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Private Equity buying head doc out. A good deal for Jr docs?

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  • Private Equity buying head doc out. A good deal for Jr docs?

    The head doc and sole owner of our multi-office practice has decided to sell to a VC or PE group.  All of us junior docs were expecting to be able to buy in and achieve partnership status at some point in the future.  Obviously that cannot occur now.

    The head docs point was that his shares were so expensive due to the valuation of the practice that they were unobtainable for a reasonable buy out number.  Because we are losing any potential partnership he is going to give all of us a small number of shares in the new VC owned company.

    Obviously we would be getting shares for free which is great but all of us would miss the first financing round and obtain no financial benefit.  The gifted shares only have value if the practice goes through another financing/investment round.  I don't know how those shares could be sold or liquidated and if the company doesn't succeed in ramping up profits to sell to a future VC group in the undetermined future we all end up with worthless shares.

    I may point out we are all bound by iron clad restrictive covenants so leaving is...challenging...!

    It seems we are all losing a lot (future ownership and control) and may have to now endure a slave-driver management position all to receive shares that MAY or MAY not have some future value.  None of us know how MANY shares are being gifted either.

    Am I asking to much?  He is giving these shares away which on face value seems generous but also ties us to the new company and keeps everyone around instead of a mass exodus.  It may be secretly more self-serving.  It just seems he gets an enormous paycheck from a lot of all of our combined work while we get stuck out in the cold with a carrot dangled out in front of us.

    I would appreciate anyone's advice or comments on the matter.

     

     

  • #2
    Sounds like a pretty terrible deal for the junior docs.  What consideration (other than a paycheck) did you get in exchange for these "iron clad restrictive convenants"?

    Did the sole owner in anyway breach the contract, or are all of the junior folks simply SOL?

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    • #3
      I can’t imagine a restrictive covenant is enforceable with a new ownership structure unless you sign away your life with the new deal. I would probably ask for a cash payout instead of shares while having an attorney review your original contract. The worst he/they can say is no.

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      • #4
        Gut feeling... He's not gifting shares, but the PE company wants you to think he is so he retains goodwill and you are tied to the practice.

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        • #5
          I would check with a lawyer but I would bet the farm your non-compete is invalid once the sale finalizes.

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          • #6
            "It seems we are all losing a lot"

            You're 100% correct in your analysis of ther situation. You and all the other junior guys who are getting hosed should just go set up your own shop elsewhere. Then his big PE payday will probably fall through. The shares are merely to tie you to the practice so he can cash in and they can make money off your work in perpetuity.

            Check with a lawyer regarding any issues with doing that based on your contact. Either he needs to cut you guys in or you should all bail...let him find out what the practice is worth without you.

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            • #7




              The head docs point was that his shares were so expensive due to the valuation of the practice that they were unobtainable for a reasonable buy out number.  Because we are losing any potential partnership he is going to give all of us a small number of shares in the new VC owned company. Click to expand...


              What a thoughtful guy. Weird how it also guarantees he gets 100% and no sharing.


              Because we are losing any potential partnership he is going to give all of us a small number of shares in the new VC owned company.
              Click to expand...


              This comes with strings I assume and are not free, and may actually be extremely expensive.


              I may point out we are all bound by iron clad restrictive covenants so leaving is…challenging…!
              Click to expand...


              Your current contract and everything in it likely dies with ownership change.

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              • #8




                “It seems we are all losing a lot”

                You’re 100% correct in your analysis of ther situation. You and all the other junior guys who are getting hosed should just go set up your own shop elsewhere. Then his big PE payday will probably fall through. The shares are merely to tie you to the practice so he can cash in and they can make money off your work in perpetuity.

                Check with a lawyer regarding any issues with doing that based on your contact. Either he needs to cut you guys in or you should all bail…let him find out what the practice is worth without you.
                Click to expand...


                Totally agree. Deal might just vanish without you guys. Either way, not a trustworthy person at all. If you could herd the remaining cats and stand together you might get something or learn your actual value. Its very hard to do in practice though.

                Good luck.

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                • #9
                  Without seeing the buyout terms, you are purely speculating on his motives. Change of control, new co, and employment law get way way down into the weeds.

                  He maybe attempting to assign the contract rights and have escalators based on milestones in physician retention or performance goals. Basically, one half upfront and the second half depends on meeting the goals.

                  Definitely have your contract reviewed. The VC is buying a going concern. If the jr docs (together) refuse, the deal is in serious jeopardy. The VC and the owner need the jr docs. One Doc is replaceable, as a group you are getting cutout of the deal.
                  Nothing wrong with “golden handcuffs “, like a delayed guaranteed payout is you stay with a guaranteed payment (repurchase minimum) when your time is up or goals met. Both the PE and the owner will chip in if they want the deal to work. The valuation they have in total needs to be split. How much is given to the jr partners in newco? That’s a good starting point. Then decide if it’s worth it. As a group, shares without a market value are worthless. Certainly you won’t get MV if you leave individually.

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                  • #10
                    Thanks everyone for the comments.  It confirms all of our suspicions that we are getting a raw deal.

                    It is a odd situation.  If we all leave it will blow up the VC deal.  But, if the deal blows up, the ownership doesn't change so all of our restrictive covenants stay in place... thus we can't leave.  If he signs the deal the contracts change and we're free and then his deal blows up.  It's an odd catch 22.

                    Clearly we, as a group, have some leverage.  The question is, what is a fair ask?  How much of this first financial windfall is reasonable to ask for?  None of us want to be greedy jerks but no one wants to be a sucker either.  The future shares in my opinion are too speculative to have any value.  I agree that cash needs to be on the table.

                    Comment


                    • #11
                      "None of us want to be greedy jerks but no one wants to be a sucker either."

                      The owner obviously isn't worried about being a greedy jerk. And the private equity guys are undoubtedly greedy. While well intentioned, I wouldn't worry too much about their opinion of your desire to not get hosed.

                      The more important question for you is, do you want to be involved with these private equity guys at all? They'll fundamentally change your practice, will you be happy to go along for the ride.

                      You're smart to demand cash up front or over a reasonable work out contractual period. The shares aren't worth anything, and any nebulous future payments likely won't end up in your favor. As the terms get complicated, the PE guys have a massive edge over you as they do this for a living and will have all sorts of ways to get money out of the practice to line their pockets and leave little or nothing for you.

                      Unless they're going to give you a life altering sum up front, I'd seriously evaluate if you and the others could start your own practice. If you're early career, that will likely be more personally satisfying and financially lucrative for you.

                      Good luck!

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                      • #12
                        Value of the deal / shares= value per share
                        They proposed it. What is the value they offered?

                        Do you want stock or cash? It’s pretty simple. Hey, you might even decide to work for them. That’s your starting point. Is it enough or is it cash/stock. Point, be careful of stock. Without control the goal is to “bleed money” out for services not to show profits for shareholders.

                        Deals are done at closing, simultaneously. Contracts signed, money changes hands. Escrowed if needed like closing a house.

                        The goal is FMV of “sweat equity, past and future “. You want a successful deal, it simply requires VC and owner to cut you in and move forward. Most likely, payment in two components, at closing and when you leave newco.
                        That’s the premise. By default, the jr physicians are what the VC is buying, future revenue stream. The owner is the hurdle, he wants to keep it all. Logically, owner pays for the past and VC pays for the lockup.

                        Using the purchase price as the starting point is non-offensive, it’s their calculation. The debate is the distribution that owner and VC give up.
                        Get advice from an attorney that does practice M&A if the physicians want to get paid.

                        Comment


                        • #13


                          Clearly we, as a group, have some leverage. The question is, what is a fair ask? How much of this first financial windfall is reasonable to ask for? None of us want to be greedy jerks but no one wants to be a sucker either. The future shares in my opinion are too speculative to have any value. I agree that cash needs to be on the table
                          Click to expand...


                          If the deal can't get done without the head doc and all the other junior docs together then I'd say everyone deserves the same amount. The ship for being greedy has already been set for sail by the head doc.


                          Unless they’re going to give you a life altering sum up front, I’d seriously evaluate if you and the others could start your own practice. If you’re early career, that will likely be more personally satisfying and financially lucrative for you.
                          Click to expand...


                          This is the best advice you're going to find.

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                          • #14
                            “I may point out we are all bound by iron clad restrictive covenants so leaving is…challenging…!”

                            What were you originally offered to sign such a restrictive contract?

                            Seems like if all the jr docs can work together you have leverage. Good luck!

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                            • #15
                              These deals are almost always a terrible deal for the non-partner associates, the “junior docs”, and this case is not an exception. If the buy-in to the practice is so onerous, that was also likely unfair, but guess what? That can also be negotiated.

                              This is no longer med school or residency, and you do not have to just accept what the senior doc hands down to to you as written in stone.  There’s a decent chance that this non-compete is not enforceable, too. In fact, the more restrictive it is, the less likely it can be enforced, but you might need a lawyer to examine this.

                              I would get together with the other docs, assuming they are of similar mind, with the position that you are either in for a big payday or you will be (more likely) moving on to greener pastures. The latter is probably your best move, as these PE-backed practices are typically not great work environments for the long run.

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