Selling out

[jjandjab]

Personally, I am a money in the bank kind of guy, being less risk averse. And I have no qualms at all with being an employee - in the right situation of course. You do need to do due diligence on the the entity buying you out. But of course, hospital systems are fickle too, so who is to say they don't pull the contract you have in 3 years and you are in a worse situation (not to be too much of a downer) - especially if they are the ones making the offer. Be careful

But I look at it in simple math terms. After all expenses are evened out (some things better in your group, some things better in their employed position), say it does come out to 500k to stay independent, and 400k to sell-out. Well that last 100k is always going to be a at the max tax rate vs the 1.2 million at the capital gains rate. So let's say you are taking home an extra 60k per year to stay (taxed as income at 40%). But you are getting about 900k (1.2 million taxed at 25-ish% cap rate) from the buyout now.

So I look at the breakeven point as 15 years (60k x 15 years = the 900k after tax.) if the 900k earns nothing! And not only that, the buyout money can grow invested. If you put that in something that makes 5% - you are earning back another 45k per year right off the bat. In 15 years, 900k at 5% is 1.9 million. You'd need some significant salary increases to get to that number.

So it would likely be a long time frame to break even - perhaps never breaking even unless you are on track to have a big uptick in income over the years. I would look very closely at the math of it

So I personally would take the offer and continue to live well and enjoy the money in the bank.

[The White Coat Investor]

DMFA wrote:

The White Coat Investor wrote:

Depends on the alternative. I suspect this isn’t entirely your decision, is it?

I also agree that not only do you get paid less and probably have now a lower limit on future income increases, but now you’re also giving up some autonomy, and all for only $900K after-tax, or an amount that could sustain something like $36K a year in retirement income. If you wait a decade and let that compound, maybe that figure doubles.

It’s not a no-brainer, but if the alternative is that you just lose the practice and don’t get the $1.2M (like happens with many emergency physician groups) then sure, take the money and run.

The longer I practice the more autonomy means to me and the less money means to me.

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The working focus on autonomy over money is a lot easier when you have an $800k side gig, isn’t it?

okayplayer: if you can, I’d keep your current gig (which sounds mind-blowingly amazing, tbh), its autonomy, the sick income, and its robust tax-advantaged retirement options.  But if your worst-case alternative is a forced $1.2 million payout and a $400k salary, well…life sure must be good!

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Absolutely. I highly recommend it.

But remember that I was an owner of a practice before I was the owner of a profitable website. And I'm still there working shifts 12 times a month. And being able to make decisions about who my co-workers are, how we do holidays, how we do pay, how we do shift differentials, and how we staff the department is a big reason why I'm still there 12 times a month. Without that autonomy, practicing medicine would not be nearly as fun.

BTW- I totally agree with your comment.

[DMFA]

The White Coat Investor wrote:

Depends on the alternative. I suspect this isn’t entirely your decision, is it?

I also agree that not only do you get paid less and probably have now a lower limit on future income increases, but now you’re also giving up some autonomy, and all for only $900K after-tax, or an amount that could sustain something like $36K a year in retirement income. If you wait a decade and let that compound, maybe that figure doubles.

It’s not a no-brainer, but if the alternative is that you just lose the practice and don’t get the $1.2M (like happens with many emergency physician groups) then sure, take the money and run.

The longer I practice the more autonomy means to me and the less money means to me.

Click to expand...

The working focus on autonomy over money is a lot easier when you have an $800k side gig, isn't it?

okayplayer: if you can, I'd keep your current gig (which sounds mind-blowingly amazing, tbh), its autonomy, the sick income, and its robust tax-advantaged retirement options.  But if your worst-case alternative is a forced $1.2 million payout and a $400k salary, well...life sure must be good!

[The White Coat Investor]

Depends on the alternative. I suspect this isn't entirely your decision, is it?

I also agree that not only do you get paid less and probably have now a lower limit on future income increases, but now you're also giving up some autonomy, and all for only $900K after-tax, or an amount that could sustain something like $36K a year in retirement income. If you wait a decade and let that compound, maybe that figure doubles.

It's not a no-brainer, but if the alternative is that you just lose the practice and don't get the $1.2M (like happens with many emergency physician groups) then sure, take the money and run.

The longer I practice the more autonomy means to me and the less money means to me.

[FCP]

I would never do it; but that's only because I don't like the idea of losing my autonomy and working for someone else.  Who's to say that they will continue to pay you 400k after those first five years?  Who is to say they won't increase your workload in order to get to a certain salary, to the point where it's not worth doing the job?

If you are looking to retire early (before 40) though, then that changes everything, and in that case, selling the practice would make sense.

[okayplayer]

I am a partner in a large physician-only specialty group. I am 32 (third year of practice).

Currently I am production based and making about $580,000/yr, which after overhead/billing expenses is about $520,000/yr. Out of that we pay our own expenses such as malpractice, health insurance, etc. We have a corporate profit sharing ($54k/y) plan.

We are discussing selling our practice. Initial offers are in the 1.2mm/partner range. In exchange I would sign a 5 year agreement to work for about $400,000/yr (including paid malpractice, subsidized health insurance, +/- small retirement match) with a clawback of the buyout if we left early. I will have been a partner >1 year at that point so my understanding is I would owe long term capital gains only on the buyout.

I am weighing whether this makes financial sense for someone like me in the early stages of my career. If I took the 1mm post tax and dropped it in to VTSAX that is about 4mm at age 55 (assuming 6% growth). In exchange for this I would be trading some autonomy, taking a small decrease in income (500 to 400k, but that 100k would be at the top of the federal/state tax bracket = taxed at 50%) and losing my corporate profit sharing plan (only the standard 401k plan is offered as an employee of the new company). I could of course leave after five years and pursue another partnership track job or a better employed job, but my wife is pretty settled and comfortable in the area.

Any thoughts?