Working in Private practice as an associate. Owner contemplating on selling practice to private equity firm. Owner to retain 30% ownership with cash buy-in. Plan is equity firm to build practice, add additional podiatry practices to consolidate and package it up to sell to bigger hospital or Multi-specialty group in about 5 years. Projected to double investment. Owner is offering 50% of 30% ownership. Any thoughts or experience dealing with this?
Offered Equity in Private Practice
- Thread starter Podnasty
- Start date
- Joined
- Feb 2, 2007
- Messages
- 4,959
- Reaction score
- 6,001
You are the associate now? Do you ever wonder why you weren't offered buy-in awhile ago? He is probably just trying to lock you in because without your productivity, his sale value to PE plummets - unless there are other productive associates. If you buy-in to his plan (literally), then you are basically stuck there... yet he controls the price/sale of your collections/efforts/shares and the PE controls your working conditions. I don't see that as a good thing. If it were as good as it sounds and sure to double, he would just keep the whole 30%.
It's your situation, though... you know the office(s) and the doc better than anybody.
Basically, if you have 10-15% of his practice value in liquid assets or credit line (aka the 30-50% he offers you from the 30% he is keeping), you could just start your own practice, his sale would likely flop or get slashed in value, and many patients/refers will probably follow you or you can just build up anew? GL
It's your situation, though... you know the office(s) and the doc better than anybody.
Basically, if you have 10-15% of his practice value in liquid assets or credit line (aka the 30-50% he offers you from the 30% he is keeping), you could just start your own practice, his sale would likely flop or get slashed in value, and many patients/refers will probably follow you or you can just build up anew? GL
- Joined
- Apr 21, 2008
- Messages
- 3,486
- Reaction score
- 4,755
What is the compensation model once PE owns the practice? What happens if PE is unable to offload the podiatry practice on a hospital or MSG?
- Joined
- Oct 14, 2020
- Messages
- 858
- Reaction score
- 1,994
Better yet what is your compensation model as an associate? Tells a lot about an owner when they have you slaving for pennies to then buy in and own nothing.
Only worked there less than 3 years. Compensation currently is base plus 33% bonus. The future compensation model would be 35% of collections and 15% of earnings. Not sure what are the implications of failure to offload to another party. If no buyers, probably liquidation of assets or repurchase from us or original owner.
- Joined
- Oct 17, 2011
- Messages
- 3,367
- Reaction score
- 7,734
When the equity group sets the value of the practice it will take into account your collections and the owners collections. So your sweat and labor has already determined the price that is being paid for the group. You are now being offered the chance to buy back your own sweat at an inflated price (the rate they agreed to pay and not necessarily the rate you would have offered to buy in at). As people already said - the deal doesn't exist without you. The PE group will not buy it unless you are a part of it. But because you aren't an owner you somehow count for nothing even though you are the unpaid workhorse. So in a sleight of hand the owner offers you the chance to buy a portion of the practice to keep you interested/involved/committed when in fact the owner has already been paid for your collections and is now offering you the chance to buy your own labor back. Consider - the owner keeps his 15%, gets you to pay him 15% and he already got paid 70% even though you potentially made up 1/2 the practice or whatever. Even if the owner gives you the 15% instead of selling it to you then you've probably been massively shorted.
- Joined
- Oct 17, 2011
- Messages
- 3,367
- Reaction score
- 7,734
Other thoughts:
-In general, a physician's efforts should produce profit/reward for the physician. All this profit and earnings talk just complicates the fact that your collections in the end should be your money.
-Unless you can make so much money from this that you don't have to practice anymore - remember that your ultimate goal is to produce a practice model/lifestyle that you can live/work/breath for as long as you want to. If you kill yourself for 5 years doing this and end up with a practice model you can't stand - what's the point.
-Similarly, keep in mind that buying in has to be somewhat comical to hospital employed doctors with a good set-up. They make the best money and never give anyone a dime. Buying in is like a poor person ritual to them.
-Go over to the dermatology forum and ask them what PE has done for them and whether its benefits the practices or the patients. Similarly look at what PE owned groups do to anesthesia. These groups are looking for the "excess profits" to try and make it theirs.
-How will PE make your practice more profitable? Charging more? Negotiating better rates with insurance? More aggressively pursuing debt? Pruning benefits? Pushing more uncovered services at higher prices? The derm model is apparently hiring an army of NP/PAs to biopsy everything. What great medical practice will they bring to podiatry I wonder. PS- another podiatrist in my town sold a patient a set of powersteps for $110.
-Jokingly, isn't the point of this to somehow produce a "podiatry multimember group" to sell. Remember that as a group podiatrists are just garbage people. If you told me right now I could form a supergroup with all the other podiatrists in my town - I'd decline. At least half are clowns. Similarly, there's a reason most podiatrists function as solo practice members. Many have personality disorders and can't get along with anyone anyway.
-In general, a physician's efforts should produce profit/reward for the physician. All this profit and earnings talk just complicates the fact that your collections in the end should be your money.
-Unless you can make so much money from this that you don't have to practice anymore - remember that your ultimate goal is to produce a practice model/lifestyle that you can live/work/breath for as long as you want to. If you kill yourself for 5 years doing this and end up with a practice model you can't stand - what's the point.
-Similarly, keep in mind that buying in has to be somewhat comical to hospital employed doctors with a good set-up. They make the best money and never give anyone a dime. Buying in is like a poor person ritual to them.
-Go over to the dermatology forum and ask them what PE has done for them and whether its benefits the practices or the patients. Similarly look at what PE owned groups do to anesthesia. These groups are looking for the "excess profits" to try and make it theirs.
-How will PE make your practice more profitable? Charging more? Negotiating better rates with insurance? More aggressively pursuing debt? Pruning benefits? Pushing more uncovered services at higher prices? The derm model is apparently hiring an army of NP/PAs to biopsy everything. What great medical practice will they bring to podiatry I wonder. PS- another podiatrist in my town sold a patient a set of powersteps for $110.
-Jokingly, isn't the point of this to somehow produce a "podiatry multimember group" to sell. Remember that as a group podiatrists are just garbage people. If you told me right now I could form a supergroup with all the other podiatrists in my town - I'd decline. At least half are clowns. Similarly, there's a reason most podiatrists function as solo practice members. Many have personality disorders and can't get along with anyone anyway.
- Joined
- Apr 21, 2008
- Messages
- 3,486
- Reaction score
- 4,755
Even though you are likely going to get screwed, as others have pointed out, this is nothing more than a fairly simple math problem. What is it going to cost you to own 15%? What are your current collections (and gross income from those collections)? What will your income increase to, simply by getting 35% of collections instead? You can figure in some growth, but how many years of increased pay will it take to pay for that 15% ownership purchase?
There can certainly be buy-ins which are fair. There is value in purchasing an established business with a steady revenue stream and predictable expenses. I mean, if it cost you $200k to start your own practice and took 4 years to pay it back while you spent a significant period of time not taking much of a salary. You’d be dumb to turn down an offer to pay $300k to buy in at an established practice if that added $150k to your income, taking 2 years to pay back the initial investment (ignore interest in both cases to make it easy). I just don’t think you find buy ins that are reasonable very often in Podiatry.
Obviously I’m assuming this is a location you want to be and is a practice you would be content working at for many years. Because if that’s not the case there is no point in entertaining any of this. You’d get out before the paperwork is signed with the PE group.
And most importantly, it should be noted that rarely have PE acquisitions worked out as promised for the physician owners. ED practices are the latest victims. Anesthesia has already been bent over. Get ready to have policies and protocols in place that you have to follow in order to squeeze more money out of patients (or your labor) in order for the equity group to increase “value” of the practice aka their profit.
There can certainly be buy-ins which are fair. There is value in purchasing an established business with a steady revenue stream and predictable expenses. I mean, if it cost you $200k to start your own practice and took 4 years to pay it back while you spent a significant period of time not taking much of a salary. You’d be dumb to turn down an offer to pay $300k to buy in at an established practice if that added $150k to your income, taking 2 years to pay back the initial investment (ignore interest in both cases to make it easy). I just don’t think you find buy ins that are reasonable very often in Podiatry.
Obviously I’m assuming this is a location you want to be and is a practice you would be content working at for many years. Because if that’s not the case there is no point in entertaining any of this. You’d get out before the paperwork is signed with the PE group.
And most importantly, it should be noted that rarely have PE acquisitions worked out as promised for the physician owners. ED practices are the latest victims. Anesthesia has already been bent over. Get ready to have policies and protocols in place that you have to follow in order to squeeze more money out of patients (or your labor) in order for the equity group to increase “value” of the practice aka their profit.
- Joined
- Feb 2, 2007
- Messages
- 4,959
- Reaction score
- 6,001
Precisely. Very good points.
I have seen the PE financial power work fairly well (for the owner docs... who were owners/partners at buyout time - not "owner" afterwards). It sometimes works decent when they let DPMs continue to run the model, hire good docs, and just use the PE monies duplicate the model over and over around that metro (and often add PT, path, DME, etc labs).
More commonly, the PE tries to run it, the key docs quit or start taking much more time off after the acquisition, and it struggles. It simply functions like a hospital-run podiatry clinic or MSG where there are a lot of inefficiencies and under/over-staffing, missed revenue streams, etc. Bottom line: nobody runs a podiatry office as well as savvy podiatrist(s) whose income and enjoyment depends on that office running well.
Yes, this is the bottom line.
The only fair way to do buy-in/out is to have a valuation based on prior to when the associate/buyer starts. Even then, you are basically just buying the patients/referrals/rep (so that you don't start near zero as you would going solo) and the major XR/computer equipment (which isn't worth much depreciated). The staff, the minor medical supplies, decor, etc are all basically worthless with depreciation in the vast majority of offices. The staff are just not guaranteed to stay, they might be overpaid or under-trained, and you might do better replacing most of them after acquisition anyways. The rental lease rate/term can be a major factor, but the buy-out won't include the actual office(s) real estate - or associate wouldn't ever be able to afford it (and PE may or may not even want the land/building if the buyer is PE and seller doc owns it?).
In this thread example, it is the same as the buy-in offered to the podiatry group associate with a valuation based on what the associate's efforts grew the practice up to (in terms of pts, revenue, rep, etc). This is tale as old as time in podiatry. It is most likely a 1 owner + 1 associate practice if he is being offered 30-50% of what will be kept from PE, and that means there was basically nothing of value before his efforts/collections. Back in reality, if the associate started 2018, the buy-in should have been set long ago based on 2016-17 gross/net figures. This happens way too much where the associate gets the "chance" to pay for growth they've added.
- Joined
- Oct 17, 2011
- Messages
- 3,367
- Reaction score
- 7,734
I'll talk too much and say - I was recently offered a buy in.
I read everything I could online about different metrics and variations
For example:
-Give them nothing but a token equipment value
-Pay them a percentage of collections, *cough* garbage *cough*
-Weigh the buy in against how a similar investment would perform ie. what if you weren't buying a podiatry practice
-Weight the investment against "future profits" ie. how much would you give to have so much profit in the future taking into account risk etc - would you pay 50% of 5 years of future profit now.
I weighed this against a variety of personal factors/negative - for example, ways I will be limited
-ability to control/shape destiny and future (name of the practice)
-ability to market a certain way
-ability to hire another podiatrist ie. hire a talented rearfoot and ankle surgeon to cut toenails 🙂
-ability to train staff
-location of the office
-having to tolerate being around the owner
-having the owner decrease their utility to the practice/want more time off/operate less/just do nails etc
I weighed some of the positives
-lack of interruption of my practice
-lack of interruption of the care I'm providing complicated patients/continued care of people I've operated on
-continued pursuit of board certification which has already been harmed by Covid
-Office is in some ways decently set-up and real estate is very affordable
-My pursuit of other real estate/office spaces hasn't borne fruit
-Two doctors who produce income can produce a better overhead rate perhaps than 1 ie. the office manager is always being given work to do, claims to pursue. I won't be able to match my current income for awhile (probably)
-Owner has been referring me more cases lately
-There's a more than fair amount of uncertainty is straight starting your own thing, credentialing, trying to get up and going.
The real heart of the issue was - the more time I spent thinking about it - the more it comes down to
-how much does it take to start a practice
-what is the actual income of a partner against an associate ie. what is the profit that you are buying.
-I went into a meeting pretty sure I was going to say no because I expected to hear an enormous number and I'm mostly of the opinion that most people overpay for "profits".
I hear all these stories about multi-hundred-K buyins and complicated profit sharing and yet I feel like a lot of the people I speak to are just 400ishK collections people. If you make $120K as an associate and your future partnership income is $160K - if you give hundreds of thousands for your buy - what are you really buying. You are giving your partner level income up for years for a stake in a depreciating asset. That's me speaking at my most negative.
*That said - the above paragraph is really just a rambling version of something dtrack said better above. It is all about math. How much time and effort will it take to repay back verse starting from scratch. What are you really buying.
The number that I was told was actually something I could work with. I found myself thinking of when I bought a house. It had been on the market for too long. We did the old low ball game with the goal being to land in the middle which was where the house should have been valued. Anyway, we were essentially right around the midpoint trying to figure out if we'd fall a few thousand on their side or a few thousand on my side. As much as I'd like to drive the owner down to simply the 1/2 the price to start a new practice - it isn't a new practice. Its a two doctor practice. It has its advantages and disadvantages. It doesn't require starting from scratch. And the difference is actually pretty trivial.
Anyway. I'm hiring a better lawyer for the next round. Won't really know what it all means till I see the contract, but the starting offer is doable. Now comes the hard parts. Ensuring that the "divorce" is ultimately amicable. That profits are split fairly. Figuring out time table for his ultimate departure. That my "podiatry expenses" ie. boards and CME and all that becomes practice expense.
I read everything I could online about different metrics and variations
For example:
-Give them nothing but a token equipment value
-Pay them a percentage of collections, *cough* garbage *cough*
-Weigh the buy in against how a similar investment would perform ie. what if you weren't buying a podiatry practice
-Weight the investment against "future profits" ie. how much would you give to have so much profit in the future taking into account risk etc - would you pay 50% of 5 years of future profit now.
I weighed this against a variety of personal factors/negative - for example, ways I will be limited
-ability to control/shape destiny and future (name of the practice)
-ability to market a certain way
-ability to hire another podiatrist ie. hire a talented rearfoot and ankle surgeon to cut toenails 🙂
-ability to train staff
-location of the office
-having to tolerate being around the owner
-having the owner decrease their utility to the practice/want more time off/operate less/just do nails etc
I weighed some of the positives
-lack of interruption of my practice
-lack of interruption of the care I'm providing complicated patients/continued care of people I've operated on
-continued pursuit of board certification which has already been harmed by Covid
-Office is in some ways decently set-up and real estate is very affordable
-My pursuit of other real estate/office spaces hasn't borne fruit
-Two doctors who produce income can produce a better overhead rate perhaps than 1 ie. the office manager is always being given work to do, claims to pursue. I won't be able to match my current income for awhile (probably)
-Owner has been referring me more cases lately
-There's a more than fair amount of uncertainty is straight starting your own thing, credentialing, trying to get up and going.
The real heart of the issue was - the more time I spent thinking about it - the more it comes down to
-how much does it take to start a practice
-what is the actual income of a partner against an associate ie. what is the profit that you are buying.
-I went into a meeting pretty sure I was going to say no because I expected to hear an enormous number and I'm mostly of the opinion that most people overpay for "profits".
I hear all these stories about multi-hundred-K buyins and complicated profit sharing and yet I feel like a lot of the people I speak to are just 400ishK collections people. If you make $120K as an associate and your future partnership income is $160K - if you give hundreds of thousands for your buy - what are you really buying. You are giving your partner level income up for years for a stake in a depreciating asset. That's me speaking at my most negative.
*That said - the above paragraph is really just a rambling version of something dtrack said better above. It is all about math. How much time and effort will it take to repay back verse starting from scratch. What are you really buying.
The number that I was told was actually something I could work with. I found myself thinking of when I bought a house. It had been on the market for too long. We did the old low ball game with the goal being to land in the middle which was where the house should have been valued. Anyway, we were essentially right around the midpoint trying to figure out if we'd fall a few thousand on their side or a few thousand on my side. As much as I'd like to drive the owner down to simply the 1/2 the price to start a new practice - it isn't a new practice. Its a two doctor practice. It has its advantages and disadvantages. It doesn't require starting from scratch. And the difference is actually pretty trivial.
Anyway. I'm hiring a better lawyer for the next round. Won't really know what it all means till I see the contract, but the starting offer is doable. Now comes the hard parts. Ensuring that the "divorce" is ultimately amicable. That profits are split fairly. Figuring out time table for his ultimate departure. That my "podiatry expenses" ie. boards and CME and all that becomes practice expense.
- Joined
- Dec 2, 2018
- Messages
- 623
- Reaction score
- 1,104
I will happily use $200K to start my practice from scratch and own 100% of the practice than buy-in less than 50% for $300K at an established practice.
This is me speaking from first hand experience. I opened a practice (even in the heat of COVID) with less than $200k and it is the best career decision I have made. In my first year as a practice owner, I will be making 3 times income (not net revenue) compared to being a pod associate.
- Joined
- Dec 2, 2018
- Messages
- 623
- Reaction score
- 1,104
To the OP, as others of said. You are buying back your sweat and PE firms are not working in your best interest. I am not going to repeat what others have said however what I will add, is this PE take-over not a good time to get rid of your non-compete (or narrow the non-compete) and start making plans to go solo? Something to think about.
If the owner is offering you 50% of 30% ownership, how much is the cost? If it is anything more than $100K then you are 100% better off getting a business bank loan and opening up your practice and owning it 100%. If you don't want to do that, then simply don't buy-in so you have the option to leave down the road without any complication. The economy is opening back up and lots of hospitals and MSG are now hiring podiatrists. You literally have the upper hand at this moment.
After-all where do you plan to get the funds to even buy 50% of 30% ownership? A loan is a loan if you are doing either sweat equity, owner financing or business bank loan.
If the owner is offering you 50% of 30% ownership, how much is the cost? If it is anything more than $100K then you are 100% better off getting a business bank loan and opening up your practice and owning it 100%. If you don't want to do that, then simply don't buy-in so you have the option to leave down the road without any complication. The economy is opening back up and lots of hospitals and MSG are now hiring podiatrists. You literally have the upper hand at this moment.
After-all where do you plan to get the funds to even buy 50% of 30% ownership? A loan is a loan if you are doing either sweat equity, owner financing or business bank loan.
