Physician in private practice 2 years (associate), exploring avenue to partnership

[angelex13]

Hi There,

I'm a plastic surgeon in private practice on the east coast. I joined my mentor after graduation July 2018 - he had previously been in practice for 23 years.

Over the last 18months I've generated significant revenue for the practice that puts me at the highest bonus level per my initial contract. However, i'm still only making about 20-25% of what he generates. His practice is about 80% cosmetic, 20% reconstructive, mine is the opposite.

We've had several discussions about what being a partner entails, and whether or not i'm able to financially contribute to run the business on a partnership level.
He currently has a third party evaluating the business to determine its valuation and buy-in.

We've both agreed we need to figure out how to split the business in a way that seems fair and equitable i.e. individual vs group and fixed vs variable.
We lease the office and do not have ancillary services (PT/Radiology/equipment) beyond printers, etc.

Who could help me navigate this financial situation? I don't want to end up in a partnership where I can't cover my cost of running the business and/or feel like i'm being taken advantage of.

Some people have mentioned accountants or lawyers, and I have briefly spoken with other colleagues but my situation seems unique (1 senior partner, junior associate). He has provided me the financials of the business broken down several ways and over the last 3-4 years. He's planning to talk to some people, and I agreed I should as well.

Thanks in advance for any info.

[ACN]

This seems pretty cut and dry to be honest. Your "buy-in" should entail hard assets only, I wouldn't buy any "blue sky." As you become more well known, your cosmetic practice will probably increase, thus your revenue will increase.

Once you are 50/50 partners, fixed expenses are split 50/50 (rent, staff salary, lights, ect). Then variable expenses are splint based on production, thus he'll pay more until you produce more.

Since there are no ancillary services or revenue, it's basically eating what you kill model. If you get ancillary services in the future, those are split 50/50.

[jacoavlu]

this board tends to oppose placing much or any value on “goodwill” which may be appropriate in some situations but very much not in others. Having a well established referral base and above market payer contracts or solid hospital contracts can definitely be worth real dollars. These things require experienced analysis of specific facts and circumstances.

that is to say, try to find someone competent and independent that look at numbers and come up with a valuation. If the boss finds someone to do the same, well now you have some starting points to try to bring together.

[Tim]

•”We lease the office and do not have ancillary services (PT/Radiology/equipment) beyond printers, etc.”.
Very reasonable for you to split office expenses, including any administrative expense.
•”He currently has a third party evaluating the business to determine its valuation and buy-in.”
This maybe a point of contention. What are you buying that contributes to YOUR income? A place to practice and build your patient base in the future, not the past. He already pocketed the value of the past earnings and is keeping his patient base.
Revenue - variable costs - shared overhead = profit. You have visibility of your revenues. Can you carry your share of the fixed costs? If you get a CPA, you can proforma the past and the future.
You might be able to do this yourself. What if simply modeled the past under the new assumptions? Same numbers simply split into two shares.
The mix of cosmetic vs reconstructive may result in substantially different results for each partner. He actually may be subsidizing you a bit while your practice matures. That has value. The goal is to allow an equitable split now and in the future based on contributions. A straight eat what you kill is two practices with shared expenses. A partnership splits profits based on contributions but weathers ups and downs on an agreed basis.
Understand the numbers and it sounds like you both want a fair split rather than a straight eat what you kill. That’s the point you get a healthcare attorney involved. The document includes the start, during and exit. Back to making money! Good luck.

[ENT Doc]

This seems pretty cut and dry to be honest. Your "buy-in" should entail hard assets only, I wouldn't buy any "blue sky." As you become more well known, your cosmetic practice will probably increase, thus your revenue will increase.

Once you are 50/50 partners, fixed expenses are split 50/50 (rent, staff salary, lights, ect). Then variable expenses are splint based on production, thus he'll pay more until you produce more.

Since there are no ancillary services or revenue, it's basically eating what you kill model. If you get ancillary services in the future, those are split 50/50.

Would disagree to some degree. Staff (billing) are not just fixed and whose work depends on production. Also, ancillaries are fixed and variable. If I order and read more CT scans, for example, I get more of that revenue.

[EastBayHand]

I was in a very similar situation and happy to share more offline if you'd like - please send me a PM.

In brief, there are pieces to what everyone has already said above. "Buy in" generally refers to earning ownership (50% of shares) that encompass (1) Hard assets, (2) Goodwill, and (3) AR. The professional practice consultant who does the valuation will come back with an extra-ordinarily high number because it is based on 3 prior years EBITDA for the practice, which obviously includes his 80% cosmetic practice. The MAJORITY if that valuation will actually be attributed to Goodwill. For those that don't believe there is value in Goodwill - that is simply not the case. Goodwill reflects the energy and effort it takes to start a practice, obtain insurance contracts, set up office protocols, reception staff, phone lines and EMRs, billing companies, referral patterns, community reputation, online reputation, website, etc. Basically, Goodwill is saying "how much are you willing to pay to not have to build this all up from scratch." If it's a practice that is already generating hundreds of thousands of dollars of income per year.... you can bet the Goodwill valuation will be in the hundreds of thousands of dollars. The real question for you (as noted above): Why would you pay for "referral patterns and reputation" if you will not be benefiting?

The first conversation you need to have with your partner is what does it mean to be a PARTNER? If you own the practice 50/50, then you get 50% of the referrals. How you decide which patients are seen by which provider is up to you. In my partnership we first tried doing it by "day of the week" (Monday to me, Tuesday to him, etc) and for a number of reasons it wasn't ideal. So we switched to patient's birth-year (odds to him, evens to me) and that has worked well. Of course if a patient REQUESTS a specific provider, that is where they are scheduled. Your partner's natural inclination would be to respond "but why should I share these referrals with you, I've spent 23 years building up my referrals!" And the answer is simple: because that's why you're PAYING him for Goodwill. And ultimately he should realize that you are his exit strategy and he is now cashing out on the work he has put in. If you don't pay him (and he doesn't share referrals) then he is left alone with zero dollars. So he's better off taking a mutually agreeable value from you.

Coming up with a formula for fixed/variable expenses is relatively easy. The practice consultant can help with that. Typically fixed expenses are about 40% of overhead, so you adjust the remaining 60% based on productivity (usually either charges or collections, up to you). I'm not a plastic surgeon, but there may also be some correction factors for your different patient populations (ie: do cosmetic patients who pay cash require lower expenses because there is no billing involved and less overall paperwork and time? Or do they require more time in the office and reflect a higher "usage" of the office?).

A/R is just math. Basically, you have to "buy" the money you have already made (for him, as an employee) but not yet collected. This is obviously discounted based on your expected collection rate. Or, alternatively, you can defer that part of the valuation until you know exactly how much you collect 6 months down the road and then pay it back.

What you need is a "practice consultant." They are much cheaper than accountants and lawyers and 10,000% more valuable. This is what they do. Once you've finalized the details, you hire a lawyer to write it all up in a partnership agreement. It's going to cost you both quite a bit ($20k-ish), but it's the cost of doing business. At the end of the day, if you can invest in a successful practice that will generate DECADES of high income and earning potential, it will be a good investment for you. Private practice can be challenging, but the rewards can be exceptional. Not just financially, but psychologically. Having the freedom and flexibility to practice your way with minimal administrative influence is amazing.

PM me and we can talk offline.

[jdkelso]

East Bay Hand's answer is really good. I think the best thing to do is to get an understanding of what is being offered. Generally, you want to be an equal owner. Solo owners tend not to be able to share very well and it will be important to figure out if the owner can share. Cosmetic versus reconstruction are 2 very different business models. If you are expected to share 50% of the cost of marketing that can really hurt you because you will not get 50% of the benefit. You would get 20% of 50% of the benefit. Paying for something like that is a friction point and will lead to conflict. Negotiating is not getting what you want. It is more about probing to understand the actual deal and trying to find out how the other party will react if things get tough. It boils down to fairness.

[DCdoc]

I’m not trying to be snarky, but did you have any conversations re: partnership before taking the job? At this point, he has the upper hand since you’re already working there and building your practice. Hopefully it is truly done in a fair way, but buying goodwill is a very subjective term, as you can see from some diverging posts here. I’m not in a field where that applies, so I can’t add much value, but hopefully you had a general sense of what becoming a partner might entail prior to taking the associate job.

[EastBayHand]

In response to DCDoc above. In theory, of course it is ideal to have a partnership pathway nailed down before engaging. In reality, this NEVER happens in these circumstances. The reason is that incorporating a second person into a solo practice is new for everyone involved. When I started practice as an employee I had a practice consultant "walk me through" the whole process: the contract, the partnership path, buy-in, etc. On it's face, everything looked fairly cut and dry, but of course the devil is always in the details. In an employment agreement there is simply no reason to delve into the details. As noted above, it generally costs about $20k and significant time, effort, and lost-sleep going through the actual negotiations and there is no reason you would do that when hiring an employee that you're not even sure is going to want to become a partner. So it's not until the true negotiations that the details become apparent. That is the moment that you realize the only thing that really mattered is if your partner is honest, ethical, and serious about wanting to slow down/retire/sell part of his practice. If those three criteria are met, the negotiations and partnership will happen. If not, you might as well walk away now. But circumstances are extremely stressful.

I wish there were an easier way, but you cannot understand the process unless you have been through it before. And for a new graduate and a solo practitioner, that is rarely the case.