Practice ownership is a goal many physicians pursue, but solo ownership may not be for everyone. Buying into an existing medical practice can provide many of the same benefits.

Making the leap into a medical practice partnership is not a simple decision. It comes with careful consideration of your needs and goals and the potential risks involved.

We spoke with two industry experts who help doctors transition into practice ownership and partnership to hear their perspectives on the benefits, pitfalls and trends of buying into a medical practice or surgery center.

Here’s what Stuart Neiberg, partner at CohnReznick, and Josh Lantz, CRPC®, chief investment officer & financial advisor at MD Financial Advisors, had to say.

What are the benefits of buying into a medical practice or surgery center?

SN – The benefits are similar to other equity-like investments. First, there is the generally consistent cash flow that comes from making such a purchase. Second, a physician owns the equity, so there is potential for an exit in the future and the liquidity event. Further, with an ambulatory surgical center, the physician is able to take profits from technical fees, which would otherwise go to a hospital and monetize such.

JL – There are economic and non-economic benefits to buying into a medical practice and/or surgery center.

Let’s start with the non-economic benefits. Most of the time, you’re making this purchase alongside your colleagues, the people you work with daily. Many times, you’re making the purchase after others have, therefore, there’s an element of joining the club. As part of the club, you join the business conversations and decision-making process regarding the practice. This should not be underestimated. Being a part of the decision making, ultimately means you have more control over your destiny, your work environment, and your future.

The physician universe in the United States tends to be divided among private practice and W2-employee physicians. The private practice setting allows for buying ownership in the practice and sometimes surgery center shares.

From helping hundreds of doctors with their financial plans and serving both W2 and private practice doctors, I’ve noticed a strong pattern — private practice physicians stay much longer at their practices. In other words, there’s a strong correlation with those who purchase ownership in their medical practice and job tenure. Alternatively, W2-employee physicians tend to job hop every few years and have little control when it comes to their work environments.

As far as economic benefits, they tend to be substantial. It’s no wonder private equity is chasing this asset class. I work with surgeons whose surgery center shares are paying 40% or more dividends each year in addition to appreciating in value.

The wealthy own things. Here’s your opportunity as a physician to gain ownership. If you own part of a medical practice and/or surgery center shares, here’s how you benefit. If you’re not selling your shares, and they appreciate, they are appreciating without taxation. They continue to appreciate each year as you stay at the practice.

Then, upon termination, liquidity event, or retirement, you sell your shares back to the practice. The gains are taxed at long term capital gains rates which are much lower than income tax rates. For perspective, the top capital gains rate is 23.8% when you include the NIIT tax. The top federal income tax rate is currently 37.0%. That’s a difference of 13.2%, which adds up to more in your pocket.

What are the common pitfalls in analyzing if a practice or surgery is worth buying into?

SN – Physicians need to assess risks associated with revenue — payor mix, physician mix, specialty mix, etc. Typically, one would want to join a practice/ASC with diversified revenue streams as opposed to one with a particular concentration.

This will mitigate the risk of the capital put up to purchase the equity interest — if one particular revenue driver goes away, it could cause a lack of profits.

JL – Often, physicians do not do any analysis of the purchase. That’s probably the biggest pitfall. Their investment process is merely that everyone else did it, so it must be good. I suggest working with a financial advisor who will look over the documents for a second pair of eyes.

Beyond not doing any analysis, physicians commonly overlook the terms outlined in the written agreements on death, disability, termination, retirement, and liquidity events.

For example, maybe the documents outlining what happens upon death and disability say that you should receive a lump sum for your shares. However, when you dig into the details, you realize the partners have not acquired any life insurance and/or disability buy-out insurance, which would provide them enough cash to payout a lump sum in the event of your disability or premature death.

Another example is finding out whether your surgery center shares are required to be owned in your individual name. Maybe there’s a state requirement for that to happen. However, maybe the shares can be owned by a trust, which can assist in your estate planning or tax reduction strategies. If there’s expected to be a large enough payoff, you might consider an incomplete non-grantor trust for reducing state income taxes upon sale later.

What are current trends seen in buying into medical practices or surgery centers?

SN – There are benefits to ongoing cash flow as well as the prospect of liquidity events upon a sale. Several private equity firms and health systems are still very active in looking to acquire provider-service businesses.

JL – One trend is private equity having a large interest in medical practices. If you own a private practice, your group of partners could likely sell your shares for a good multiple. My suggestion is, if you’re interested in this, make sure to find the right private equity firm.

The reason being you often cannot sell your shares and leave — you sell your shares and are forced to stay to fulfill a contracted number of years. Some private equity firms are only interested in the almighty dollar, and I’ve seen what happens to the physicians who are forced to stay after selling out. The work environments begin to deteriorate and burnout happens. On the other hand, it can be lucrative and with the right private equity partner the conditions can be manageable.

Ready for partnership in a medical practice?

We spoke to Stuart and Josh about other topics surrounding partnership in a medical practice or surgery center. Learn more about preparing personally, professionally and financially for buying into a practice here.

Read more about medical practice buy-in

If you are considering practice ownership, we’re here to help! The Panacea Practice Solutions team can help you get the funding you need with same-day approvals up to $400,000 and more if needed. Click here to learn more.

Want to learn more before taking the leap? Our Resources page has articles to answer many common questions about practice buy-in and practice financing. Check out one of our curated articles:

• 5 Things Physicians Need To Know About Buying Into a Medical Practice or Surgery Center
• How Doctors Should Negotiate Partnership Agreements, According To Contract Attorneys
• 5 Reasons To Consider Becoming A Partner In A Practice

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