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Tips for saving/paying for buy into partnership

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  • Tips for saving/paying for buy into partnership

    Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?

  • #2
    The way we used to approach this was that we would set one year salary ( if it was at least 80 % of the average billings of the partners) as the buy in and after being an employee for two years the associate would buy in for the first year at 60 % of billings, the second year of 70 %, the third year of 80 %  and the fourth year at 10 % and then the associate would have bought in.

    This has not worked for us for the last 10 years. There is no great incentive to go into private practice and work 60-70  hours a week.

     

     

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    • #3




      Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
      Click to expand...


      Getting a business loan is tax advantaged in that you can write off the interest. Maybe not relative to other options like decreasing your income as 'buy in', but its something.

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      • #4
        No idea. I just have a low interest rate private loan somewhat organized from the employer. I figured it's lower interest rate than my mortgage so I wasn't going to worry about it too much.

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        • #5
          In the distant past (15-20 years ago), when I joined my radiology practice, there was a buy-in to the accounts receivable. There was a formula that calculated how much a share of the AR was at the time of making partnership, the number usually ended up around $100k, and the buy-in was a salary reduction over the next three years.

          Fast forward to about seven years ago, when new hires started to balk at this, we eliminated the buy-in for the new people BUT we bought out all of those of us who were already "bought-in" with a salary add by the same formula, over the next five years.

          We do have a separate imaging center business partnership (separate from the professional partnership) that we encourage all partners to buy in. We have artificially set the buy-in/buy-out value formula to be relatively low and allow the new partners to buy-in immediately to the profits with a salary deduction over two to three years. We made it such when we learned that another practice in town encouraged new partners to buy in to the imaging centers upon partnership--"just deliver us a check for $900,000 for your share, and you're in!"

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          • #6
            I have nothing amazing to offer, except to say if it comes to needing a loan (i.e. paying interest to get the capital) why not just "live like a resident" and save the cash?  You have probably 1-2 years and the buy-in is most likely less than 30% of your salary.....?  In many cases it could be done, obviously not all.

            This doesn't answer your main question about tax-advantaged methods.  I don't know of any other than getting the practice to limit your income in lieu of buy-in in order to drop your income tax bracket.

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            • #7




              Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
              Click to expand...


              I'm not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

              All ptr agreements are different. To me, what's even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
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              • #8
                A little off topic but could use some of your input. The partnership track for my practice is 20% of deferred compensation for 5 years, which is essentially one year's salary. To me, that seems awfully expensive. Because I get paid a percentage of net collections, the main incentive of being a partner would be to receive whatever is left over after overhead rather than having the practice skim some off the top of what I'm actually generating. Since a full time dermatologist at the practice can generate anywhere from $400-500k annually, is buying into the partnership a good investment? Seems like an awful lot of money to have tied up and maybe I'm better off just investing that money into a well-diversified, low cost, indexed portfolio. Thanks!

                 

                 

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                • #9




                  A little off topic but could use some of your input. The partnership track for my practice is 20% of deferred compensation for 5 years, which is essentially one year’s salary. To me, that seems awfully expensive. Because I get paid a percentage of net collections, the main incentive of being a partner would be to receive whatever is left over after overhead rather than having the practice skim some off the top of what I’m actually generating. Since a full time dermatologist at the practice can generate anywhere from $400-500k annually, is buying into the partnership a good investment? Seems like an awful lot of money to have tied up and maybe I’m better off just investing that money into a well-diversified, low cost, indexed portfolio. Thanks!

                   

                   
                  Click to expand...


                  A lot of practice buy ins have out dated valuations, and most have a hard time showing you what you're actually getting and its consistency. A lot of us younger folks arent really into it, especially if the practice does not have a lot of hard assets that would be difficult to fund for a single person. I think Vagabonds story illustrates that. I have a hard time considering such a buyout myself, you cant really purchase patients anymore, especially if youre in a less hospitalized specialty and more cash based like derm can be. If you dont have much say over the budgets and how to make the overhead more efficient, I certainly dont want to have my income stream subject to someone elses decisions that maybe arent that wise. Tough situation as it has in the past been lucrative, I think the value proposition is falling in general and harder to find good ones. Its definitely good to be an owner, but due diligence is certainly required.

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                  • #10
                    I am a fellow derm and we have one productive NP that generates significant profits for the office and this is essentially what I've already bought into but it's more so the buy out to own the practice completely when my partner retires in 4 years. My buy out is a similar total to yours, 550k, so I have 4 years to start making these large payments. My advice to you would be to buy in to your practice if there are any mid-levels since they could generate 100-200k of profit for the practice a year that would justify the large buy in getting a piece of that pie as a return on your buy in investment. If it is only physicians and you're getting a high percentage of collections in 40s then may be best to pass or ask for higher percent collections.

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                    • #11







                      Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
                      Click to expand…


                      I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

                      All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
                      Click to expand...


                      I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I'm buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?

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                      • #12










                        Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
                        Click to expand…


                        I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

                        All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
                        Click to expand…


                        I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I’m buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?
                        Click to expand...


                        Sounds like a good way to sell whole life insurance to me. Just because there is a tax benefit doesn't mean it is a good idea.
                        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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                        • #13
                          Great topic for discussion. Interesting to hear people's experiences.

                          I wonder if a decent analogy might be how the most impressive investment gains are buying into a growing business on the way up, but if you are buying a large, established blue chip you shouldn't expect those kind of impressive gains.  Similarly, it may have been lucrative to be a partner when the practice was growing aggressively, but a young person buying into an established practice with low/medium growth may not see an impressive return on that capital, especially with current directions healthcare reimbursement and operating expenses are trending.

                          And what happens when several older partners start wanting to divest into retirement or for estate planning?

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                          • #14













                            Just wondering if there are any tax advantaged ways of saving for a buy in/out vs getting business loan or how people approach this expensive financial endeavor?
                            Click to expand…


                            I’m not sure where the tax advantaged ways of saving come in to this question. It seems to me that this has more to do with cash flow than taxes. Or were you wondering if you can buy in through your IRA? If so, very bad idea.

                            All ptr agreements are different. To me, what’s even more important than the buy-in is a possible separation from the partnership. Had this with a client a couple of years ago and she had to threaten legal action to get any of her investment back. When it is one against a group, it can be very intimidating. The contract should specify the terms of how to get out if the need arises. Are there triggering events? How is the buyout structured? Are you assured of getting at least your purchase price back? And so forth.
                            Click to expand…


                            I was wondering about a tax advantaged savings process like a restricted property trust for putting my pre-tax dollars into funding a whole life policy on my partner I’m buying out such that he can start withdrawing the buy out money tax-free (at least for the first 70%) that way we both benefit from a tax standpoint. Any experience with these or thoughts on other ways to not have to pay with after tax dollars?
                            Click to expand…


                            Sounds like a good way to sell whole life insurance to me. Just because there is a tax benefit doesn’t mean it is a good idea.
                            Click to expand...


                            I agree I swore I would never buy a whole life policy but this seems like it may make sense with a restricted property trust to buy out my partner. If a 100k/year of pretax money is funding the policy over 5 years that would allow me to buy him out with 500k of pretax dollars rather than having to use 875k gross income to pay him the 500k in after tax dollars (considering my tax rate of 43%). Sounds like he would benefit from a tax standpoint as well not being taxed on the first 70% of the 500k he takes out then taxed only at 30% on that last 30%. Again, I promised myself I'd never buy a cash value life insurance policy but anyone have any other alternative ideas to use pretax dollars and thus a 43% discount on buying out my partner? Thanks!

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                            • #15
                              I thought it was mentioned but the obvious way to do so is to just take a salary cut and 100k/y of it goes towards your equity buy in, this is pretty standard.

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