The Under Utilized Buy in- Buy Out Option

When the older  TV doctor Marcus Welby MD, took on the younger, dashing Steve Kiley MD as a partner, beside being a rating coup, he probably orchestrated  the first televised  buy in to a medical  practice  ( sorry readers born after 1970, you may have to Google them). Many physician medical groups are set up to potentially allow other physicians  to become partners  (or buy in) to  the medical group if both sides are amenable, over a period of time. This affords the older physician to ability have a balanced  lifestyle, a  contributor to the generation of revenue for the practice, a built in colleague, someone to share overhead expenses, and the right person who can pay them to own a portion, and then buy them out upon retirement.

There are  many established, well seasoned  therapists in private practice that  do not  have an exit strategy, built in or otherwise in their practice model, and an outright sale to a third party may be difficult to bring to fruition. Likewise, many younger therapists are on the fence about taking the plunge into private practice because of economic concerns, the competitive market place and the lack of access to start up funds to build or buy an existing practice outright.  The buy in may be a viable, workable option for both parties. It is never too late for any private practice to do some restructuring and offer a buy in option ( either for existing staff or a therapist new to the practice).  It is never too early for any therapist seeking employment in a private practice to inquire whether a buy in option does, or potentially could, exist.

Structuring the Buy In – There are many ways the buy in can be structured. The basics typically include multifaceted mutual decisions, including  what the buy in price is, which requires a practice valuation by the primary owner. Ownership  price should include, at a minimum, the value of the practices’ furniture, fixtures and equipment ( FFE) allocable to the equity interest being purchased by the new owner – for example, 30% of the FFE if the new owner is purchasing a 30% interest in the practice.   The buy in price will be a percentage of the total value, usually divided equally among all of the partners. Thus, if there are already two partners, you would be the third partner, and the total practice value would be divided by 3 to determine your buy-in amount.  Group practices have different cultures that influence how the ownership is divided. The price should also account for the new owner’s pro-rata interest in the practice’s accounts receivable (AR). The practice can either require the new equity owner to purchase the value of the AR allocable to the equity interest it is purchasing or allocate the existing collectible accounts receivable directly to the existing owners, payable to them over a pre determined period of  time ( ie.12-24 months).

Realistically it almost always  make the most sense for the  buy-in  to occur over several years. If  the buy-in is structured over 3 years, every year a  third of the total buy-in price is paid until. you become an equal partner with the others in the group. Additionally, buy-ins spanning several years are often structured as deductions from your annual salary. So if the buy-in payment is $50,000 for each year, instead of paying cash, your salary would be reduced by $50,000 each year.

If you are paying the amount of the buy-in during a period of time, the agreement should specify the interest rate, frequency, and duration of your payments.

As an equity shareholder you will also be responsible for buying out the share of any partner leaving the group. The buy-out structure is equally important, and often times what is called a  force buy-sell. If someone leaves for any reason (retirement, death, moving ) the remaining shareholder(s) is obligated to buy that party out. The buy-out is typically paid over time and, for tax purposes, usually part of it is structured as a combination  of stock  and deferred compensation.

In addition to consulting with the right attorney and accountant, it is equally important that the therapist on both side of the equation are a good fit. A brilliantly crafted contract will be meaningless if there is not first a sound compatibility on practice standards,and  ideas for growth and development between the parties.

We now offer a user friendly formularized excel spread sheet to help determine how to structure the buy in schedule so that it is doable for both parties

Excel Spread Sheet Formula for Practice Buy in Option


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