The mid level threat to derm

[zanzizic]

One reason that a buyout makes sense for a doc with 5 years to go is that you get that payout with much less tax consequences. If you sell out and make $2 million you’ll pay 20% capital gains taxes on it. If you had just worked the 5 years and collected that money yourself you’d end up paying top income tax rate of 37%.

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[Solodyn]

I think we are pretty much talking about the same thing with different perspective. It is true that 1 derm 4 PAs won't fly in New York City. But I know there are plenty parts of country where this is possible. When there is a shortage of derm with a big drawing area, being the only derm practice in town will be able to support this kind of practice. All the PAs will stay busy with the practice being the only game in town. Some examples comes to mind are El Paso and Abilene in Texas.

The difference between EBITA and EBITDA is the "depreciation" This comes into play when clinic owns a building. Other cases, solo practitioner pays himself a modes salary and 3 PA gets 150K a piece. With the rest being distribution after the expenses, that leaves plenty left for 2.5 million at 200 patients a day. I have seen this exact action with one of my derm friends. Of course it is not an average practice, but it is not unrealistic.

Regardless, even if you half the buy out price at 5 million dollars at the above example, it is still lot higher than 1.5 you can sell. So expect more retiring derm selling their practice to PE (and encourage other to do so) rather than sell to newly graduated BCDs.

Ultimately, I don't think this buyout multiplier model will be sustainable. The driving force behind it relies on the PE to continue being bought out every 5 years and attract more funds into the PE. The individual PE is forced to spend the infused money somewhere and thus the practices are being bought at an inflated price with the hope some other company will buy it out. About 2 years ago, the CEO of Advanced Derm told me this is around the 2nd inning of the buy out and there are plenty of apples to bite. I wonder what inning it is right now.

 

[sore eye asses]

Nobody’s getting 10 mil. Or even 5. The old dogs sell (can’t blame em), work 5 more years, the bloodsuckers work their magic, then magical EBITDA happens and old dogs ride into sunset, young bucks left holding the bag wondering wtf happened. Get to answer to MBA for remainder of career. Alternatively, hang your own shingle and give it a go. Good times...

 

[sore eye asses]

Correction: young buck will never see the bag. (S)he is a good little machine. Don’t you squeak now little cog. Nobody likes a squeaky cog. Logan, your palm is blinking. Run. Nobody’s following. Your replacement model is ready and waiting. And so is theirs. Don’t worry, this can all be cured with CBD oil. It’s the new coconut oil. You’ll see.

 

[reno911]

It is really not an unreasonable amount of offer. We are assuming a single general derm physician practice with 3 PAs. That can reasonably bring in 2.5 Million dollars a year. Let us say it is sold at 5x EBITA, it will get you conservatively 10 million. If PE really wants your practice because you corner the market, or if you are an AAD leader, or if you are particularly famous, they may increase the multiplier.

In real life with all the people I spoke to, the multiplier of the EBITA is tied to the number of years of the contract you are required to stick around. Therefore, if you get a 5x EBITA offer, you have to stick around as an employee for 5 years. So in a sense, you are paying for your own buyout. If you are relatively early in your career, the sale will not make sense since you can buy yourself out in 5 years anyway. You could have simply keep working for 5 more years and have all the revenue and still own your practice. However, if you are retiring and sailing off into the sunset, this will be a great deal for you. You get 10 million as opposed to 1.5 million selling to a new BCD derm.

In addition, I heard that the PE doesn't even pay you in cash when you sell. They pay you in "shares of the company" so the performance of the PE firm will determine the value of your shares thus the return. The goal is for the "second bite of the apple" where the shares will either go public or go for a resale and you get paid more than what you buy in the shares. Therefore, after you sell, you will work hard at the clinic for the remaining 5 years and tell all your friends (or constituents if you are an AAD leader) how wonderful PE is and everyone should sell because the value of your shares depends on it.

I agree with reno911 that everyone has a price. If I build a practice where someone will pay me $10 million, then that will be the market price. It is really worth that much because someone will pay for it. Why would I short myself 8.5 million by selling it to BCD? You can argue that it is unethical to short yourself that kind of money you work so hard for by building a successful practice.

I guess I'm a bit late, but practices that "bring in 2.5 million dollars a year", have nowhere near a 2.5 million EBITDA. I suppose it depends on what you mean by "bring in", but there is no reasonable definition of that which gets you to 2.5 million EBITDA for a 1 derm + 3 PA.

 

[reno911]

I think we are pretty much talking about the same thing with different perspective. It is true that 1 derm 4 PAs won't fly in New York City. But I know there are plenty parts of country where this is possible. When there is a shortage of derm with a big drawing area, being the only derm practice in town will be able to support this kind of practice. All the PAs will stay busy with the practice being the only game in town. Some examples comes to mind are El Paso and Abilene in Texas.

The difference between EBITA and EBITDA is the "depreciation" This comes into play when clinic owns a building. Other cases, solo practitioner pays himself a modes salary and 3 PA gets 150K a piece. With the rest being distribution after the expenses, that leaves plenty left for 2.5 million at 200 patients a day. I have seen this exact action with one of my derm friends. Of course it is not an average practice, but it is not unrealistic.

Regardless, even if you half the buy out price at 5 million dollars at the above example, it is still lot higher than 1.5 you can sell. So expect more retiring derm selling their practice to PE (and encourage other to do so) rather than sell to newly graduated BCDs.

Ultimately, I don't think this buyout multiplier model will be sustainable. The driving force behind it relies on the PE to continue being bought out every 5 years and attract more funds into the PE. The individual PE is forced to spend the infused money somewhere and thus the practices are being bought at an inflated price with the hope some other company will buy it out. About 2 years ago, the CEO of Advanced Derm told me this is around the 2nd inning of the buy out and there are plenty of apples to bite. I wonder what inning it is right now.

There's a lot wrong here:

-So, now we've added a PA and we're at 4? Still 2.5 million EBITDA is a tall order for that set up. Maybe it's theoretically possible, but calling it "realistic" is a bit of a stretch, I think.

-Clinic owning a building is generally not an issue, because that's a stupid way to set it up. Generally the building is owned separately and the practice rents the building from the owners (i.e., themselves).

-EBITDA doesn't really depend on the "modest salary" the derm chooses to pay himself when he owns it. It's based on the market rate. Because when that dermatologist walks away with his bag full of cash in 3-5 yrs, they're going to need to replace that guy at a market rate.

-Market rate is generally around 40% at worst (I suppose it's rarely worse), but if you gave a guy who is so insanely productive as the scenario you've set up only 40%, that's likely underpaying as he can very likely just go and set up shop across the street for more than that (because, remember, in your hypothetical scenario this is in an area with few derms which could easily sustain another dermatologist).

-If we half the price to 5 million that's a multiple of 2 of in your scenario. I wouldn't say that is a "lot" higher than 1.5. Now 1.25 million dollars is nothing to sneeze at, but in the scenario you've constructed (i.e. 2.5 million EBITDA) that's way less than one year of income (salary + distributions) for the one derm who is "supervising" 4 PAs and creating 2.5 million dollars of EBITDA.

-Along the same lines, if this dermatologist is truly generating 2.5 million of EBITDA and owns the whole thing, then selling it for 5 million would be odd. If he is young he should just keep that 2.5 million of EBITDA for himself as long as he can possibly sustain it. By the time he gets to be late career he should be so rich (because he's has been milking this 2.5 million cash cow for years AND that's on top of his salary), that 5 million should make very little difference to him. Instead of selling and being a PE slave for 3-5 yrs, he could just work for 2 more years and shut the doors and be better off. Of course lots of docs are terrible at personal finance, so it's not hard at all to imagine a doc who has been making that much money for such a long time, but is so bad a managing it, that giving him 5 million to sell such a tremendous asset might actuall wrk.

 

[Slack3r]

I’ve come across a few places that are owned by plastic surgeons and are “supervising” several PAs practicing gen derm, then referring everything to another employed Mohs surgeon. Doesn’t seem like this is legal...

 

[MOHS_01]

There's a lot wrong here:

-So, now we've added a PA and we're at 4? Still 2.5 million EBITDA is a tall order for that set up. Maybe it's theoretically possible, but calling it "realistic" is a bit of a stretch, I think.

-Clinic owning a building is generally not an issue, because that's a stupid way to set it up. Generally the building is owned separately and the practice rents the building from the owners (i.e., themselves).

-EBITDA doesn't really depend on the "modest salary" the derm chooses to pay himself when he owns it. It's based on the market rate. Because when that dermatologist walks away with his bag full of cash in 3-5 yrs, they're going to need to replace that guy at a market rate.

-Market rate is generally around 40% at worst (I suppose it's rarely worse), but if you gave a guy who is so insanely productive as the scenario you've set up only 40%, that's likely underpaying as he can very likely just go and set up shop across the street for more than that (because, remember, in your hypothetical scenario this is in an area with few derms which could easily sustain another dermatologist).

-If we half the price to 5 million that's a multiple of 2 of in your scenario. I wouldn't say that is a "lot" higher than 1.5. Now 1.25 million dollars is nothing to sneeze at, but in the scenario you've constructed (i.e. 2.5 million EBITDA) that's way less than one year of income (salary + distributions) for the one derm who is "supervising" 4 PAs and creating 2.5 million dollars of EBITDA.

-Along the same lines, if this dermatologist is truly generating 2.5 million of EBITDA and owns the whole thing, then selling it for 5 million would be odd. If he is young he should just keep that 2.5 million of EBITDA for himself as long as he can possibly sustain it. By the time he gets to be late career he should be so rich (because he's has been milking this 2.5 million cash cow for years AND that's on top of his salary), that 5 million should make very little difference to him. Instead of selling and being a PE slave for 3-5 yrs, he could just work for 2 more years and shut the doors and be better off. Of course lots of docs are terrible at personal finance, so it's not hard at all to imagine a doc who has been making that much money for such a long time, but is so bad a managing it, that giving him 5 million to sell such a tremendous asset might actuall wrk.

Agreed; the simple fact of the matter is the "EBIDTA" that you are selling is only your income in excess of what a similar replacement would reasonably demand / expect. For example, say you're at the 90th for general derm, netting $1m; if your system is efficient enough that Jr can be hired, perform equally, and be convinced that he's only worth $700k, you've freed up $300k for the sale. The trick is not solely what you are willing to give up tomorrow to gain today, it's what they expect your eventual replacement to accept as well. You are self funding your buyout and selling the future of your organization in the process. It's simple math, really -- they just seem to be better at it than our esteemed "senior" colleagues are..... or this esteem was always misplaced. Your call, I've made my decision.

 

[Solodyn]

There's a lot wrong here:

-So, now we've added a PA and we're at 4? Still 2.5 million EBITDA is a tall order for that set up. Maybe it's theoretically possible, but calling it "realistic" is a bit of a stretch, I think.

-Clinic owning a building is generally not an issue, because that's a stupid way to set it up. Generally the building is owned separately and the practice rents the building from the owners (i.e., themselves).

-EBITDA doesn't really depend on the "modest salary" the derm chooses to pay himself when he owns it. It's based on the market rate. Because when that dermatologist walks away with his bag full of cash in 3-5 yrs, they're going to need to replace that guy at a market rate.

-Market rate is generally around 40% at worst (I suppose it's rarely worse), but if you gave a guy who is so insanely productive as the scenario you've set up only 40%, that's likely underpaying as he can very likely just go and set up shop across the street for more than that (because, remember, in your hypothetical scenario this is in an area with few derms which could easily sustain another dermatologist).

-If we half the price to 5 million that's a multiple of 2 of in your scenario. I wouldn't say that is a "lot" higher than 1.5. Now 1.25 million dollars is nothing to sneeze at, but in the scenario you've constructed (i.e. 2.5 million EBITDA) that's way less than one year of income (salary + distributions) for the one derm who is "supervising" 4 PAs and creating 2.5 million dollars of EBITDA.

-Along the same lines, if this dermatologist is truly generating 2.5 million of EBITDA and owns the whole thing, then selling it for 5 million would be odd. If he is young he should just keep that 2.5 million of EBITDA for himself as long as he can possibly sustain it. By the time he gets to be late career he should be so rich (because he's has been milking this 2.5 million cash cow for years AND that's on top of his salary), that 5 million should make very little difference to him. Instead of selling and being a PE slave for 3-5 yrs, he could just work for 2 more years and shut the doors and be better off. Of course lots of docs are terrible at personal finance, so it's not hard at all to imagine a doc who has been making that much money for such a long time, but is so bad a managing it, that giving him 5 million to sell such a tremendous asset might actuall wrk.

I do have a very good source on the number above and also the offer price and estimate. So I will refrain from arguing over what is "possible" from each one of your perspectives. But the bottom line is whether the PE sale price is 5M or 10M or somewhere in between, it is still a lot more than the 1.5M that would have been made sold to a new BCD. Also, there are not that many BCD on the market to buy existing practices. To even be a qualified buyer, someone has to go to med school, get into a derm residency, and graduate to decide to buy a practice. Last time I checked it was less than 20% of new graduates. Then the said person has to be willing to move to a highly underserved area with no opera house in the city. Finally, you have to convince the person that it is better to buy the practice from you then to set up shop next door. The candidate also needs to have the means to finance the purchase price. Even if you want to sell for 1.5M, you won't find a buyer to do so. For any derm who build a profitable infrastructure a secondary market, selling to PE seems to be the only option.

Granted, you will be funding your own buyout. It will make no sense if you are young. But for a retiring derm, it makes perfect sense because you won't deal with the risks of patient abandonment for closing the practice, but rather it will transition to the new PE ownership.

To MOHS_01's point, salaries of PA capping at 20% still leaves 800K to the EBITDA if the PA generate 1M a year. It is not an impossible task with the right patient population with lots of freezing and biopsies. Throw Mohs surgery in the mix the number is not unreasonable. As the market rate of the replacement derm at this particular setup, I suspect one derm replacement at 40% still generates plenty of EBITA given the cost of supervision of the existing PA infrastructure. Heck, a derm may not even need to be replaced but rather supervised by existing PE employee derm in another city within the same state! The PE simply manage the existing infrastructure and fly in Mohs once a month to do the cases.

To Reno911, No one is owning their clinic building. I only discussed to illustrate the difference between EBITA and EBITDA. I reiterate that whether the sale is 2X, 5X, or 10X of EBITA, there is no BCD buyer for the practice. If your goal is to retire, no matter how many years you want to drag the practice on, it will need to end sometime. Rather than shut the practice down, you might as well get paid for the infrastructure. Just because you are already incredibly wealthy from have accumulated wealth doesn't mean should not sell your practice for a good price when you want to get out of the game.

 

[MOHS_01]

...

Granted, you will be funding your own buyout. It will make no sense if you are young. But for a retiring derm, it makes perfect sense because you won't deal with the risks of patient abandonment for closing the practice, but rather it will transition to the new PE ownership.

To MOHS_01's point, salaries of PA capping at 20% still leaves 800K to the EBITDA if the PA generate 1M a year. It is not an impossible task with the right patient population with lots of freezing and biopsies. Throw Mohs surgery in the mix the number is not unreasonable. As the market rate of the replacement derm at this particular setup, I suspect one derm replacement at 40% still generates plenty of EBITA given the cost of supervision of the existing PA infrastructure. Heck, a derm may not even need to be replaced but rather supervised by existing PE employee derm in another city within the same state! The PE simply manage the existing infrastructure and fly in Mohs once a month to do the cases.
...

With all due respect, grossing 1m is a far cry from netting 1m; grossing 1m (I'd lay odds that is north of the 95th % for midlevels, btw), assuming medical / procedural mix ex cosmetic product and sales, may pre-provider compensation net the practice $500k. No one capable of that kind of production (legitimately) is naive and frankly stupid enough to settle for 20% of collections as a ceiling, but even if they did, that leaves 300k to practice cash flow, not 800k. The entire scenario is utterly unrealistic.

 

[MOHS_01]

FWIW, I know several folks who have sold out to various PE groups and it is exactly as predicted; old guys cashed out at the expense of the young folks who ended up leaving. Young guys trading 3 years of "excess" income to get it up front and relocate when their time is done. Revolving door provider policy ever since as people bounce around like perpetual malcontents, never understanding that the true trade off for "just practicing medicine" is being someone else's employ, someone else's profit engine, someone else's tool. They package and sell a lie; they may get a few more bucks per unit work from some insurers (temporarily, those days are rapidly closing), Medicare doesn't give two ***** if you are Little Lone Joe or employed by Bain Capital -- you get what you get (if you're lucky). Maybe they can squeeze out a 12-20% discount on supplies by better bulk pricing -- but who ****ing cares when the medical supply line item comprises single digit percentage on your income statement? Do you really believe that your MAs will work for less per hour because Chicago Equity Partners has bought a controlling interest in the group? Ha.

 

[reno911]

I do have a very good source on the number above and also the offer price and estimate. So I will refrain from arguing over what is "possible" from each one of your perspectives. But the bottom line is whether the PE sale price is 5M or 10M or somewhere in between, it is still a lot more than the 1.5M that would have been made sold to a new BCD. Also, there are not that many BCD on the market to buy existing practices. To even be a qualified buyer, someone has to go to met school, get into a derm residency, and graduate to decide to buy a practice. Last time I checked it was less than 20% of new graduates. Then the said person has to be willing to move to a highly underserved area with no opera house in the city. Finally, you have to convince the person that it is better to buy the practice from you then to set up shop next door. The candidate also needs to have the means to finance the purchase price. Even if you want to sell for 1.5M, you won't find a buyer to do so. For any derm who build a profitable infrastructure a secondary market, selling to PE seems to be the only option.

Granted, you will be funding your own buyout. It will make no sense if you are young. But for a retiring derm, it makes perfect sense because you won't deal with the risks of patient abandonment for closing the practice, but rather it will transition to the new PE ownership.

To MOHS_01's point, salaries of PA capping at 20% still leaves 800K to the EBITDA if the PA generate 1M a year. It is not an impossible task with the right patient population with lots of freezing and biopsies. Throw Mohs surgery in the mix the number is not unreasonable. As the market rate of the replacement derm at this particular setup, I suspect one derm replacement at 40% still generates plenty of EBITA given the cost of supervision of the existing PA infrastructure. Heck, a derm may not even need to be replaced but rather supervised by existing PE employee derm in another city within the same state! The PE simply manage the existing infrastructure and fly in Mohs once a month to do the cases.

To Reno911, No one is owning their clinic building. I only discussed to illustrate the difference between EBITA and EBITDA. I reiterate that whether the sale is 2X, 5X, or 10X of EBITA, there is no BCD buyer for the practice. If your goal is to retire, no matter how many years you want to drag the practice on, it will need to end sometime. Rather than shut the practice down, you might as well get paid for the infrastructure. Just because you are already incredibly wealthy from have accumulated wealth doesn't mean should not sell your practice for a good price when you want to get out of the game.

I don't think anyone is trying to argue that PE will not pay more than another dermatologist would. They will definitely pay a lot more. Especially in an underserved area as you describe. If anyone did, I missed it, but it's certainly not me.

 

[LebLlama]

Deleted as per warning.