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Is it worth it? (Partnership)

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  • Is it worth it? (Partnership)

    From a financial point of view, I look at partnership as an investment on the increased income between an employee versus an owner as well as the eventual buy out. Is this an incorrect way to look at it from a financial point of view? If it takes 5 years to pay off (owner compensation - employee compensation) x 5 = purchase price, is that equivalent to 5x EBITDA on the valuation? How long should it take to pay off the loan on the practice buy in with the profits from being an owner in the business? I've been advised to use current employee compensation as employee compensation rather than market compensation. Is that the correct way to look at it? Partner track positions often pay less than non partner track positions and otherwise wouldn't be able to hire without the prospect of buying in.

  • #2
    “ If it takes 5 years to pay off (owner compensation - employee compensation) x 5 = purchase price, is that equivalent to 5x EBITDA on the valuation? How long should it take to pay off the loan on the practice buy in with the profits from being an owner in the business?”

    Owner compensation is after interest, taxes, depreciation, and amortization within the partnership. So, earnings difference is not 5x EBITDA in your example above.

    No rule of thumb for time to payoff. The return is actually how much and how long one maintains that increase.

    Yes use what the associate comp is, not market comp. You are making that on a partnership track.
    Sweat equity + buy-in = cost of partnership.

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    • #3
      The numbers are one element. In my case, absolutely worth it. Partner in about 2 years, make 3x what an employed doc in my specialty would make.

      Numbers aside, there is significant value in the autonomy which comes from partnership. Choosing which days I want to work, when to take vacation, when to start/end my day, how many patients/day, when to discharge patients from the practice. I don't answer to an office manager or hospital admin. Don't underestimate how much this can do for your sanity

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      • #4
        Originally posted by Tim View Post


        Owner compensation is after interest, taxes, depreciation, and amortization within the partnership. So, earnings difference is not 5x EBITDA in your example above.
        so is the earnings difference greater than or less than 5x ebitda?

        In my particular situation, the valuation and buy in is based in part on a 1 time withholding of productivity compensation. If I buy in this year, regardless of how much I produce, I will be compensated the same base salary. However, the excess productivity goes to the profit of the practice and the valuation is based on that. The more I make, the more I'll pay. Does that sound right or typical? If what you're buying is the difference between associate compensation, not market compensation and owner compensation, it sounds like you're then paying sweat equity forever.
        Last edited by wcinewbie; 04-21-2022, 07:12 PM.

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        • #5
          I’m not sure I follow the numbers and method you presented. But there’s a huge difference between being a partner and an employee and it’s much more than just money. In a true partnership you’re an owner. Depending on specialty and location you may have an opportunity to really grow things. I ran a successful partnership for many years. Our partners did much better than employed docs in the same specialty. But we realized we were business owners, that meant at times there were challenges financially and it wasn’t as simple as just collecting a paycheck. Even when times were leaner our partners valued their ability to direct how the practice was run. Overall, we did well financially, but we valued the ownership aspect as much if not more. Not sure if this is relevant now, with more and more docs employees an Private Equity in the mix. But I’m glad my career was as a partner/owner and not an employee.

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          • #6
            Suppose revenue you generated is $410 and they pay you $200. They 2 partners pocket $210 and split it 50/50.
            After you buy-in, absolutely no practice financial change, except partner. The $210 is now split 3 ways, $70 apiece. You go from $200 to $270.

            Absolutely no change in revenues, costs or EBITDA. You are trying to create a comp/EBITDA ratio that doesn’t exist.
            The profit split is after interest, taxes, depreciation and amortization (ITDA), not earnings before (EB). EBITDA is higher than Earnings.
            Yes, EBITDA would be higher if you doubled production and stayed at comp of $200. And they would pocket the additional $410 (50/50).

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            • #7

              I agree very difficult to follow. The explanation sounded like total gaslighting followed by "that's just how it is" and "you should have known." Family members in similar of businesses have given the same negative reaction when I try to explain it to them.

              As an example, suppose the revenue I generated was $600. My base compensation is $200 and productivity compensation is $100. The base + bonus ends up being typical market compensation. The partners pocket $300 and split it 50/50. The year that I am to buy in, I get paid $200. The productivity compensation is being retained and the 2 partners now pocket $400 and split it 50/50. That one time excess profit is also being used to calculate ebitda overhead and value the buy in. After I buy in with no practice financial change, I go from $300 to $400 (but payed for a valuation of going from $300 to $433).

              I'm told its a great deal. Itll make sense when i see the numbers. At best, I think it's an average deal. The calculated good will is literally the average good will published in the goodwill book adjusted for overhead which i dont feel is accurate in this case. My basic understanding is the deal is marginally better than VTSAX, with a lot more risk and work. Am I wrong to feel like I'm being gas lit?
              Last edited by wcinewbie; 04-22-2022, 12:16 PM.

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              • #8
                Whoa!
                You generate $600 and you pay them $200 so you keep $400 after you paid for the business?
                What you are talking about is revenues. Don’t buy your own revenues, not profits.
                Offer $433 now for $400 guaranteed comp.
                Bingo- you have a payback in two+ years.
                If it’s good later, then why not now? Problematic.
                Comp is not profits of a partnership.

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                • #9
                  Originally posted by wcinewbie View Post
                  How long should it take to pay off the loan on the practice buy in with the profits from being an owner in the business?
                  Shorter than you plan to work there as a partner. Just kidding. Kind of.

                  More seriously: You need to be able to look at the actual numbers and see that you will make more as a partner than as an employee...over the long term...after accounting for buy in. It's that simple.

                  Agree with the other comments that partnership can be about more than money. But, usually partners make more than employees.

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                  • #10
                    Ownership is very satisfying generally.

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                    • #11
                      Depends on how the group is run and the people you work with. A well-run group composed of highly motivated partners in theory should do well.

                      In reality partners contribute unequally in productivity and admin. Depending on the size/complexity of the practice admin can consume a lot of time during and after work. Scheduling. Dealing with people calling in sick. Handling complaints. Payroll. Managing staffing including hiring and firing. Acquiring new business and dealing with lost business. There's other stuff but you get the gist.

                      It's more than just showing up for work.

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                      • #12
                        I am currently In the same point and was wondering if it was worth buying into the practice (ophtho).

                        For partners, is the sole reason for the usual timeframe for partnership track 2 years to make sure the associate is a right fit?

                        I feel that partners would have a good idea regarding the associate in the 6month to a year.

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                        • #13
                          Originally posted by chocolatebear11 View Post
                          For partners, is the sole reason for the usual timeframe for partnership track 2 years to make sure the associate is a right fit?
                          From the owners’ standpoint it’s sweat equity plus it’s difficult to hide any personality red flags for 2 years. At least that was the reasoning in my former group. A lucrative group may be longer a needy group might be shorter.

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                          • #14
                            6 months is not enough time to audition a new partner. It is also not long enough to break even. In many practices the employed physician is being subsidized for 1-2 years. Meaning, they may not be earning more than they are paid for a while. Especially if they are an additional doc rather than a replacement.

                            partnership (generally) brings ownership and responsibility and hopefully more money to take home. No risk no reward. Somebody built the practice, bought the equipment, etc etc. so they will not want to compensate you the same until you invest as well.

                            of course you have to decide if it is worth it. Not all practices are run well enough that you want to own part of it. Because you get all their liabilities too.

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                            • #15
                              It takes most of our employed partnership track surgeons 1.5-2.5 years to break even.

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