Partnership buy in due diligence

[MSooner]

Spouse was recently voted in as partner, but the buy in date is not til this summer. We are waiting on the details, but know a little bit from people who bought in before. We already have a lawyer lined up to review the contract because we are concerned about the buy in amount as it seems like it is going to be extraordinarily high compared to what friends at other groups have reported for similar setups.

What sort of professional do you hire to help you financially evaluate a practice and what sort of output should we be looking for from them? A CPA? Should we expect just an opinion or a full valuation?

I even have a business degree and feel like this is a minefield.

[Tim]

1) Not enough info. How firm is the price? You are two years or so into this and it comes down to the additional income purchased and how much it costs.
You can handle that. How firm is the contract? You better half and you can handle that with a decent attorney.
2) The terms and conditions of entry and exit need to be acceptable.
3) From your better half's experience (and prior experience) I would be surprised if you folks were being taken to the cleaners (so to speak).
4) Comparing to other groups is not reliable. If you need help and the methodology is consistent, getting a CPA to review the financials the best case is a list of questions or clarifications. If you actually get into an price negotiation, I would actually view that as a negative. He should be getting the same deal (formula) as everyone else. Pure and simple. This is a stable established partnership. The next prospective partner should get exactly the same deal (formula) too. Valuation calculated exactly the same way.
Your situation might be more valuable than the others you are comparing with. The Batna is saying no.

This is based mostly on your prior postings, not the partnership contract. I would be extremely surprised if you ended up walking.

[MPMD]

tread lightly
go slowly
ask a ton of questions
be wary of anything that seems evasive or incomplete
figure out what "partner" means, i have seen it mean...
a) full partner like you expect
b) weekend and holiday call mule for a lesser percentage of profit sharing bc you are "junior"

[K82]

Every specialty is different but in Radiology its pretty straightforward.

Don't buy "good will".

It should easy to get a valuation of equipment, land, office buildings, imaging centers, etc. Other than that, the 'buy in" is typically accounts receivable, ie, the billing that has been submitted up to when you become a partner and that you will be getting part of payment for as that money comes in.

Be wary of anything beyond that. Anything else you should have already "paid in to" by working your way up to partner.

[MSooner]

What about the value of a hospital contract? And what if that contract is up soon and not fully renegotiated? (Unsure if this is the case, but it’s possible)

Would hiring a CPA with a valuation certification (CVA)to review their professional valuation be a good way to get bearings?

[jfoxcpacfp]

CPA, CVA focused on medical practices (note, this is NOT our firm). It seems to me that physician partner expectations are (in general) notorious for being opaque for those on partnership track when a buy-in is involved. Or maybe only the deals that have suchopacity lead to posts here, dunno. I’m sure there are many exceptions but it seems to me that a doctor being hired with the understanding that the goal is for him/her to make partner should have at least a measure of clarity in the beginning as to what those expectations are. I understand valuations can change with the growth of a practice, but at least a documentation of calculation and an estimated buy-in if one were to be voted in as of the signing date, perhaps a history of the inflation of the amount. Something to refer to when the time comes. And a clear understanding of historical exit values and/or what that buy-in amount has returned on investment in other ways (increased time off, voting privileges and length of time until equal with more senior partners, profit-sharing expectations, whatever).

Of course, a signed NDA would be part of the deal. But is it right to dangle a carrot in front of a doctor who is committing valuable, irreplaceable career years to working up to partner without an attempt at clarifying expected benefits? It seems to me that it’s easy for fairly new (to business) docs to get taken advantage of. NOT that this is the case here.

[jacoavlu]

What about the value of a hospital contract? And what if that contract is up soon and not fully renegotiated? (Unsure if this is the case, but it’s possible)

Would hiring a CPA with a valuation certification (CVA)to review their professional valuation be a good way to get bearings?

the challenge you have is that trying to get an independent valuation toward a deal that may be different than what prior partners got is going to be met with resistance. If you like the job and partners first step might be having your own lawyer review contract and sitting down with the cpa that handles practice financials and working through things.

hospital contracts and payer contracts have value but that’s where goodwill comes in and then things are open to a lot of interpretation. You may struggle to find someone with a lot of specific knowledge that can accurately value those things.

[VagabondMD]

Our practice always discussed the partnership track and the formula for buy-in in the hiring process. We spoke about what recently minted partners had to commit and what recently exiting partners received upon exit. We did our best to ensure that the buy-in was at least as fair to the new person as it was to the exiting partner, often more fair. When you think about it, the group should be more invested in the person coming in that the one going out, be it for retirement or to take another job.

We were an old school group, and our word and a handshake meant something. Our terms were generally non-negotiable. They were the terms of the last x number of people to buy in, and you could take it or leave it. When people did not continue with partnership, it was for other reasons (not the right job/lifestyle fit, relocation, etc.).

Nobody ever brought in a consultant (that I am aware of) to look at the books. I suppose that we would not have cared, other than any costs that accrued for the group in the discovery process (legal, accounting), if any, should be borne by the party requesting the information. If the buy-in is high, you should be getting a lot in return.

[MSooner]

They are already paying for a valuation by an accounting firm, so redoing that seems silly. But I can’t say either of us could look at that and really understand what it means or if it is a fair valuation without professional help. I mean, if you are buying part of a business, should you understand the financials in detail regardless of what business it is?

I wish I could say it has been transparent and we completely trust them, but that isn’t the case. It’s not necessarily that things are being hidden on purpose, but communication with associates hasn’t been a great strength and we’ve had a few surprises already. At the same time, we have good reason to believe that long term this is the place we want to be. I’m not as anonymous as I’d like on here, so I don’t feel comfortable saying too much more. Mostly just trying to figure out what a reasonable way to approach it all is without getting anyone upset, but protecting our interests.

[jacoavlu]

I’m guessing the valuation that is happening is more about hard assets. Real estate. Equipment. AR. Those things aren’t hard to value. But if you want to get into contracts that’s a different animal.

[zlandar]

They are already paying for a valuation by an accounting firm, so redoing that seems silly. But I can’t say either of us could look at that and really understand what it means or if it is a fair valuation without professional help. I mean, if you are buying part of a business, should you understand the financials in detail regardless of what business it is?

I wish I could say it has been transparent and we completely trust them, but that isn’t the case. It’s not necessarily that things are being hidden on purpose, but communication with associates hasn’t been a great strength and we’ve had a few surprises already. At the same time, we have good reason to believe that long term this is the place we want to be. I’m not as anonymous as I’d like on here, so I don’t feel comfortable saying too much more. Mostly just trying to figure out what a reasonable way to approach it all is without getting anyone upset, but protecting our interests.

If the buy in and buy out formula have been unchanged for years then it's consistent. It may not be the most accurate valuation but can you complain it's unfair if the associate in front and behind you go through the same process? This is something you should have asked about before joining the group. It's kinda late to start raising objections at the time of buy-in.

Attempting to bring in your own CPA to give his/her own valuation will likely upset people.

[ACN]

Our ortho group has done the same valuation formula. It's valued low for easy buyins versus a true value that we would sell.

It would be extremely weird if our employed partnership surgeon brought his own valuation or told us he's paying X instead of Y. Not gonna happen.

All of this buyin info should have been known and done prior to you taking the job. I interviewed at a few groups that made you purchase blue sky for partnership. I told them respectfully to pound sand.

[MSooner]

We’re not expecting to change the buy in—just understand where the business is financially and determine if buying in is worth it.

As far as we know, there are no hard assets save a building. We don’t know much about it, other than it’s not full of medical equipment or related to medical procedures.

FWIW, the people who bought in last year paid 5x what we were told the buy in was about 3 years ago by an outgoing partner who was willing to share those details. It does sound like the base salary has gone up.

Partner details were not offered up front during the interview process except for the fact that it was a partner track and it was 2 years. Everyone who has found out any details prior to partnership has gotten them informally. No, we don’t like that this was the way it is/was.

[altadoc]

Partner details were not offered up front during the interview process except for the fact that it was a partner track and it was 2 years. Everyone who has found out any details prior to partnership has gotten them informally. No, we don’t like that this was the way it is/was.

This is pretty typical, unfortunately, in private practice medicine. Much of the partnership process is opaque, and associates are demeaned or worse for asking about practice finances.

Thankfully, most of the time, the reasons are benign. Many senior partners simply don't know the practice and financial details! But there are times when practices are evasive and will screw the younger partners.

At a minimum, have an attorney - who routinely works in the healthcare space - review the partnership agreement. I agree with what others have said that bringing in a CPA or consultant to get a valuation will ruffle some feathers. It is worth understanding the finances, the billing, the status of any insurance negotiations, and especially negotiations with hospitals are surgery centers. How stable is the practice? This is ultimately the question you want to be answered first! Without a thorough understanding of the group's stability, the cost of the buy-in is secondary.

[ACN]

My group shared all financials with me during the interview process. The groups that didn't, I told them that's not acceptable, either you share like the other groups or I'm out. All groups actually have me info.