Getting in and getting
William P. Prescott, Esq., EMBA
AFTER SELECTING THE APPROPRIATE BUSINESS AND TAX STRUCTURE for
the group practice, two concerns facing group practices are ( 1) whether the
associate is ready for and can pay for the buy-in and ( 2) ensuring that the buy-sell
agreements consider all, not some, of the buyout triggering events.
This article is part
two of a three-part
series. Part one appeared in July, and
part three will appear in September.
Find part one on
Associate buy-ins should be based upon predetermined
performance standards measured over time. The standards
include not only productivity, but also quality of clinical
treatment, effort, working relationships with patients,
referral sources, and total contribution to the practice.
Associate buy-ins average two to three years for general
practices and one to two years for specialists.
Associate buy-ins are usually internally financed because lenders will not lend on a fractional interest unless
the practice entity and/or practice owner guarantee Dr. Junior’s loan. The risk for the practice or Dr. Senior is this:
if Dr. Junior leaves and Dr. Senior is paid for the buy-in up
front, the lender must be repaid if Dr. Junior defaults on
the loan. If the practice entity for Dr. Senior guarantees
Dr. Junior’s loan, Dr. Junior should get very little upon
departure or default, and the time period of any guarantee
should be limited.
Some advisors still advocate that Dr. Junior’s compensa-
tion as an associate be reduced and a portion of it held in
escrow for a future buy-in. This practice is ill-advised, as
there is usually insufficient profit attributable to Dr. Junior’s
productivity to pay Dr. Junior a competitive rate and contribute any meaningful sum to an escrow account. In
addition, the funds held in escrow are taxable as ordinary
income to Dr. Junior each year.
The purchase price for the associate buy-in is based
upon an appraisal of the practice. Whatever valuation
method is used for the associate buy-in, Dr. Junior needs
to be fairly paid as an owner in order to pay the lender(s)
and to pay his or her proportionate share of the operating
expenses, all within a measured period of time. For associ-
ate buy-ins, I do believe that pro rata accounts receivable
should be excluded from the value as should practice debt.
But if pro rata accounts receivable is included, pro rata
practice debt should also be included. For Dr. Junior, his
or her CPA should confirm or refute the valuation report
prepared by the appraiser who is paid for by the practice.
The valuation report for the practice should be com-
pleted for the calendar or fiscal year immediately preceding
the associate’s employment. An updated valuation report
should be prepared one year after Dr. Junior works on a
full-time basis in the practice. The rationale behind a valu-
ation after one year of employment is that for at least the
first year, Dr. Junior’s production is from the pent-up practice
demand, not Dr. Junior’s efforts. Dr. Junior should not accept a valuation report prepared for the immediate year
prior to ownership. Exceptions to this are ( 1) when Dr. Ju-
nior is entering into a solo group or ( 2) when Dr. Junior has
the ability to purchase or become an owner of the primary
practice location where he works, pursuant to a predetermined formula.
For those practices operating as S corporations, distributions must be made on the basis of ownership. For the buy-in,
Dr. Junior should purchase and pay for a specified percentage
of stock each year until Dr. Junior attains the agreed percentage purchase (e.g., 50% or 49%). If, on the other hand, Dr. Junior