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Private Practice ENT Buy-in. $25 million discounted valuation for non-voting shares.

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  • #31
    Originally posted by ACN View Post
    Echo a lot of what's stated above. Seems like you are purchasing "blue sky" which is very typical of these smaller groups where the senior partners value their name. It's all bullshit. If they have been making 400k++ off you each year, that's on you for signing such a bad contract.

    We are PP ortho, our pre partnership employed doctors earn a salary and can keep 90% of their bonus (if they are positive... In your situation, the 400k, you would have kept 90%).

    Our buyin for our group is like $5-10k. This makes you partner with voting rights and you share ancillary revenue. Our 1+++m buyin is for our asc and has a rolling valuation performed annually.

    Sorry to hear about your situation... Definitely sucks and hard place to be in.

    Get an independent evaluation. Equal voting rights. Figure out why you see giving your partners 400k/year for 5-10 years.

    I interviewed for another PP ortho group years ago out of fellowship. They told me buyin was $3m. I asked to see the books and ask what the buyin was for. They didn't show books and said $3m is the valuation for my share of the practice (no asc, no therapy, only an MRI). That was a hard pass. They asked me a few months later, why I passed and told them their group seemed shady and valuation was crazy.
    I love it. Your group sounds very equitable and reasonable, and I love you told the other the truth, doesnt happen enough for obvious reasons.

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    • #32
      I'm ENT. Much smaller practice. But this sounds absolutely crazy to me. How is it that your income is going to increase 400K a year?? Most practices run somewhere around 50% overhead. So that implies that your collections are going to increase 800K or either they have been underpaying you 400K per year already. I am always amazed how older docs are willing to screw over the younger guys. Granted, I don't know all the specifics in your case, but I would use the 4million they want you to buy in with and open my own practice. I just cant even get close to a 6 person group having that kind of valuation unless you own some extremely fancy real estate that you are making money on by leasing to other docs or something.

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      • #33
        Originally posted by ACN View Post
        Echo a lot of what's stated above. Seems like you are purchasing "blue sky" which is very typical of these smaller groups where the senior partners value their name. It's all bullshit. If they have been making 400k++ off you each year, that's on you for signing such a bad contract.

        We are PP ortho, our pre partnership employed doctors earn a salary and can keep 90% of their bonus (if they are positive... In your situation, the 400k, you would have kept 90%).

        Our buyin for our group is like $5-10k. This makes you partner with voting rights and you share ancillary revenue. Our 1+++m buyin is for our asc and has a rolling valuation performed annually.

        Sorry to hear about your situation... Definitely sucks and hard place to be in.

        Get an independent evaluation. Equal voting rights. Figure out why you see giving your partners 400k/year for 5-10 years.
        My PP ortho was the same. The ASC and real estate portion is where you can get into million dollar buy-ins. Not just for the "practice" itself.

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        • #34
          I wish OP would give some updates, because clearly if this includes a lot of real estate that is a different story than no real estate/ASC, etc.

          It also shows for any new physician looking at jobs you should a clear defined path to partnership (if desired) and a contract that is clear about what will happen in the future. One group I was interested in had an extremely long time until partnership and during those years they were making a killing off of you. At anytime they could just dump you before they offer partnership and also would not share any details about how much they were bringing it, etc. I hired a contract attorney to review all contract offers I interviewed with, he told me he had never seen a contract so bizarre as the one above. Too many red flags.

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          • #35
            I was part of a private practice many years ago early in my career. The group had started its own billing business and when I joined the group they told me that this was a separate business for the current partners which I would not be part of. I thought nothing of it at the time. They told me this billing business was a great deal since they went the "extra mile" in collecting funds. I found that they were charging around 13% of collections, which in radiology is egregious. In my current practice we pay an outside billing company around 4%. This was a large radiology practice with multi millions in collections every year. I was getting screwed big time but had no idea, I was young and naive and had no idea what a competitive collection rate was. Of interest is that this large group has since gone belly up. Life is interesting.

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            • #36
              Originally posted by K82 View Post
              I was part of a private practice many years ago early in my career. The group had started its own billing business and when I joined the group they told me that this was a separate business for the current partners which I would not be part of. I thought nothing of it at the time. They told me this billing business was a great deal since they went the "extra mile" in collecting funds. I found that they were charging around 13% of collections, which in radiology is egregious. In my current practice we pay an outside billing company around 4%. This was a large radiology practice with multi millions in collections every year. I was getting screwed big time but had no idea, I was young and naive and had no idea what a competitive collection rate was. Of interest is that this large group has since gone belly up. Life is interesting.
              Ouch thats a new one!

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              • #37
                I sold my 2700 square foot building with all instruments, full OR and recovery room (and established staff) in 2015 for $500,000.(solo plastic surgeon). Nuff said

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                • #38
                  thanks for all the great responses so far. An additional few questions:

                  What are typical buy out formula’s and plans for physicians after they leave the practice?
                  What plans are in place as physicians slow down their practices.

                  Thanks!

                  Comment


                  • #39
                    A good place to start is paying out some % of the AR. After that it really depends on what type of assets the practice owns. For my former anesthesiology group, essentially zero. Other types of practices may have hard assets to buy back. I wouldn’t pay for goodwill, which from your original post may be the expectation of the equity partners.

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                    • #40
                      Originally posted by startupdoc View Post
                      thanks for all the great responses so far. An additional few questions:

                      What are typical buy out formula’s and plans for physicians after they leave the practice?
                      What plans are in place as physicians slow down their practices.

                      Thanks!
                      Why do you have to buy them out? Theyre no longer contributing and if you do nothing its worth zero. That is a gift to them, nothing more, which I'd consider your decade of service pumping the coffers to have already paid for.

                      Maybe Im a sucker but unless theres a real cost I just cant imagine imposing any cost to someone, especially after theyve been there working.

                      There are tons of docs that have thought they had something and found out otherwise when they shopped their place. I've taken meetings with some plastic surgeons in great locations, think excellent suburbs of LA near big time studios, beaches, orange county, etc....that i just walked away from with zero further contact. Often you can get these details from the recruiter, and the fact they need one in the first place.

                      You can just let these people fail. I have gotten calls years later from some asking if im interested still as theyre about to take total losses. Without a producer, theres zero value, and a certain premium for doing it your way. In cosmetics you have to pay to acquire a large portion of your patients (at very least initially) so theres no value there either, its just assets.

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                      • #41
                        Originally posted by startupdoc View Post
                        thanks for all the great responses so far. An additional few questions:

                        What are typical buy out formula’s and plans for physicians after they leave the practice?
                        What plans are in place as physicians slow down their practices.

                        Thanks!
                        The questions remain about real estate, ASC, etc

                        Comment


                        • #42
                          Originally posted by MPMD View Post

                          seems like a really good way to proceed here is for the partners and the prospective partners to agree on an independent appraisal.

                          my guess is that it would be relatively easy to find someone like this. require unanimous approval of the appraiser by all involved.

                          as part of contract w them (non disclosures etc) could ask them to verify that they a) had no prior relations w/ any stakeholder and b) have disclosed all private conversations. my guess is that would be something that an independent reviewer wouldn't even blink at but a shady one would find very scary especially if they were planning to produce some ridiculous valuation.

                          if the people selling you the practice/shares only want to go off of a valuation they produce and are unwilling to have a 3rd party i think that is every possible red flag. double red flags if they invoke emotions, "i'm offended that you don't trust me."

                          i know someone who sold part of a medical practice, the way he handled it is the prospective partner picked his consultant and the partner paid for it. seems very fair to me.
                          You think someone who proposed that sort of deal won’t pitch a fit when an independent appraiser comes back and says it’s worth $12M?

                          I’d look at this from a return point of view. If I was investing in a risky asset, I would want to see a premium for the return. They’re offering you 10%. I would love expect double that for something that could go bust.

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                          • #43
                            25M is a bit steep for 6 doc ENTs... not crazy if they have a good piece of commercial real estate or two and are highly entrenched in the community, though.

                            Old valuation was one avg year gross (seller/owner will want this method), newer is one year net (buyers will always want to use this).
                            Then, you add in any tangible major equipment (MRI in ortho group, surg center/suite in dent/plastic/etc), real estate, company vehicles, etc at present depreciated value. The minor instruments and XR and ultrasound machines and otoscopes and office computers and printers and phones and stuff are very minimally valued unless they're basically brand new. Finally, do fudge factor for how good/bad of a local rep and referral pattern the group has, try to foresee any potential buyout by a hospital (usually bad for all, partners and associates and all), and guesstimate on how long/short any key docs might stay in the group.

                            You have to remember that you can quantify it all you want... the group is worth nothing if there is no buyer. If there are three local hospitals bidding on a GI or vascular group or whatever, it is worth more than you could ever logically arrive at (net/gross) if you are the junior associate in that group.

                            So, back to the value... I would sure hope a good private ENT doc working full time can gross 2M from services. It depends on how much staff and hours/wk and if office has surgery suite and blah blah. Let's say the gross 2M each and then net 1M each for simple math. Six docs means the practice is worth 6M (net) to 12M (gross method) with slight goodwill adjust... plus any major quantified assets (so zero if they rent the office spaces and don't have major equip).

                            ...as others have said, for the price they want, have control and just START YOUR OWWWWWWWWWWWWWWWWWWN

                            Originally posted by Auric goldfinger View Post
                            I sold my 2700 square foot building with all instruments, full OR and recovery room (and established staff) in 2015 for $500,000.(solo plastic surgeon). Nuff said
                            This is not applicable here. The value of a solo (or group) heavily surgical practice is all in the talent and name of the surgeon(s). If you or I step down, even if the office was rocking a year or two ago, our office is instantly only as valuable as the depreciated equipment and the space. Your office overall probably lost 50-80% value when you stopped running the machine... and would have lost another 10% of the equipment/building value annually until sold. Our name or our results don't help the price anymore, unless the buyer believes we will keep working awhile.

                            For an active multi-doc group like OP is an employee in, the value is almost all in the revenues they bring in (which represent rep and referral patterns)... oh, and the "potential" if you believe the OP's owner doc, lol.

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                            • #44
                              Originally posted by Max Power View Post
                              So, back to the value... I would sure hope a good private ENT doc working full time can gross 2M from services. It depends on how much staff and hours/wk and if office has surgery suite and blah blah. Let's say the gross 2M each and then net 1M each for simple math. Six docs means the practice is worth 6M (net) to 12M (gross method) with slight goodwill adjust... plus any major quantified assets (so zero if they rent the office spaces and don't have major equip).
                              Have you had personal experience with a valuation being calculated this way? Because I have 2 surgeon friends and a family member in private equity, and even while we are over-simplifying, that is not how I've ever heard the valuation being reached.

                              Common in surgical groups, is an "adjusted EBIDTA." So to use your numbers, the 6 docs bring in $2M each collections. They have 50% overhead and each takes home $1M. But their salary is also an expense, so if the MGMA median ENT income is $500k, then the "adjusted EBIDTA" is $500k per doctor (basically the profit over what they could be reasonably paid... their income of $1M minus the "typical" income of an ENT). So the group's "adjusted EBIDTA" is $500k x 6 = $3M. $3M x whatever modifier you want (5, 8, 12) = the value of the practice in the private equity world. Plus hard assets of course.

                              I'm sure it's been calculated other ways too so I anxiously await others' disagreement.

                              Harder to determine with the OP's situation too since it's not 6 equal partners. Anyway...

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                              • #45
                                Agree with above. Multiples of ebitda is generally how it is done.

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