Partnership buy in due diligence

[Tim]

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

Reading between the lines, you both don’t feel confident to read the complete financials OR the valuation. That is due diligence. You could easily hire a CPA to review them with you and explain them to you. That is NOT the same as having a separate valuation performed. Hiring a coach or tutor is not offensive.
The partnership is an asset to produce future income. If the profitability has increased, it is worth more if it continues and you are getting an equal share.
Educate yourself. You are about to become an owner. This is a skill you need.
The same with the attorney. Understanding is due diligence. This is a skill you need.

If you understand the financial and legal terms and conditions, no surprises, That is your goal of due diligence. That should not offend anyone. Fear of the unknown breeds suspicion and mistrust.

Now, the choice of negotiation or accepting or rejecting is a completely different process.

[zlandar]

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.

Couple of thoughts:

1. Has the buy-in calculation methodology changed in 3 years? If so that's a red flag.
2. Has the group undergone significant growth (AR up), paid off liabilities (i.e. loans, pension, 401k, etc), partners retired, and has real estate that has appreciated (building)? These are all things that will increase buy-in. I can significantly increase/decrease an associate's buy-in depending on how much cash is in the group's bank account and whether I have paid off the group's cash balance and 401k profit contributions for that year.
3. Most medical partners do not know the ins/outs of how a buy-in and buyout are calculated. I know enough to be dangerous and I defer to the group's CPA. He uses the previous CPA's calculation method (group changed CPA a couple years ago) so we are consistent. It's highly unlikely the best method of determining the actual value of the group. Honestly the best way to get an accurate value would be to sell out to private equity.
4. All the other partners in my group are clueless on how this process works.

[altadoc]

[QUOTE=Tim;n330475

Educate yourself. You are about to become an owner. This is a skill you need.
The same with the attorney. Understanding is due diligence. This is a skill you need.

If you understand the financial and legal terms and conditions, no surprises, That is your goal of due diligence. That should not offend anyone. Fear of the unknown breeds suspicion and mistrust.[/QUOTE]

This nails it. Being an owner and running a practice is a mentality and the associated actions. Of course, there is risk involved in running any business. And being an owner isn't for everyone, and that's ok.

Understand what you are signing and what the terms mean. Ask questions, see how they answer. Like zlander said, most partners are clueless about how the money comes in and how the group is valued. Look for those areas of the group/practice that are liabilities or weaknesses (payer mix, big contract up for renewal) and make sure they are mitigated as much as possible

[pit.alumni]

Looking at your posts some of this sounds sketchy. You mentioned a hospital contract. Is this a hospital based specialty dependent on one contract? They can be stable and lucrative or volatile. No assets except a non medical building? New associates told one thing then buy in increased 5X. I’d imagine in the two years before partner the pay is less. Is there any sweat equity. I’ve been involved in business dealings both in and out of medicine. I’ve found when you trust the people you are dealing with what’s written in the contract doesn’t matter and when you don’t trust the people you are dealing with what’s written in the contract doesn’t matter. Trustworthy people will do the right thing and untrustworthy people will find a way to screw you. After two years if you don’t really know and trust your partners that’s another red flag.

[jacoavlu]

Honestly the best way to get an accurate value would be to sell out to private equity.

PE just uses a multiple of ebidta

[MSooner]

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

Reading between the lines, you both don’t feel confident to read the complete financials OR the valuation. That is due diligence. You could easily hire a CPA to review them with you and explain them to you. That is NOT the same as having a separate valuation performed. Hiring a coach or tutor is not offensive.
The partnership is an asset to produce future income. If the profitability has increased, it is worth more if it continues and you are getting an equal share.
Educate yourself. You are about to become an owner. This is a skill you need.
The same with the attorney. Understanding is due diligence. This is a skill you need.

If you understand the financial and legal terms and conditions, no surprises, That is your goal of due diligence. That should not offend anyone. Fear of the unknown breeds suspicion and mistrust.

Now, the choice of negotiation or accepting or rejecting is a completely different process.

Yes, this is what I was getting at. We don't want another valuation. We just want to understand the valuation the practice has already performed (is being performed?) and understand the financial standing of the practice. That is what we need help with and I'm still unclear as to what professional that would be besides a CPA.

As of now, my spouse has not heard anything helpful directly and is being stubborn about asking, but that is a different story. We haven't seen a contract, have no idea what the partnership terms are, not a clue on the buy in except for what people paid last year. And yes, we did confirm indirectly the group's contract with the hospital is up soon and currently being renegotiated, but we don't know the status. Apparently this is causing the delay in partnership info, but it was also a last minute thing last year too, who knows. So many red flags, but absolutely nothing I can do. Still hopeful it will all work out, but I'm terrified were going to have a week at most to make a decision with no info and a huge impact on our lives

[Tim]

You need a CPA that has medical practice clients to walk you through the complete financials. You may need some supporting schedules as well.
Examples would be an accounts receivable and accounts payable aging , details of fixed assets, lease or debt agreements, tax returns, prior years financials. For your husband, he needs to up his game. HE is the partner and will have a say in partnership decisions. A spouse will not be welcomed to any partnership discussions. I doubt he would appreciate having to meet with a partner’s spouse on business issues.

You need an attorney with a health certification to review the contract.

Calm down. Operationally, I would want to know a lot of how the business financial side is ran. Running a partnership in some ways is similar to a marriage and budgeting. Money in and money out with the remainder accumulating. Individuals and joint decisions are made.

You fear red flags, not sure actual red flags.

[zlandar]

At the time of the buy-in you should be presented with a written valuation by the group's CPA. You should be able to discuss the details with that CPA. I don't know if you will be able to comprehend all the details.

You can have another CPA versed in healthcare group buy-in/buy-outs review that valuation and see if there are any red flags.

Partnership details like income and time off should be clear. In my group the profits and vacation time are equally split. Board members get extra days for admin.

[MSooner]

Yes, I understand I cannot get these answers, hence my frustration at not being able to do anything. I have no desire to have any part of the running of the practice once he is in. Lord knows I have enough keeping me busy at home already. But the initial decision to buy into a business is definitely a family financial decision that we will consider together before he decides one way or another.

But fearing red flags is different from actual red flags—you are correct there. Some of the fear is based off valid past experience, though.

[jacoavlu]

the group's contract with the hospital is up soon and currently being renegotiated

"the" hospital

single hospital? small group?

[Tim]

The birth of my first child was nerve racking. The first words out of the OBGyn’s mouth during delivery were too ME, not wife.
Ten fingers and ten toes. Cut the cord?” I think he got around to my wife eventually.

The point is situational awareness. As an observer, you have to be nervous, it’s expected an normal. Key point, it’s his job. More to be aware about, particularly the work situation. As much as possible, try to assume an advisor role.