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Assessing A Private Practice Partnership Opportunity

Getting offered partnership at a private practice is an exciting prospect for most physicians. It means that you get to shift to actually owning a piece of a business and sharing the profits of the business, including ancillary income streams of the private practice, and with it, the autonomy and control that comes from being an owner rather than an employee. Here at Physician Side Gigs, we're big advocates for practice ownership and being your own boss, especially in a healthcare landscape where the demands placed on employees is increasing on a daily basis, without sharing of the upside of the fruits of your additional labor. As with any purchase or major commitment, however, assessing a partnership opportunity requires due diligence and weighing of the pros and cons. This will become a large part of your identity and your mental bandwidth, as the shift in mindset from employee to business owner comes with extra responsibilities and worries. Before you buy into a practice, doing proper due diligence will help ensure you go in eyes wide open to both the potential upsides and downsides, and hopefully mitigate the risk that you make a decision that's not the right one for you.


Disclaimer: Every practice is different. You should consult related and licensed expertise before making any decisions based on these resources, which are only intended to be educational and help develop a framework from which to explore deeper, rather than individualized advice. Many of the resources on this page are sponsors and/or affiliates, which means that they support our mission through advertising money. You should do your own due diligence prior to using these resources. To learn more, visit our disclaimers and disclosures.



Quick Links





Resources


Take a deep drive into our private practice primer for more information on the business side of medicine.


Our attorney database can help you find a contract lawyer to review your partnership agreement prior to finalizing the deal to make sure you have all your bases covered.


Financing a practice buy in: See our private practice resources page for lending resources, and personal loan resources.



Disadvantages of Private Practice Partnership


We're going to start by getting the downsides out of the way, because on the whole, we're big fans of practice ownership and want to shift the focus to how to buy into a practice successfully! Make no mistake, there are downsides to being a private practice partner and owning a portion of the practice.


Because you own it, you ultimately are responsible for the overhead, which consists of all expenses of the practice. Rising costs due to inflation, staffing shortages, loss of patients, real estate leases, and poor reimbursement contracts all affect the bottom line profit, which ultimately affects how much you earn in a given year. As an employed physician, these are not your responsibility, and you always make what you are promised by your employment contract. As examples, if overhead costs are rising because of the rising salaries of medical assistants and employed physicians, then the partners, AKA the owners of the practice, have to foot the bill for this. If there is an unexpected expense such as equipment that stops functioning suddenly or regulations that necessitate a major expense, you have no choice but to pay for it.


Then there's the mental bandwidth that goes into practice ownership. You'll likely have committees or have to weigh on on decisions routinely about practice management issues, employee issues, and expenses. If a bathroom leaks, it's your problem to make sure it's fixed immediately so as not to disrupt the practice schedule (or at least your job to get the right person on the job for it). You have also taken on medicolegal liability. Practices and all owners are typically named in lawsuits rather than a single individual since the practice has deeper pockets. Some of these decisions will likely keep you up at night or may lead to discord amongst the partners, which can be stressful. Only you can decide how these downsides fit into the rest of your life and whether being a business owner is something compatible with your personal and professional goals.



Advantages of Private Practice Partnership


That said, there are many advantages to ownership via a private practice partnership.


The first is that as a business owner, you have a say in the way the practice is run, the way policies are made, and ultimately, more control over your own career and your future. It's hard to put a value on this in this day and age in healthcare, where so many employed physicians are subject to the whims of their employers. Your job stability is much stronger and your ability to change the things that bother you on a daily basis are both things that will hopefully enhance your career longevity.


From a financial perspective, one of the biggest benefits of practice ownership is the pathway to increasing income as well as net worth. When practices are profitable, the partners enjoy the excess profit the practice generates after all expenses are paid. This can be quite significant depending on the practice, especially if the practice has lots of ancillary revenue streams. These could include things like real estate, laboratory services, skin care lines, imaging centers, or employed physicians or other members of the healthcare team that generate profits for the business. Owners of the practice generally have more access to tax advantages, whether that be the ability to write off more expenses, put more money into retirement, or take some profits as distributions rather than salary subject to payroll taxes.


You also enjoy the appreciation of the value of the practice as it grows. As your practice expands in the number of patients it sees, the number of locations, or in its reputation, the enterprise value of the business increases. Appreciation in the value of real estate can be significant. If your practice is sold or consolidated, you get part of the upside there too.


Lastly, it's fun to build something! A lot of us have multiple talents, and the ability to use a different part of your brain can keep things exciting.


Questions to Ask When Assessing a Partnership Buy-In Opportunity


Let's start at the 30,000 foot level before going deeper into the buy-in structure and financing. When considering partnerships, here are some key questions to ask:

  • How will you be paid as a partner?

    • Eat what you kill model: you are entitled to all income you generate, but overhead is shared.

    • Practice evenly distributes all profit

    • Combination of the two depending on the income stream (clinical, ancillary revenue, etc.)

  • What is the practice overhead, and what is the trend in increase in overhead and how has it affected the profitability of the practice over the past few years?

    • What is the formula for calculating how much overhead each partner pays? Is it evenly distributed or based on something else?

  • What ancillary income streams does the practice have that will generate income for you beyond what you generate from your own clinical revenue? How much do partners currently make from those streams? Are there any plans to expand them? Learn more about possible additional practice revenue streams here.

  • How often is profit distributed, and how?

  • The practice will have more senior partners - are you considered an equal to them with regards to profit? Or are there tiers to the partnership?

  • Do some partners receive revenue streams that others do not? For example, is there an earn in process to the revenue from the imaging center or a lab or profits from the non-partner employees? Do any of these income streams require a separate buy-in?

  • Decision making:

    • What is the process by which decisions are made?

      • Does everybody have an equal say or is there an organizational structure where certain partners have more of a say in the decision making? If so, how are those people chosen and compensated?

      • How much outside expertise does the practice use to substantiate decisions? Is there a practice consultant that runs numbers behind major decisions?

    • For major changes, do decisions require a simple majority vote, or a larger percentage of the partners to agree?

  • Practice culture - this may feel like a soft criteria, but it's important, as it will gage how much drama and unrest a practice will have, and how much mental bandwidth the practice will occupy

    • How many times has the practice been sued, and for what?

    • Are employees generally happy? What are their biggest complaints?

    • Is there collegiality amongst the partners, or are there factions amongst the partnership that lead to lots of politics?

  • What is the buy in process? See here.

  • What are your financing options for buying in. See here.

  • How is practice real estate handled? See here.

  • What is the buy out process? See here.



Buy-In Structure


Okay, so what do you need to think about if you've decided to embark on this journey? When becoming a partner, you are purchasing shares from the other partners to own a portion of the practice, and how you do this is important. Ask lots of questions about how the amount of the buy-in was calculated, so that you understand how much of it is based in hard assets (lower risk) and how much of it is based on intangibles (higher risk).


Practices can tailor partnership buy-in in any way they want.


Some private practices will have a pure earn-in process. For example, after providing a certain number of years of service as an employed physician, the practice will then offer partnership without asking for any additional buy-in for share purchases. While this may sound like an excellent offer, keep in mind you are giving the practice your time and revenue to then be offered partnership in the future, and there is an opportunity cost to that time. Practices with no buy in tend to have a longer track to partnership.


Other practices will ask for a specific buy-in, which is essentially the cost of the shares to purchase ownership into the practice. This can be calculated in any way the practice wants.


While there are fewer practices doing this today, some continue to have a “goodwill” buy-in, which means the practice is increasing its share price because of the philosophy that the potential partner is buying into a lucrative and established practice. A classic example is a successful small group of plastic surgeons with an excellent reputation will have a high goodwill buy-in because it believes the incoming partner is buying into the reputation of the practice as well, and they essentially are associating a price tag with that reputation.


More commonly, practices will have a specific formula for calculating share price and buy-in. Usually, this consists of determining the value of the hard assets of the practice, as well as sometimes the value of the charts as well. So, when looking at a practice buy-in, it is important to ask what the formula is that’s used to calculate the price tag.


And then, of course, there are practices whose buy-in is calculated as a hybrid of both the goodwill and the calculated share value.


You should ask to see the books to substantiate the numbers that are being presented to you. Make sure you ask when the last appraisal of the practice was done, so you know the numbers reflect current value. If you're not sure what you're looking at, consult a lawyer or an accountant to make sure things pass the sniff test. This is likely one of the biggest financial commitments you will ever make, and you don't want to take it lightly.


Another factor that can be calculated into practice buy-in is the status of your accounts receivable when becoming a partner. This potentially can add to your buy-in amount. As an employed physician, you are paid a fixed salary. If you are in an “eat what you kill” model as a partner, then there will be accounts receivable pending at the time when you become a partner. Since this is the practice’s income and not yours, as it was generated when you were an employee, one way to have the incoming partner pay that income back is to calculate pending A/R and add that value to the buy-in. Therefore, while you see that A/R come through as income as a partner, you are essentially paying it back to the practice.



Figuring Out Financing


Assuming there’s a priced buy-in for partnership, the next point to consider is how are you going to pay it?


Ideally, the practice will allow you to at least partially pay this buy-in pre-tax using your collections. Also, if possible, can the practice purchase be distributed over time to ease the financial impact to the new partner? If so, will there be an interest rate charged to the incoming partner?


This may occur because if the buy-in amount is distributed over time, the existing partners are essentially giving you a loan when they sell you their shares, and you are paying that back over a longer time period. The interest rate on this loan can be set to anything they wish.



Real Estate

A private practice will also likely have real estate in some capacity. When assessing the real estate aspect, consider these questions:

  • If the real estate is rented, are the costs evenly distributed across the partnership, or is your portion dependent on what office you are in?

  • If the real estate is owned, who owns it? If the real estate is held by a handful of partners, how are lease terms and rent prices determined? Are these interests aligned?

  • Can the incoming partner buy into existing real estate holdings, or just future purchases?

Frequently, large practices will have multiple medical offices that are conglomerated into a separate real estate LLC with its own separate buy-in process. Other practices, however, will not offer real estate buy-in to the incoming partner as this can potentially dilute the rent paid to the real estate owners.



The Buy Out Process


Lastly, consider the buy-out when evaluating buy-in, as you always want to know the consequences of leaving:

  • How does the buy-out process work?

  • If you retire or leave the practice, what is the process by which you sell your shares back to the other partners?

  • Is the value the same, or is it adjusted as the practice has potentially grown?

  • Presumably the other partners pay for the buy-out of a partner who is leaving, but what happens to the A/R of that partner that is leaving or retiring?

    • The partnership contract will likely have a clause addressing these things and describing the situations in which the A/R is paid out to the leaving partner and when it is not paid out. One example may be that circumstances may be different in the case of termination with cause or without cause.

  • Are there any special circumstances in the event of an unanticipated departure (for example, death or disability)?

  • Is there any ongoing income that you get from the partnership (for example, do you have to give up your ownership in the real estate, do you get a pension of any sort, etc.)?

    • What determines how much that is?



Conclusion


Buying into a practice is a long-term decision that dramatically affects your life. It should be vetted thoroughly and carefully, given the enormity of the impact both financially and personally. Do your due diligence - we have an attorney database if you need your partnership contract reviewed. Once you're sure you've made the right decision for you, it's time to take the leap and enjoy the benefits of ownership!

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