Help Evaluate Business Buy-In

[mkd]

I would love some wisdom and collective advise of the WCI community as I evaluate a buy-in of my practice's financial business.

 

The details:

I'm a partner in a single specialty group, over 10 partners.  Prior to my even joining the group, the original partners created a billing company separate from the medical group.  Their goal was to expand the administative arm of the group and gain new business doing billing for other practices.  The growth never really happened so the majority of the business is doing billing and management for our medical practice.  This leads to some profit on the business side, which I currently do not get any of.  I've never been happy with this arrangement, but this was the area where we wanted to live and there weren't any better options when I was looking for jobs so I'm trying to make the best of my situation.

Recently I've learned there may be opportunity for me to join the business side as there are some of the full partners in both who are beginning to cut back and they recognize that us younger partners in the medical side are not going to be happy with a continued percentage being shifted to the "business side" without us having some benefit.

Anyway, my question is how people would go about evaluating what would be a fair buy-in.  I know what the last few years of earnings were.  Is there a target return on investment that people would aim for?  It's obviously a much riskier investment than just buying index funds, and I would want to be compensated for that risk.  We could lose our hospital contract tomorrow and my share would be worthless.  Or we could continue like we are for the next 10 years in which case I would do well.  What type of return do people look for in a surgery center?  This isn't a surgery center, but I'm just trying to get ideas.

My financial house is in order in terms of retirement, etc.  Long time adherent to WCI principles even before I learned about him.  I would just divert money going into my taxable account in order to fund this.  Thank you for any thoughts you may have.

[DCdoc]

I don’t see any intrinsic value. It’s just money shifted from clinical to billing, which is then divided by the partners in billing. There’s no outside “business.” It’s just your group? Is the amount being charged fair? Or is the billing cost being inflated to screw the clinicians not in that setup?

[Tim]

Of course the billing company has been making a profit off of your work. Since the sole client is the group, how much is the billing company worth if they lost the group?
My point is the exit of the older partners and transition to newer partners is problematic. The original intent seems to have been unsuccessful.
To me it comes down to how the group splits the total profits of the group and the billing company too. What would be your share if it was contracted to a new billing company or brought in-house? The “opportunity” is in the future, not in the past. It seems like through the group you’re bearing a share of the “costs” but getting zero share of the profit. Who collects the buy in and how does that get split? The value of your future profits discounted would be a start. Sounds like they want a buy in for the “right to bill your work”. Politically, this is a land mine. Exiting members want to “sell”. What are they really selling?

[ENT Doc]

DCdoc wrote:

Or is the billing cost being inflated to screw the clinicians not in that setup?

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Yeah, this.

The analysis here will need to come from evaluation of the separate entity.  If they are profiting from doing a mild amount of work for other practices you'll benefit from this too, but you'll be expected to pay more for a buy-in.  The "is it worth it" analysis will come from an after-tax cash flow analysis under a "do it" vs "don't do it" comparison.

[Ozarka]

That's interesting...so if the billing company is really only servicing that clinic that the partners are associated with then it's almost as if the owners of the business side are taking money from the clinic for their profit in the business side, no? Almost as if the size of the pie (money) remains the same but is sliced a little differently (clinic profit vs. billing co. profit).

I could definitely see the appeal if the billing side serviced other practices but if yours is the main one then that's....interesting. How many of the 10+ partners are owners of the billing co.?

[childay]

mkd wrote:

Their [supposed] goal was to expand the administative arm of the group and gain new business doing billing for other practices.  The growth never really happened so the majority of the business is doing billing and management for our medical practice.

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Fixed that for you

[ajm184]

Financially, a 'number' can be determined using a variety of methods including discounted cash flows, EBITDA multiple, or some type of revenue valuation.  The other intrinsic part to evaluate will be a. can the % of collections rate be improved, b. is there an ability to expand business beyond the current clinic?  Billing is a tough low margin business that is dependent upon people and processes to extract the highest collection rate in the most efficient manner.

I would like to be assured that the capital invested is mostly used to improve/expand the business versus paying off other partners.   Lastly, if your capital is being used to purchase new billing technology, then I would be cautious that the historical returns may not occur in the future as the business may have been underinvesting previously.

[Tim]

Don’t make the mistake of thinking of this as an enhancement to your earnings.
It is an investment with an expected return subject to risk of loss. Rate of return for your investment and the certainty involved.

[ACN]

Seems like you are paying into in the billing without obtaining any profit. So you almost have to buy in, but at what cost, and then what is the break even point?

Ex: Buy in $50k with $5k profit... 10 years.

Also, what is the buyout of the senior partners? For example, our surgery center has specific bylaws for retiring Drs. Certain cases per year and a certain buyout strategy.

[CordMcNally]

That's nice of the other partners to give a current partner the chance to buy revenue back that was already earned...I guess.

[G]

mkd wrote:

This leads to some profit on the business side

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unless you count the nonshareholders paying in, the captive billing company doesn't really have a "profit," it's just less expense, right?  kind of like if the shareholders were charging the group to plow the snow out of the office parking lot vs hiring a snow removal service.

anwyay, its value is x% of group's collection minus admin expenses.  back of the envelope numbers: 10 docs collecting $5MM total x 5% fee - perhaps 250k admin = zero.  iow, your "share" is already worthless, I hope it is priced accordingly.

regardless, for our much larger group, I have long wanted to do this, but with each year of added bureaucratic hassles, I get less enamored of the idea....

with a group your size, the economy of scale may not be worth it.

probably the best thing would be to shop out the contract and see if a big player would bid to absorb the company or you could use the captive as a bargaining piece for a better rate with a big player.  either way, the pessimist in me wonders if this is why you're being allowed the opportunity to buy in.

also, as much grief as we had spinning off a little side-business, I really wonder what the attorneys would say about your situation.

[DCdoc]

So your buy-in just allows you to keep a higher % of the revenue you’re currently already generating. You keep more of it and the other partners steal less?

[White.Beard.Doc]

The details of the billing company set up matter.

What percentage of collections does the billing company charge?  Is it line with market rates from independent billing companies?

Are the employees of the billing company completely separate from other practice employees or is there overlap?

Is this billing company set up as a true separate business with actual expenses and true market value revenue?  Or could it be set up as a sweetheart deal to shift revenue to the senior partners based upon above market charges to the practice?

If I was going to buy into this billing business, I would insist that an independent accountant with medical practice and medical billing expertise come in and look over the structure, the client fees, the company expenses, and the P and L.  This type of setup has the potential to be a major source of abuse of the partners who do not share billing company ownership, but you don't really know until you do the analysis.

Were the bottom line numbers of the practice shared with all partners in the past, including the expenses for the billing company?  The main practice entity should be paying a market based fee to the billing company.  If you have been paying above market without disclosure, then your practice has honesty and trust issues that could get ugly as this setup sees the light of day.

[mkd]

Thanks for all of the great responses.  It's an issue for me that has a lot of gray area and probably no clear cut answers.  Some of the reasoning for a higher management fee, although still in line with industry norms, is that it helped with hospital contracts.  Administrators don't seem to go after that as hard as they do the doc salaries.  We have quite a few non-partner docs so a percent or two split with a smaller group of people can end up being substantial.

 

Tim wrote:

Don’t make the mistake of thinking of this as an enhancement to your earnings. It is an investment with an expected return subject to risk of loss. Rate of return for your investment and the certainty involved.

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This is how I'm approaching it.  I don't really know what should be a good target ROI.  In my mind 5-8% is far to low given the potential of the investment becoming quickly worthless if our medical group runs into problems.  This would be significantly riskier than the S and P 500.  20% would be a target I'd rather aim for, but I don't really have any idea of how businesses are evaluated.

I would definitely prefer to be in a situation where we either use an outside company and actually negotiate a reasonable percent overhead, or else do it all in house and be a full partner in the medical group.  However, this is the situation I was dealt.  I would like to be a partner in everything because then my incentives are in complete alignment with all of my partners, I just don't want to significantly overpay to be full partner in everything.

If this proceeds, I will have the chance to see the books so I'll have a decent idea of what I'm getting into.  The business itself hasn't really established how to deal with retiring partners and there is a chance that some of my buy-in would be going towards buying someone else out.  Some of the partners want no new partners so the complete opportunity may never actually be presented to me.  However, some of the partners recognize that if you want younger members to be active and advance the practice, they need to have ownership or else it can lead to disgruntled junior partners.  Even the thought that this would be an option for me has made me feel more engaged in wanting to advance the practice.  The thought of continuing for years with a slice of my earnings evaporating before my eyes makes me more likely to approach my career as a job which in which I show up and provide solid clinical care, but avoid the extra work that goes along with being an owner.

I really appreciate all of your feedback.

[mkd]

White.Beard.Doc wrote:

The details of the billing company set up matter.

What percentage of collections does the billing company charge?  Is it line with market rates from independent billing companies?

Are the employees of the billing company completely separate from other practice employees or is there overlap?

Is this billing company set up as a true separate business with actual expenses and true market value revenue?  Or could it be set up as a sweetheart deal to shift revenue to the senior partners based upon above market charges to the practice?

If I was going to buy into this billing business, I would insist that an independent accountant with medical practice and medical billing expertise come in and look over the structure, the client fees, the company expenses, and the P and L.  This type of setup has the potential to be a major source of abuse of the partners who do not share billing company ownership, but you don’t really know until you do the analysis.

Were the bottom line numbers of the practice shared with all partners in the past, including the expenses for the billing company?  The main practice entity should be paying a market based fee to the billing company.  If you have been paying above market without disclosure, then your practice has honesty and trust issues that could get ugly as this setup sees the light of day.

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Great points White Beard.  I think that our management fee is in line with industry average, probably on the higher side of what is accepted. My guess is that if we were dealing with a true outside company, we would be more aggressive in negotiation a better deal.