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Buyout questions

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  • Buyout questions

    I have a situation I wanted to run by the forum. I'm a few years out of training and part of a private practice group in a subspecialty. This a bigger group in the field. The goal of management is to expand beyond our geographic area and eventually bring in other groups under the same roof to lower overhead and decrease cost, which will need capital. Part of this will involve forming a Business Support Service Organization to peel off the business side from the medical practice, which can then be bought out by Private Equity and then taken nationwide.

    Like any other buyout, this seems positioned to benefit partners the most, and older ones even more. A majority stake will also be given to the PE firm, which is a major concern for those of us early in their careers. There will be initial up front money to partners at some amount that is yet to be determined, which then needs to be paid back as a "management fee" every year which will likely be some 6 figure amount until they are paid back. As current associates, we would not get this but will also be "spared" the management fee out of our collections so could theoretically make more $ per year than the partner seeing the same amount of patients, although with less in the bank. As current associates we would also get some bonus $ AND a small portion of equity given to us when we do reach partnership. We are being told that as associates we aren't being forgotten, but also aren't getting as sweet of a deal as the partners which sounds accurate to me. From what we are being told, future recruits into the practice wont have access to this $ whatsoever. Since no deal has been closed and they are still getting offers, I unfortunately cant provide exact numbers.

    Has anyone been part of an arrangement like this? Are there any other questions I should be asking?

    In my time with this group I have overall been happy financially and am 1-2 months away from paying off my $230 K of student loans early by living like a resident. So if this is a sign to leave at least I will have one less monthly payment to worry about (and am very grateful to WCI for this advice).

    Thanks in advance

  • #2
    This sounds appropriate to me, but others will post who have gone through the process themselves. Not sure why it would be a sign to leave unless you aspire to be a partner in a small democratic group (and you can never predict the future), in which case, this is not the place for you. But you already signed up with the "bigger group in the field" so I would presume that is not a huge goal. Sounds like a possibly lucrative opportunity for you. And you can always take your cut and go elsewhere (probably outside the geographic area if you want to practice) if and when the plans become reality.

    The fact that those who have been there the longest get the biggest part of the pie only makes sense. A bite of something good is almost always better than just smelling it.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087


    • #3
      Probably state and specialty specific, but I know of 2 groups that have been bought out by PE, and it hasn't been great for associates.
      • Most deals promise a chunk of capital upfront, paid out over the next 3-5 years, and divided up by partners as they see fit. In return the PE gets operational control ("we won't touch anything!") and contracts for those 3-5 years paying out ~20% less in W2 income than what you were making. This is how they get the money back.
      • If AR stays same or grows, they don't touch anything. If it shrinks, then they start trimming benefits/vacation/flex time/salaries.
      • GREAT if you're partner in the last 3-5 years of your career: get a big lump sum payout paid out over the last 3-5 years of your career, coast. However unless you're a critical administrator/clinician, you probably won't be retained after that as anything <0.8 FTE, easier to replace you with a productive new grad.
      • NOT GREAT if you're associate/partner track: they may throw you a token sum (10-100k) or worse, offer you privately held "company shares" of the new entity (which can only be bought by your partners or the PE firm) and pay a token annual dividend. One buyout even required you to "buy in" to the shares over time, locking up your money. Also gone is any flexibility built into the old system: if your private group allowed you to split an FTE with someone, or take unlimited vacation for commensurate reduction in pay, that structure will probably disappear.
      • I know many partners who retired happily from such a deal.
      • I know many 3-25 year stable clinical associates who didn't get a payout, who are now being asked to reduce their salaries/work longer because their clinical divisions aren't doing as well as projected. They didn't get a payout. The younger ones can move, the older ones will probably stay due to inertia.
      • We get offers all the time to join the buyout - USAP/Mednax/TeamHealth/NAPA have courted our group. Since we're all equal partners, the payout isn't that great (works awesome if you have 5 mega partners, and 25 CRNAs or associates). Philosophical debate of "selling out the future of private practice" aside, the numbers don't make sense.
      My advice:
      1. Start looking for other jobs - always worth knowing what you're worth/having a Plan B. It may be you're in the best group for your scenario.
      2. PE will NEVER have your interest in mind. They want doctors' revenue generating potential, and want to pay you in company stock.
      3. Find other practices/groups that the PE firm has bought out, and see how that's going for that group. Did they grow/shrink, and what did the PE firm do? How's the associates lives?

      Good luck!
      Last edited by redsox19; 11-19-2019, 06:12 AM.


      • jdkelso
        jdkelso commented
        Editing a comment
        Great summary. I agree the buy out dollars are not generally used as the sale pitch for the younger folks. The buy out price after taxes is not sufficient to lose your voice/freedom if you have a career ahead of you. Young folks know this. The sales pitch for younger folks is always efficiencies of scale, no hassles, business people know how to do this better. These are not enough to offset the basic issues that create burnout. PE can't fix burn out but they try to sell that they can. They also can't manage surly patients or other aspects of the job that create career dissatisfaction. That may be too harsh, maybe I should say PE claims they can make life better. If your practice sells, your work load and meeting requirements will not decrease. They will increase and you just gave away a lot of your profit (ie the gravy) to the corporate folks. If PE keeps 15-20% and you get $50 per WRVU, that means you now get $40-43.

        In the PE meeting with the PE folks, ask how much of a bonus the PE people in the room will get if this deal closes. (That is what you call an attention getter. Bill, how much do you make if our practice sells?) Like redsox19 said, you can look into the dissatisfaction with the companies listed.

        The show down will be inside the group itself and your group will only survive if the young folks can fight off the vote to sell to PE. My advice is to get as many young people into leadership roles asap.

        When clients call me and ask me about PE, I always say I am an attorney and I would never give 15-20% of my profit from my labor to wall street. Attorneys have not sold out to PE. It does not happen in law.

        Lastly, these transactions are multi-layered. It is not the equity purchase and supporting sales documents that are necessarily bad. It is the employment agreement. It is not easy to leave once the sale goes through and you have signed all the paperwork. You generally have to be in a position to justify a for cause termination by the physician. In many instances, the physician cannot terminate without cause for 3 to 5 years. This process can be painful.

    • #4
      Yes thanks for this. I agree I joined the bigger group for a reason, although I didn't do that expecting something like this. I dont intend on leaving just over this, just keeping my options open for the future.


      • #5
        Golden parachute for the partners, nothing for the associates. If my group did this before I was partner, I would leave unless this is the location I would want to live forever. I'd look for a new job as a backup plan. My guess is you'll be working longer hours, less pay, and then most of the senior partners will retire once their contract is up; thus making you take on more hours, pay for fees, and not get a pay raise.


        • #6
          yes, I agree about the golden parachute for older partners especially. we are not 100% tied to the area (which is very HCOL for one thing), so will likely start to look around while the discussion continues since it's not set in stone yet


          • #7
            Nothing wrong with preparing for it, but it may be an ok deal, maybe terrible...but right now its a dream deal that doesnt exist and may never so any drastic moves can simply wait. Prepare away and even line things up, but dont commit until you have real info. Some of these things never end up happening for all kinds of reasons.