Selling out

[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?

[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.

[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.

[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.

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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!

[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.

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!

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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.

[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.

[jfoxcpacfp]

What is your partnership basis?

[okayplayer]

Thank you for the thoughtful replies. I was thinking about this issue basically in the way jjandjab has described, ie. the utility of front-loading a brokerage account early in my career and the "break even" point vs. staying put at my current job. I plan to work until about 55 or so.

Of course, you all bring up excellent points in terms of what you give up in this type of deal. I enjoy being a shareholder in a physician-owned corporation and all of the autonomy that entails, as described by WCI. But there are no guarantees in life in terms of whether my income will continue to grow - or even stay the same, whether we lose our contract in some hostile fashion, etc. But as DMFA said, there are worse problems to have than my 2 current options.

[hightower]

Forgive me for prying, but what specialty are you in?  You started practice at 29 years old which means you only did a 3 year residency?  What 3 year residency can land you in a position making 500k+/yr?  Or did you somehow get through medical school at a younger age than most?  I think I chose the wrong specialty!

[jhwkr542]

I value autonomy over money. Also, work more, make more in your current situation. Nothing would prevent your future bosses from increasing your workload if you're salaried. My wife is salaried and they are constantly understaffed and overworked. Yeah, it'd depend on who buys you out, but without selling, you know who your bosses are.

[Zaphod]

Whats the alternative here? You already mentioned your wife likes the area. Is there a non compete?

I mean, I wouldnt essentially throw this money away and start from hope if thats the alternative. Maybe you can work on the contract and payback terms to be more in your favor than they currently are.

[kingsnake]

Play hardball and sell for 1.5M per partner with a guaranteed contract for 5 years. I left partnership PP for an employed gig...benefits to both. The think I like about being employed is the simplicity relative to running a practice, surgical center, etc. I actually work less and get paid more being employed...albeit with less autonomy and more bullsh$t.

[Overlap12]

My wife's private practice has been positioning themselves the last few years to be sold, so I am very intrigued to hear about your outcome.  For her group, the physician incomes range from $300-$550k with most partners working a "normal" schedule making about $400k a year.  The current negotiations are making it sound like the partners will receive a big windfall, guaranteed salaries higher than what they make now, and board representation in their new organization. For us, this might mean accelerating our financial goals, one of which was paying non-mortgage debt off in 6 years (~$600k).  This all feels too good to be true right now so I'll be holding my breath the whole year until the deal goes through.

On a side note, does anyone know if the PM will pay capital gains tax on the full $1.2M buyout or will part of that be offset by an adjusted cost basis in the partnership or corporate ownership?

[jfoxcpacfp]

Overlap12 wrote:

On a side note, does anyone know if the PM will pay capital gains on the full $1.2M buyout or will part of that be offset by an adjusted cost basis in the partnership or corporate ownership?

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Sorry, I'm having a brain cloud - I thought PM was either Prime Minister or the part of the day after AM. What are you referring to? And I have no idea what you mean by corporate ownership.

The selling partner wil pay LTCG on the excess of sales price over the basis of the partner's share. The partner's basis = the purchase price + inside basis (in general, this is previously taxed income) + outside basis (it's complicated). As long as your CPA has been faithfully tracking and accurately calculating the adjustments to your basis each year, you will be fine. This might be the time (well, after April 18) to sit down with him/her and start calculating projected gain and doing some tax planning so you will be well prepared for the joyous event. Congratulations!

[Overlap12]

Oops I meant OP for Original Poster.  Thanks for the reply!  She will just be a partner for over a year, so hopefully the calculation is not too complicated.  Nice to know we wouldn't get taxed on getting our original buy in back (~$250k).