Understanding Buy-in Agreements
There are several cost components to a buy-in agreement that should be outlined and understood, if that is part of your employment agreement.
The hard assets of a practice will include equipment, furniture, computers, and anything else the practice owns. The value of these hard assets should be included. Generally, a large group practice will have had its physical assets appraised and can tell you its depreciated book value as well as its proportionate value when you would be buying in. A smaller practice may need to have an appraisal done. If that is the case, the appraiser should be instructed to appraise based on book value and not replacement value.
A practice might also own the building in which it is located. This is generally the biggest item in a medical practice and is usually a separate buy-in option.
The Accounts Receivables (AR) of a practice, or the amount of money owed to the practice, is also typically part of the buy-in formula. The amount that still needs to be collected from patients is typically added to the total value of the practice as an asset.
Though rarely used anymore, on occasion, the partners will place a value on the goodwill of their practice. However, it is used more for practice purchases than new hires. Goodwill places value on patronage, reputation, and the good standing the practice has developed within a community. Practices in highly desirable locations are more likely to add goodwill into a practice valuation, but since goodwill is not a tangible asset, it is difficult to determine a hard number for buy-in purposes. Generally speaking, you should not pay more than a year's net salary for goodwill. If goodwill is added to the practice valuation at more than that, you need to decide how badly you want to be with that practice or in that community.
Almost all group practices are incorporated. As a result, when you buy into a practice, you will be buying stock in a corporation. The stock value is based on the physical assets of the practice, the building, receivables, and goodwill assets (if included). Remember, the money you spend on the stock to become a partner will not be tax-deductible, so it will be in your best interest to minimize that amount. The payments you make will normally be made in pre-tax dollars through income transfer, meaning the practice will take what you owe out of your income. The payments work well this way as the practice is not taxed on that money, and you will be paying in cheaper pre-tax dollars.
The cost to buy into a practice varies dramatically from specialty to specialty and no two are exactly the same. For example, orthopedists have more hard assets than a psychiatrist, so their buy-in costs (at least in terms of physical assets are going to be significantly higher than the psychiatrist's costs. Orthopedists will also generate more income than psychiatrists, so their buy-in expenses for accounts receivables will be higher as well. There are also differences depending on size. A large group practice may have several levels of "partners." Some partners may have invested in real estate and ancillary services that may not be open to new physicians who join. On the other hand, a solo practitioner may have a simple 50% hard assets calculation to become an equal partner.
After your employment period, it will generally take another three to five years to complete a buy-in. A practice will not want to scare you away by making buy-in payments phenomenally high, so it will spread the payments out over time. But the partners are not going to want to just give their practice away either, so you can expect to spend a decent chunk of your income on the buy-in. Most of all, it is important to feel confident that you are being given an equal voice as a partner while the buy-in process is being completed.
These articles are included to inform you, in general, about healthcare legal issues. The information contained herein is not intended to provide solutions to individual problems. It cannot be relied on as legal advice. We caution you to not attempt to solve individual problems on the basis of this information and advise you to seek competent legal counsel to address your specific issues.