5 Things Physicians Need To Know About Buying Into a Medical Practice or Surgery Center

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on facebook
Share on twitter
Share on linkedin
Share on email
practice buy-in

5 Things Physicians Need To Know About Buying Into a Medical Practice or Surgery Center

Key takeaways: 

  • Becoming a partner is a great way to become a co-owner in an existing, thriving practice.
  • Before signing the agreement, review the buy-in offer, know the practice value, learn the income distribution structure, understand exit plan options, and know your payment options.
  • A partner buy-in loan can help you obtain the funds needed to become a partner in your practice.

Having a stake in a practice can be incredibly fulfilling and beneficial to a physician. There are different ways to do this, like buying 100% of an existing practice or starting a new practice from scratch, but a third option can allow for a smoother transition for both you and the practice — becoming a partner. 

But what is a partner buy-in? Buying into an existing practice allows you to purchase a piece of an existing, thriving medical practice or ambulatory surgery center, which can benefit you through the practices’ income in addition to your salary. A buy-in also allows you to have a say in how a practice is run and focus on high-quality care for your patients, without the headaches that come with starting a practice from scratch or becoming the sole owner of an existing practice.

Once you have decided buy-in is the right step for you, it is time to understand what that will look like. Here are five questions you should be able to answer before pursuing a buy-in.

How is the buy-in offer structured?

When preparing to buy into a practice, it is important to understand the structure of the offer. This requires thorough document review. An experienced legal team can help you review and understand each aspect of the deal. There are many firms that solely focus on healthcare and purchases agreements, such as Dental & Medical Counsel, which we would recommend. 

Your attorney should examine the existing bylaws of the practice and the shareholders’ agreements. They should determine if all shareholders and/or partners have the same terms or if they are different for each partner. 

Together with your team of professionals , evaluate the following:

  • Financial Information: Income tax returns and financial statements help determine if the practice is growing and will be beneficial to buy into.
  • Assessment of Leverage: Before negotiating the deal, it is important to understand how much bargaining power you have. If you are already an associate at the practice you are buying into, consider how dynamics could change if the deal falls through.
  • Financial Return Forecasts: Understand what the expected earnings of the buy-in could yield in the future. 
  • Extent of the Offered Interest: Is the offer for equal ownership or a minority interest? Minority interests may prevent you from having decision making power.
  • Partner Personalities: Consider how the personalities of existing partner(s) mesh with yours and if there will be difficult dynamics between partners.
  • Legal Control: Will the senior partner maintain legal control? If not, when will you earn legal control?
  • Elements of Value: Evaluate both tangible and intangible assets.

How much is the medical practice or ambulatory surgery center worth?

Before you buy into a medical practice or surgery center, you want to have an understanding of the value of the practice. Aspects that can affect the buy-in price include hard assets, real estate, accounts receivable, book value, cash flow and goodwill.

With your CPA or a financial advisory firm, perform due diligence of the practice’s income tax returns and accountant-prepared financial statements like balance sheets, profit and loss statements, depreciation statements, accounts receivable summary, and a breakdown of physician productivity for the past year.

Be sure you understand how the valuation was found. There are many possible methods: comparable sales, discounted cash flow, internal rate of return, and payback period. Your advisor will use this information to find the value of the business, then use this valuation to evaluate the buy-in price. 

If the CPA finds existing debt on the balance sheet, make sure to ask if you will become liable and responsible for the existing debt. The practice is responsible for the debt, so it is highly likely you will inherit the debt also. This can help you lower the price to buy-in. 

It is also important to note that ambulatory surgery centers can have different ownership models than the medical practices they may be associated with. For instance some ASC’s are corporate or hospital owned while others are physician owned with different structure and distribution models.

How does the practice distribute income?

Understanding how the buy-in will benefit you financially is a large part of the decision to become a partner. Knowing how a medical practice or surgery center distributes its income is an element of that. Though there are many different compensation structures, the three most common ones are equal allocation, productivity and a hybrid of the two. 

Equal Allocation: The equal allocation model is the simplest compensation type. In this model, each partner has an equal ownership stake in the practice, and therefore, receives equal amounts of the practice’s income and revenue. This makes each owner equally responsible for the practice’s expenses.

This model is best for circumstances where all partners have equal responsibility and workloads, but it can cause strain if some partners feel they are contributing more than others.

Productivity Model: Based on the productivity model, income is distributed strictly based on a doctor’s productivity. This can be determined from RVUs, patient billings, billing collections, or a combination of the three.

The productivity model is often used to incentivize the hard work of younger physicians with the goal of growing the practice. This model can cause problems when partners see the practice as “every person for themselves,” creating an atmosphere of competition rather than teamwork.

Hybrid Model: One of the most common income distribution models is a hybrid between equal allocation and productivity. In this model, a portion of the earnings are distributed equally between partners, while another portion is based on productivity. 

This model allows all partners to receive a set income while encouraging productivity and hard work to make the practice more successful.

There is no right or wrong method for distributing income among partners. The best model for your situation is entirely based on your individual circumstances, but it is important to have a clearly defined structure in writing. Having a confusing structure or one that is not written can cause conflict later on if partners feel unfairly compensated based on their understanding of the deal. 

What happens if I decide to leave the practice or surgery center?

When buying a portion of a practice, it is important to think long term, including what will happen if/when you decide to leave the practice or surgery center. You should know under what circumstances your interest will be repurchased and when you are required to participate in future purchases.

Be aware of the equity repurchase structure including whether the departing partner’s stock will be bought at a set price, at a value determined upon buy-out by a previously-agreed-upon method, or if a partner is entitled to a buy-out at all. Deferred compensation is another aspect to consider. This is a payout to recognize the departing party’s interest in the accounts receivable and goodwill. 

You should also consider the protections for the on-going group and how they would affect you should you decide to leave. Aspects you should take note of include:

  • Percentage of Gross Income: the maximum amount of deferred compensation that can be paid out in one quarter
  • Competitive Practice: reduces or eliminates the payout should the departing partner open a competing practice. Some practices include non-compete clauses in their buy-out structure, preventing the partner from opening a new practice in a certain geographical space or within a certain time frame. 
  • Reduction for Short Notice: a reduction in deferred compensation should the partner not give ample time before departing — six months or more before departure is recommended
  • “Bad Boy” Clause: a clause that eliminates a partner’s compensation should they be terminated or suspended based on professional misconduct or a criminal offense based on moral turpitude
  • Post-termination Liabilities: determines whether a former partner should be responsible for liabilities that occurred or began before their exit

All of these should be identified and considered before entering into the agreement.

How should I pay for the buy-in? 

Before becoming a partner at a practice, it is important to know how you will pay for the buy-in. Almost all practices are incorporated, so buying-into a practice means buying stock in the corporation. 

Pay through your paycheck. It is common for buy-ins to be paid through your paycheck. This means you can expect a certain amount to come out of your paycheck over a set amount of time and can be beneficial to you because you will be paying in cheaper, pre-tax dollars. 

It may take time. You may experience a delay before being issued the stock you are investing in. There are two main types of vesting you may experience: 

  • Time vesting: You will be granted the stock after you invest for a certain amount of time. A common structure of this is to receive some stock after one year, and your full stock after four. 
  • Productivity vesting: In productivity vesting, a partner is granted stock once they reach a certain milestone or complete a certain task.

Consider a lump sum. As you prepare to buy-in to a practice, you may want to consider providing a lump sum up front to kickstart the purchase. Even if you don’t have the cash on hand, partner buy-in loans can be a great option for an immediate investment.

Before you go…

Taking the leap into practice ownership or partnership can be exciting but daunting. A partner buy-in is a great option for those wanting greater say in the practice they are employed at. With these tips, we hope you can pursue your goals with confidence. 

As you prepare for this transition, we encourage you to consult professionals who have an understanding of the process and can advise you on the unique circumstances of your deal. If you need help building your team to pursue buy-in, visit our Build Your Team page to get connected with experts.

If finances are a roadblock on the way to your partnership, we at Panacea Financial are here to help. Our partner buy-in loan can provide up to $400,000. And if you need more than that, we can help there too! Chat, email, or submit your info to start the process.

Share this article:

Share on facebook
Share on twitter
Share on linkedin
Share on email

Share this article:

Share on facebook
Share on twitter
Share on linkedin
Share on email