By Michael Torney, CFP, J.D., LL.M.

Medical doctors working in a private practice may one day get the opportunity to become an owner of the business. When this offer is made, a physician needs answers to several questions, ranging from how the business is run, the cost to become a partner and how much more money they will earn.

To answer these questions, we recommend meeting with an attorney who specializes in healthcare mergers and acquisitions, and who has a high degree of experience and expertise. They can provide advice on the standard parts of the buy-in process, as well as what items can be negotiated. And, once several pieces of important information are collected, they can work with a financial planner to help guide you through the decision-making process.

You will want to gather information and understand the following:

• How the medical practice makes decisions on topics such as practice management, billing, hiring, finances and more.
• At least the most recent three years of financial statements and its cash flow. Ask the attorneys to review and provide you with a summary of their findings.
• If the practice owns any real estate. If so, will you also be an owner and in what proportion?  What is left on the mortgage and how are the payments made?
• If you will be responsible for your patients’ accounts receivable? If the practice doesn’t collect these payments, what does it mean?
• What does the cash flow of the practice look like each year?
• Whether there is any goodwill related to the practice that makes it more or less desirable?
• Finally, how much will you earn once you are a partner? Medical practices have different payment models. For example, some pay partners in equal shares and others pay partners on production (RVUs).  Some have a hybrid model.

Determining the Value of the Medical Practice

After receiving answers to these questions, the attorney can help you understand the value of the business.

There are three primary ways to value a medical practice. There is the price/earnings ratio; the discounted cash flow method, and the comparable sales model. There are other methods that the attorney can explain, but here is a short description of these three methods:

• The price earnings ratio, referred to as the P/E ratio, attempts to find a reasonable price to pay for earnings of the practice. This ratio shows the value of the practice based on its past or future earnings.
• The discounted cash flow model attempts to take current and expected earnings on the business and come up with a present value of future cash flows. However, the present value is the price you should be willing to pay.
• The comparable sales model reviews the sale prices for similar medical practices in recent years to establish a base price for your practice. We advise using more than one model to see if the price is similar under different valuation methods.

How to Finance Your Part of the Ownership

Once a sales price for your piece of the business is established, you may not have enough money to make a cash purchase. If that’s the case, you’ll need to finance the purchase over time. There are a few different ways to accomplish this goal:

• A bank loan in exchange for collateral.
• An internal agreement with the partners.
• Use equity payments you would otherwise be entitled to until your purchase price is paid.

Let’s use the equity payments as an example.  Assume you earn $300,000 now, but are projected to earn $450,000 as a partner with $150,000 profit distributions. If the purchase price to become a partner is $450,000, you would give up three years of the extra $150,000 of profit sharing distributions to finance the purchase. In year four, you would earn the full $450,000. This method also allows you to pay before your money is taxed, making it even more advantageous.

Becoming the owner of a medical practice is an exciting day for any medical doctor. By doing your research and employing professionals, this decision can propel your medical career to a new level and help you achieve financial security.

If you have questions about buying into a medical practice and want to discuss a strategy, our team can be reached at DuffTorneyteam@monetagroup.com. We offer a free consultation to help discuss how we may be able to help accomplish a smooth purchase that is incorporated into your overall financial plan.

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