Contract Negotiation: Buy-in Agreements

Hard Assets

The hard assets of a practice include equipment, furniture, computers and anything else the practice owns. The value of these hard assets should be included in the agreement. Generally, a large group practice will have had its assets appraised and can tell you depreciated book value as well as 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 on replacement value. While it isn't considered a hard asset, the practice you sign an agreement with may also own the building in which it is located. This is the typically the biggest item in a medical practice and is usually a separate buy-in option.

Accounts Receivable

The Accounts Receivable (AR) of a practice, also known as 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.

Goodwill

On occasion, the partners will place a value on the goodwill of the practice, but this is used more for practice purchases than for new hires. Goodwill places value on patronage, reputation, and the good standing the practice has developed within its community. Practices in highly desirable areas are more likely to add goodwill into a practice valuation, but because goodwill is not tangible, it is difficult to determine a number for buy-in purposes. You should not pay more than a year's net salary for goodwill.

Payment Structure

Almost all group practices are incorporated, and as a result, you will be buying stock in a corporation when you buy into a practice. The stock value is based on the physical assets of the practice, the building, receivables and goodwill assets (if included). The money you spend on the stock to become a partner is not 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. This method works well because you will be paying in cheaper, pre-tax dollars and the practice is not taxed on that money.

Cost

The cost for buying into a practice varies drastically between specialties, and no two practices are the same. Some specialties have more hard assets than others, so their buy-in costs are going to be higher in terms of physical assets. The same can be said for accounts receivable — some specialties bring in more money, so the buy-in for their accounts receivable are higher, as well. Depending on the size of the practice, there may be several levels of partners. Some partners may have invested in real estate that may not be open to new physicians who join. On the other hand, a solo practitioner may have a simple hard assets calculation to become an equal partner.

Buy-in Completion

After your employment period ends, 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 high, so the payments will be spread out over time. However, the partners will not just give away their practice, so you should expect to spend a decent amount of your income on the buy-in. It is important that you feel like you are being given an equal voice as a partner while the buy-in process is being completed.