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Practice Buy-In loan question???

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  •  nattydread 
    Participant
    Status: Spouse
    Posts: 5
    Joined: 09/24/2016

    So my spouse is about to buy-into her multi-specialty ophthalmology practice. We are seeking some advice. The cost is $380,000 and the group is offering terms of 5 vs 7 years at prime + 1 (6.5%). Ouch. Is this our best option, or can someone point us in a better direction. Any other tips for negotiating buy-in terms. Like having a cap if/when the prime rate continues to rise.

    #177273 Reply
     Peds 
    Participant
    Status: Physician
    Posts: 2409
    Joined: 01/08/2016

    What is the bank offering?

    #177277 Reply
    Liked by ACN
     Pmrdoc45 
    Participant
    Status: Physician
    Posts: 2
    Joined: 11/18/2018

    What is she getting for it, bldg equipment etc? I hope more than goodwill because that is worth nothing nowadays.

    #177290 Reply
    ACN ACN 
    Moderator
    Status: Physician
    Posts: 438
    Joined: 01/08/2016

    I’m guessing there are ancillaries involved in becoming a partner, thus making it worthwhile.  Check with local banks or credit unions.  I know our practice actually doesn’t offer loans (not sure why), but we have good relationships with the local banks for “good’ interest rates.

    If you're ever having a bad day, just remember in 1976 Ronald Wayne sold his 10% stake in Apple for $2,300.

    #177293 Reply
    Liked by jfoxcpacfp
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6382
    Joined: 01/09/2016

    Is there a possibility for a family loan? Any home equity you can tap? Otoh, will you be able to pay off the loan on an accelerated basis (such as.   in 2 years)? If so, just go the simple route and take the partner loan.

    btw, the interest on the loan will be “investment interest”, which means it can be deducted against only investment income 🙁

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #177313 Reply
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 264
    Joined: 10/29/2017

    Check with First Citizens if they are active in your area.  They are really trying to get big in the practice loan market.

     

    Ignore the comment about goodwill being worth nothing.  All practice valuation comes down to is buying a percentage of profit you are already helping to create.  How it’s labeled is for the tax preparers.  Used exam tables and stethoscopes are with didly squat.  It all comes down to how much your income goes up compared to now.  If your income goes up by enough to service the loan in around 3-5 years or so, then the interest rate is secondary and the deal is probably worth it.

    #177324 Reply
    Liked by Tim
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2197
    Joined: 01/14/2017

    Family is a possibility though they’d follow the IRS AFR:

    https://www.irs.gov/pub/irs-drop/rr-19-03.pdf

    Local banks can offer good rates too.

    I’d make sure the valuation is appropriate. There are two kinds of goodwill that have been brought up, both of which I wouldn’t include in a buy-in situation. The first of which is the goodwill you see on a balance sheet. This means the business essentially overpaid for a prior acquisition and still believes there are synergies remaining that are of some worth (otherwise should be written off). I doubt most practices are actually doing robust testing of goodwill, so it’s probably just residual from someone overpaying.

    The second is the general goodwill the practice has in the community that helps generate referrals, patient interest, etc. This comes from years of reputation, marketing, building networks. The reason that I wouldn’t pay for this is because you also contributed into that goodwill through prior employment and will continue to do so regardless. Also, exactly how is this quantified? It’s open to wide interpretation – not to your benefit. Everything else at least has objective value to it based on sound accounting practices.

    #177361 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 868
    Joined: 09/18/2018

    “Everything else at least has objective value to it based on sound accounting practices.”

    Accounting principles are intended to fairly present the historical results of the entity.

    A purchase price is the current value of the future results of the entity. Risk, competition and time are factors to be considered, but is simply what a buyer is willing to pay. Future profits are prohibited from recognition until earned. Those profits are what is being purchased.

    #177363 Reply
    ENT Doc ENT Doc 
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    Status: Physician
    Posts: 2197
    Joined: 01/14/2017

    I disagree with this notion of purchase price in terms of practice buy in. Buy in to a practice typically involves purchasing a percent of assets – fair market value of real estate, assets net depreciation, A/R, etc. Those are not indicative of future streams of cash flows discounted by cost of capital.

    On the other hand, if you’re buying into a surgery center the purchase price is typically expressed as an EBITDA multiple, an alternative to the discounted cash flow model you speak of.

    #177380 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 6382
    Joined: 01/09/2016
    Earnest refinancing bonus

    I disagree with this notion of purchase price in terms of practice buy in. Buy in to a practice typically involves purchasing a percent of assets – fair market value of real estate, assets net depreciation, A/R, etc. Those are not indicative of future streams of cash flows discounted by cost of capital.

    On the other hand, if you’re buying into a surgery center the purchase price is typically expressed as an EBITDA multiple, an alternative to the discounted cash flow model you speak of.

    Click to expand…

    Yes, but buying in as a % of B/S values (Balance Sheet, not the other BS) may be THWADI but not necessarily representative of the intrinsic worth of the practice – actually, probably isn’t.

    • RE is typically not a component of the practice but held in a separate entity.
    • A/R may or may not be well-managed and can be bloated with uncollectables, especially if the OM is incompetent or stealing.
    • B/S assets (equipment, software, etc) may be high but not representative of a practice that is underperforming. For example, EMR purchased but not fully implemented, etc.
    • Dynamics of leadership are always tricky – no way to put a price tag on this but important to consider. The partner agreement, bylaws, etc should be carefully reviewed.

    By looking at the metrics (past and current results) of the practice compared to similar-size practices in the same specialty and how the practice can be expected to perform in the future, you will develop a better value estimate. Very tricky and difficult, which is why we revert to THWADI of asset valuation because you are working with hard numbers. It’s just doubtful they mean much of anything. At least impo.

    This is not something I do but CPA firms exist that specialize in this area.

    Johanna Fox Turner, CPA, CFP, Fox Wealth Mgmt & Fox CPAs ~ 270-247-0555
    https://fox-cpas.com/for-doctors-only/

    #177385 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2197
    Joined: 01/14/2017

    I agree with a lot of what you’re saying here. I agree that you need to look at those things to see if the buy-in and expected future cash flows allow you to overcome the hurdle rate for that kind of investment. Two practices may have the same (accurate) B/S assets but perform very differently. When it comes to the actual decision to buy-in you’ll look at those things, but I was looking at things more from the perspective of the practice. They’re still going to expect that you’ll buy into X% of the assets. For example, I doubt an underperforming group is going to discount their assets for you to buy into and give you an equal cut simply because it doesn’t meet your intrinsic value calculations. Yet you’d want to do this analysis to see if it’s even worth buying into or stay an employee with bonus structure X. I’ve known people to not buy into a practice simply because there wasn’t much upside because the contract was so nice.

    #177390 Reply
    Liked by Tim
     nattydread 
    Participant
    Status: Spouse
    Posts: 5
    Joined: 09/24/2016

    Thanks for all the responses. Such a lively conversation. This is a great group!

    #177395 Reply
     bonebrokemefix 
    Participant
    Status: Physician
    Posts: 29
    Joined: 04/10/2017

    Is “goodwill of the group” typically some thing that is arbitrarily assigned a monetary value in these discussions? I’ve heard the above sentiment, that it is worthless but can see how a group might say it is “worth” X.

    And when it is said that 3-5 yrs of loan time is about right, is that solely based on the income that becoming partner opens up?

    #179381 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2197
    Joined: 01/14/2017

    I’m sure it’s not completely arbitrary, as they’d look pretty stupid if asked how they came up with the number. But I’m sure the assumptions are laughable and don’t account for the fact that your participation is just as marginally beneficial to all the partners. I imagine the 3-5 year loan time is time to pay the loan off.

    #179447 Reply
     Tim 
    Participant
    Status: Accountant
    Posts: 868
    Joined: 09/18/2018

    Sorry,
    Goodwill is actually a defined term.

    Excess of the purchase price over the Net assets purchased. The asset are recorded at historical values at the time of purchase (depreciated where appropriate useful life. This can be accelerated or straight line.
    It is a mathematical computation.

    Note: This represents what has previously been paid by the previous buy-in. It is an intangible, meaning you can’t touch it. For example, one big hospital contract have value for sure, it may be the most valuable. No asset shows on the books, but you would need to buy in to get a percentage right to it.

    #179465 Reply

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