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Wricha wrote: Tue Dec 10, 2019 7:20 pm Might consider answering the following for better feedback
How big of a group is it? (Number of docs)
5 partners, 3 associates, several part timers (non-partnership)

Any conversations about selling the practice?
Yes, possibly in a few years and then retaining reading rights

How many years of sweat equity have you already put in and at what cost?
Associate year 1: 275k
Associate year 2: 300k
Associate year 3: 325k


What is the value of the A/R per provider vs buy in?
I'm told partners make about 500k. Buy in is 200-300k.

None of the providers own real estate or equipment correct?
Correct

How likely do you think other young physicians would make a similar buy in?
Moderately likely

Restrictive covenants? Now or after partnership?
I think there is a noncompete, otherwise Not that I know of, can find out more.

Can you continue as employed physician?
Not sure, I think it's expected that I'll buy in.
But since partners might sell in a few years, they'd probably be happy for me to stay employed.


Ancillaries associated with the practice? Lab, imaging and procedures?
None.
Competing practices? Owed or independent?
A few local competitors.
Dominant practice in community?
One of the few growing in the community.
I wouldn't say dominant. Pretty rare for groups to have partnership in this area.
Most are part of large managed companies now.



Yes, by all means lawyer up that should be a given. In today’s world it would have to one very attractive group to buy into and at that price it better be the only show in town with a speciality that has the dominant hospital’s attention.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

toofache32 wrote: Tue Dec 10, 2019 11:24 pm This setup sounds strange to me.
I have only bought into a practice once, but many of my former residents ask me to review their offers so I get a sense of what's out there.

What are you actually buying here? Let me give you my example. As an associate, I was paid 35% of what I collected (not produced, but COLLECTED. Production is an artificial number that has nothing to do with how much is in the bank). My practice ran at 50% overhead on average. This means that for every $100 I collected for the practice, $50 went to paying the overhead (staff salaries, supplies, rent, etc). 35% went to me. The remaining 15% went to the partners/owners. So for me to buy in as a partner, I was "buying" that 15%. So that additional 15% per year had to be GREATER than the loan amount per year for it to make sense for me to buy in.
Guess I'm buying the same. There's more collected from my productivity than what I'm paid as an associate. Not sure how it's strange.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

jacoavlu wrote: Tue Dec 10, 2019 11:45 pm So you’re going from an employed radiologist to a shareholder.

How does your compensation change after becoming a shareholder? Same salary? Paid dividends? Added benefits? Now you’re responsible for overhead?
Posted above.
Do you know how the income is divided among shareholders? Who is in charge? Is it a democratic group? Does buying in get you a seat at the table?
Yes, equally. Yes. Yes. Yes.
How about the most recent new shareholder? Was their buy in same as yours?
Lower amount. But the group had fewer contracts then.
Is anyone leaving? Is there a buy sell agreement? What does someone retiring get? What if several people retire and there are not new hires buying in?
No. Hopefully yes, they're putting that together for me to review right now.
Also, what happens if you decline?
I think they'd be flexible for me to remain employed, non-shareholder.
So many questions that I would wonder if I were in your shoes. Maybe it’s a good deal. Maybe not.
jacoavlu
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Re: Tips on medical practice partnership buy-in?

Post by jacoavlu »

Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
Spooky
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Re: Tips on medical practice partnership buy-in?

Post by Spooky »

Please get a lawyer, and ask a lot of "what if" questions. I find it hard to believe the practice does not have a lawyer.

So if you buy in, and you all get an equal share of AR, what if one partner decides to work half-time? Or not take call?

Does the practice have an accountant who can give you a projected income based on what your current production is?

Even so, I know someone who was given a projected income of $450k based on the income generated the previous year, and ended up making <$300k, due to a partner who cut back his hours significantly and quit taking call. She generated the same amount of income, and actually took more call.
Radman
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Re: Tips on medical practice partnership buy-in?

Post by Radman »

I'm also a radiologist who recently made partner in a group structured as a corporation. We also only bill the professional fee.

The partner capital gains question is weird. Don't they already know this? What happened the last time they hired a new partner? Has the group structure or buy in process changed? Is there a new president or business manager? Regardless, that is a CPA/Lawyer question depending on the specifics of the situation.

That buy in seems really high to me. 200k-300k with no technical fee? How the heck are they valuing that? They should be able to explain the high valuation, more than "we have more contracts now." Are you in a really desirable location? Are you buying other partner's shares? Are you buying newly issued shares? What happens when you or another partner leaves? This should all be explained in a buy sell agreement. However, even though the buy in is high, if you otherwise like the group and the location (which I presume you do), it still makes good business sense to spend that much to gain 175k in yearly compensation.

Just as a comparison, my partnership tract was 2 years, buy in 5k to purchase my shares. When I leave the group, the corporation buys back my shares for 5k. The process and share value is fixed in the contract. All corporate profits are disbursed equally to partners so that the corporation does not pay corporate tax.

My bigger concern would be that the partners vote for a corporate sale shortly after you buy in. Now you will be making much less and have less vacation. Additionally the sell could possibly be structured in a way that disadvantages you. I know of one recently where partners had to have been partners for at least 5 years to receive the full "payout." Not saying they would do that to you, but I also bet the contract doesn't say they can't.
Nowizard
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Re: Tips on medical practice partnership buy-in?

Post by Nowizard »

The posted comment suggests that you do not have in-depth knowledge about an investment that will be larger than any ever made by most people. That, alone, says to read about experiences of others here but obtain an attorney consult as well.

Tim
toofache32
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Re: Tips on medical practice partnership buy-in?

Post by toofache32 »

financial.freedom wrote: Tue Dec 10, 2019 11:46 pm
Artsdoctor wrote: Tue Dec 10, 2019 5:18 pm
financial.freedom wrote: Tue Dec 10, 2019 4:54 pm
bsteiner wrote: Tue Dec 10, 2019 4:49 pm If you buy shares from the other shareholders, they'll have capital gain if the selling price of the shares is more than their basis.

If you contribute money to the corporation and the corporation issues new shares to you, thus diluting the others, they won't have capital gain.

Shouldn't the lawyers on both sides consider the tax consequences in deciding how to structure the transaction?
Which lawyer? I don't have a lawyer. They don't have a lawyer.

You think I should lawyer up for a partner buy-in?

They checked with the CPA and partners pay capital gains tax. Sounds like my buy-in would be pre tax dollars, deducted from each paycheck. And I would receive nearly equal split of AR from day one.
A long time ago, I learned that a partnership agreement does more than spell out the terms of agreement in forming a partnership; that's the easy part. The real value in a partnership agreement is the terms of dissolution.

Do yourself a favor and hire a contract lawyer. For one thing, you'll be able to flesh out how favorable the terms are. For another, you can't go wrong having a contract lawyer that you may refer back to in the future.

Be careful with buy-ins. There are buy-ins that essentially are "hidden" in that your paychecks will be less. You're unlikely to feel the full brunt of the buy-in that way. There are other buy-ins where they want the money out front, which can sometimes require that you take out a loan. I've never been a fan of the latter.
Thank you for the reply.

I'll look into getting a contract lawyer for terms of dissolution.

Yes,would mean each paycheck is less. So buy in is pretax from each paycheck until completed. But share of AR is equal from day one.
Physician here. I'm amazed at how many physicians don't hire lawyers for contract review. It's like they think they are smart enough to figure it out. To me, this falls under the category of "you don't know what you don't know." I had my contract reviewed and found several things to change I would never have thought of.
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climber2020
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Re: Tips on medical practice partnership buy-in?

Post by climber2020 »

You may want to post your question on Sermo as well. Lots of knowledgeable doctors there on this subject.

When I considered partnership years back, several posters there pointed out things I had never even considered.
Fictionme
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Re: Tips on medical practice partnership buy-in?

Post by Fictionme »

How are you paying for this in pre-tax dollars? How would the IRS view this? I only ask because this came up with a colleague. He was halfway through a 600K buy in using pretax dollars then the group had a new accountant take over who said using pretax dollars would put you at risk for tax fraud if audit occurred. Additionally the partners at the time paid income tax at their marginal rate on the money when they should have treated it as a capitol gain. Going forward all the buyins were done using post tax dollars. All the more reason to have accountant take a look.

Also the point about selling the corporation when you become partner is important. Are you all equal partners with equal voting rights? Would the pay out be equal in the case of selling?

You shouldn’t not ask the question because you might not like the answer. People develop all sorts of justifications in their head for not sharing buy out proceeds when they are looking at multi-million dollar deals.
Wricha
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Re: Tips on medical practice partnership buy-in?

Post by Wricha »

financial.freedom wrote: Wed Dec 11, 2019 12:03 am
Wricha wrote: Tue Dec 10, 2019 7:20 pm Might consider answering the following for better feedback
How big of a group is it? (Number of docs)
5 partners, 3 associates, several part timers (non-partnership)

Any conversations about selling the practice?
Yes, possibly in a few years and then retaining reading rights

How many years of sweat equity have you already put in and at what cost?
Associate year 1: 275k
Associate year 2: 300k
Associate year 3: 325k


What is the value of the A/R per provider vs buy in?
I'm told partners make about 500k. Buy in is 200-300k.

None of the providers own real estate or equipment correct?
Correct

How likely do you think other young physicians would make a similar buy in?
Moderately likely

Restrictive covenants? Now or after partnership?
I think there is a noncompete, otherwise Not that I know of, can find out more.

Can you continue as employed physician?
Not sure, I think it's expected that I'll buy in.
But since partners might sell in a few years, they'd probably be happy for me to stay employed.


Ancillaries associated with the practice? Lab, imaging and procedures?
None.
Competing practices? Owed or independent?
A few local competitors.
Dominant practice in community?
One of the few growing in the community.
I wouldn't say dominant. Pretty rare for groups to have partnership in this area.
Most are part of large managed companies now.



Yes, by all means lawyer up that should be a given. In today’s world it would have to one very attractive group to buy into and at that price it better be the only show in town with a speciality that has the dominant hospital’s attention.
It appears you are dealing with a “Mom & Pop type situation. The buy in reminds me of a time of when the senior partner just made up the rules as they went on. You are correct that getting a lawyer will probably alienate you from the group. Since the contract was written a long time ago it is probably going to require significant rewrite before your lawyer will find it agreeable. Then the group will need to hire a lawyer to see if the rewrite is acceptable to the practice. This is going to cost everyone money and most certainly bring up issues that have been festering for years. What to do?
1. Hold your nose and hope for the best.
2. Hire the lawyer to make sure there is nothing “Big” that could cost you significant money or violates current laws/regulations. (Don’t tell group about lawyer) for your ears only. If nothing major shows up, hold your nose and hope for the best.
3. See if the group is willing to engage in a meaningful conversation about upgrading their contracts to be more reflective of the current medical environment and the economic realities of today. This is probably going to be a non starter but that’s where you and the group needs to be. Otherwise you are in the backseat of a car that Thelma and Louise are driving asking where are we going?
The only upside to partnership beyond getting a full share is selling the practice. How much is a small radiology practice worth? This is only place I can see you getting your money back. If you can get a significant buyout I would bet a significant lifestyle change is also on the horizon. Tough choice if you like people and the job.
aquaman
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Re: Tips on medical practice partnership buy-in?

Post by aquaman »

financial.freedom wrote: Wed Dec 11, 2019 12:03 am Might consider answering the following for better feedback
How big of a group is it? (Number of docs)
5 partners, 3 associates, several part timers (non-partnership)

Any conversations about selling the practice?
Yes, possibly in a few years and then retaining reading rights

How many years of sweat equity have you already put in and at what cost?
Associate year 1: 275k
Associate year 2: 300k
Associate year 3: 325k


What is the value of the A/R per provider vs buy in?
I'm told partners make about 500k. Buy in is 200-300k.
To confirm, you are currently salaried and receive a W2 at the end of the year, correct? Does the practice also cover a portion of your health insurance premiums, retirement account contributions, malpractice insurance, etc?

Once you buy in, you'll start paying double the FICA tax (as a salaried employee, the practice pays the employer share). How would the benefits be structured?
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

[deleted, duplicate, sorry.]
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

jacoavlu wrote: Wed Dec 11, 2019 12:49 am Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
jacoavlu
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Re: Tips on medical practice partnership buy-in?

Post by jacoavlu »

financial.freedom wrote: Wed Dec 11, 2019 9:22 pm
jacoavlu wrote: Wed Dec 11, 2019 12:49 am Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
No, you didn’t. So where does your $200k per year of extra income come from? Are current shareholders taking a pay decrease as you move up to shareholder? Something’s gotta give.
Radman
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Re: Tips on medical practice partnership buy-in?

Post by Radman »

jacoavlu wrote: Wed Dec 11, 2019 10:01 pm [quote=financial.freedom post_id=4885410 time=<a href="tel:1576117369">1576117369</a> user_id=57032]
[quote=jacoavlu post_id=4884027 time=<a href="tel:1576043355">1576043355</a> user_id=41960]
Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
[/quote]

No, you didn’t. So where does your $200k per year of extra income come from? Are current shareholders taking a pay decrease as you move up to shareholder? Something’s gotta give.
[/quote]

This is common practice in the field. He currently has been making much less than he bills for the corporation. He’s now reached the end of his partner term and if he buys in he will be a full partner equally splitting the corporate revenue. So yes, the other partners will make a little less (basically partner income was being subsidized by the associates).
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Spooky wrote: Wed Dec 11, 2019 12:54 am Please get a lawyer, and ask a lot of "what if" questions. I find it hard to believe the practice does not have a lawyer.

So if you buy in, and you all get an equal share of AR, what if one partner decides to work half-time? Or not take call?

Does the practice have an accountant who can give you a projected income based on what your current production is?

Even so, I know someone who was given a projected income of $450k based on the income generated the previous year, and ended up making <$300k, due to a partner who cut back his hours significantly and quit taking call. She generated the same amount of income, and actually took more call.
good advice, thanks!
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Radman wrote: Wed Dec 11, 2019 10:25 pm
jacoavlu wrote: Wed Dec 11, 2019 10:01 pm [quote=financial.freedom post_id=4885410 time=<a href="tel:1576117369">1576117369</a> user_id=57032]
[quote=jacoavlu post_id=4884027 time=<a href="tel:1576043355">1576043355</a> user_id=41960]
Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
No, you didn’t. So where does your $200k per year of extra income come from? Are current shareholders taking a pay decrease as you move up to shareholder? Something’s gotta give.
[/quote]
Yes, they take a pay decrease in the short term. But the group is expanding in the long term (more imaging centers etc.).

This is common practice in the field. He currently has been making much less than he bills for the corporation. He’s now reached the end of his partner term and if he buys in he will be a full partner equally splitting the corporate revenue. So yes, the other partners will make a little less (basically partner income was being subsidized by the associates).
[/quote]

Exactly! :sharebeer
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

jacoavlu wrote: Wed Dec 11, 2019 10:01 pm
financial.freedom wrote: Wed Dec 11, 2019 9:22 pm
jacoavlu wrote: Wed Dec 11, 2019 12:49 am Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
No, you didn’t. So where does your $200k per year of extra income come from? Are current shareholders taking a pay decrease as you move up to shareholder? Something’s gotta give.
Exactly! :sharebeer
Theseus
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Re: Tips on medical practice partnership buy-in?

Post by Theseus »

Spooky wrote: Wed Dec 11, 2019 12:54 am
So if you buy in, and you all get an equal share of AR, what if one partner decides to work half-time? Or not take call?
Not a physician here. But a close friend of mine is. He merged his practice with another practice. And one of the doctors from that practice is barely putting in half the time (or producing 50%) and enjoying the full share. He is so fed up with it.

Another friend left his practice for similar reason as it was so mismanaged that it was impacting his bottom line.

This thread is a classic example of how doctors being some of the smartest people make stupid business mistakes. I would never consider signing a piece of paper - especially a partnership agreement - without having a lawyer reviewed and recommended protections.
jacoavlu
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Re: Tips on medical practice partnership buy-in?

Post by jacoavlu »

Radman wrote: Wed Dec 11, 2019 10:25 pm

This is common practice in the field. He currently has been making much less than he bills for the corporation. He’s now reached the end of his partner term and if he buys in he will be a full partner equally splitting the corporate revenue. So yes, the other partners will make a little less (basically partner income was being subsidized by the associates).
I understand. I'm a private practice radiologist as well. My point is, don't expect income to stay at $500k per partner when the denominator changes from 5 to 6.
Last edited by jacoavlu on Wed Dec 11, 2019 10:39 pm, edited 1 time in total.
Theseus
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Re: Tips on medical practice partnership buy-in?

Post by Theseus »

financial.freedom wrote: Wed Dec 11, 2019 10:30 pm
jacoavlu wrote: Wed Dec 11, 2019 10:01 pm
financial.freedom wrote: Wed Dec 11, 2019 9:22 pm
jacoavlu wrote: Wed Dec 11, 2019 12:49 am Spending 200-300k to make 200k more per year sounds like a great deal. But that math doesn’t seem to make sense. Revenue almost certainly doesn’t change as you move from employed to shareholder.
I didn't say revenue changed, did I?
No, you didn’t. So where does your $200k per year of extra income come from? Are current shareholders taking a pay decrease as you move up to shareholder? Something’s gotta give.
Exactly! :sharebeer
and perhaps they going to seat back and relax and share the profits from your hard work?
jacoavlu
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Re: Tips on medical practice partnership buy-in?

Post by jacoavlu »

financial.freedom wrote: Wed Dec 11, 2019 10:30 pm
Yes, they take a pay decrease in the short term. But the group is expanding in the long term (more imaging centers etc.).

if you like the job and the practice is stable and you (and family?) like the location then it's probably the right move. I'm taking a wild guess you're closer to the coasts, or south. Private equity deals are common. The one thing I'd want to be clear of was getting an equal share of any such buyout.
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Radman wrote: Wed Dec 11, 2019 3:34 am I'm also a radiologist who recently made partner in a group structured as a corporation. We also only bill the professional fee.

The partner capital gains question is weird. Don't they already know this? What happened the last time they hired a new partner? Has the group structure or buy in process changed? Is there a new president or business manager? Regardless, that is a CPA/Lawyer question depending on the specifics of the situation.

That buy in seems really high to me. 200k-300k with no technical fee? How the heck are they valuing that? I'll double check. They should be able to explain the high valuation, more than "we have more contracts now." Are you in a really desirable location? YES Are you buying other partner's shares? YES for pot 1 Are you buying newly issued shares? Yes for pot 2 What happens when you or another partner leaves? This should all be explained in a buy sell agreement. However, even though the buy in is high, if you otherwise like the group and the location (which I presume you do), it still makes good business sense to spend that much to gain 175k in yearly compensation.

Just as a comparison, my partnership tract was 2 years, buy in 5k to purchase my shares. When I leave the group, the corporation buys back my shares for 5k. The process and share value is fixed in the contract. All corporate profits are disbursed equally to partners so that the corporation does not pay corporate tax.

My bigger concern would be that the partners vote for a corporate sale shortly after you buy in. Now you will be making much less and have less vacation. Additionally the sell could possibly be structured in a way that disadvantages you. I know of one recently where partners had to have been partners for at least 5 years to receive the full "payout." Not saying they would do that to you, but I also bet the contract doesn't say they can't.
Great advice, will look for that when I receive the agreement.

Thank you for the reply!
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

climber2020 wrote: Wed Dec 11, 2019 10:40 am You may want to post your question on Sermo as well. Lots of knowledgeable doctors there on this subject.

When I considered partnership years back, several posters there pointed out things I had never even considered.
Thanks, will check it out!
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financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

Fictionme wrote: Wed Dec 11, 2019 12:20 pm How are you paying for this in pre-tax dollars? How would the IRS view this? I only ask because this came up with a colleague. He was halfway through a 600K buy in using pretax dollars then the group had a new accountant take over who said using pretax dollars would put you at risk for tax fraud if audit occurred. Additionally the partners at the time paid income tax at their marginal rate on the money when they should have treated it as a capitol gain. Going forward all the buyins were done using post tax dollars. All the more reason to have accountant take a look.

Also the point about selling the corporation when you become partner is important. Are you all equal partners with equal voting rights? Would the pay out be equal in the case of selling?

You shouldn’t not ask the question because you might not like the answer. People develop all sorts of justifications in their head for not sharing buy out proceeds when they are looking at multi-million dollar deals.
Eek, not sure. Has anyone else on BH bought in with pre tax dollars? I'll ask my CPA
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

[/quote]
It appears you are dealing with a “Mom & Pop type situation. The buy in reminds me of a time of when the senior partner just made up the rules as they went on. You are correct that getting a lawyer will probably alienate you from the group. Since the contract was written a long time ago it is probably going to require significant rewrite before your lawyer will find it agreeable. Then the group will need to hire a lawyer to see if the rewrite is acceptable to the practice. This is going to cost everyone money and most certainly bring up issues that have been festering for years. What to do?
1. Hold your nose and hope for the best.
2. Hire the lawyer to make sure there is nothing “Big” that could cost you significant money or violates current laws/regulations. (Don’t tell group about lawyer) for your ears only. If nothing major shows up, hold your nose and hope for the best.
3. See if the group is willing to engage in a meaningful conversation about upgrading their contracts to be more reflective of the current medical environment and the economic realities of today. This is probably going to be a non starter but that’s where you and the group needs to be. Otherwise you are in the backseat of a car that Thelma and Louise are driving asking where are we going?
The only upside to partnership beyond getting a full share is selling the practice. How much is a small radiology practice worth? This is only place I can see you getting your money back. If you can get a significant buyout I would bet a significant lifestyle change is also on the horizon. Tough choice if you like people and the job.
[/quote]

Right on point -- mom and pop small operation but expanding. Currently only 4 partners, I would be number 5. Group has been around over 30 years. Their CPA is mom and pop. Contracts still have cobwebs from 30 years ago.

I like the idea of a lawyer "ghost writer" to review things in the background and look for anything BIG.

Group IS willing to upgrade/update contracts, especially for the expansion.

They could sell out now, but in expansion phase usually not wise until more centers/contracts are obtained.
Topic Author
financial.freedom
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Re: Tips on medical practice partnership buy-in?

Post by financial.freedom »

aquaman wrote: Wed Dec 11, 2019 4:15 pm
financial.freedom wrote: Wed Dec 11, 2019 12:03 am Might consider answering the following for better feedback
How big of a group is it? (Number of docs)
5 partners, 3 associates, several part timers (non-partnership)

Any conversations about selling the practice?
Yes, possibly in a few years and then retaining reading rights

How many years of sweat equity have you already put in and at what cost?
Associate year 1: 275k
Associate year 2: 300k
Associate year 3: 325k


What is the value of the A/R per provider vs buy in?
I'm told partners make about 500k. Buy in is 200-300k.
To confirm, you are currently salaried and receive a W2 at the end of the year, correct? Does the practice also cover a portion of your health insurance premiums, retirement account contributions, malpractice insurance, etc?
Yes. W2 with benefits. I don't use the benefits, use my spouse.

Once you buy in, you'll start paying double the FICA tax (as a salaried employee, the practice pays the employer share). How would the benefits be structured?
Not sure, I don't use benefits. But there is profit sharing 401k so will max that out.
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