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Practice Buy-In loan question???

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  • ENT Doc ENT Doc 
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    Tim,

    See my above post. B/S goodwill is as you stated – historical purchase price of an asset over book value. But the practice goodwill is a different and far more loose designation. It’s built on the reputation of the practice, brand, reach, negotiating power, etc. Basically the benefits you get by being a part of their practice as opposed to being on your own.

    #179475 Reply
    Avatar jacoavlu 
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    Warren Buffett had a discussion on Goodwill in one of the shareholder letters that helped me understand it somewhat. Perhaps I can find it.

    My practice definitely has goodwill. Even though my buy in was essentially zero. And as a hospital based provider we have almost no physical assets. No real estate. I sure as heck wouldn’t give my practice away. The hospital contracts and third party payer contracts have value and someone would have to pay me a substantial sum of money to buy my job.

    I like to think that I have personal goodwill as well, that some business comes to me (and the hospital I work at) as a result of my expertise and reputation. But in truth the value of my personal goodwill is a lot less than the value of the practice goodwill.

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    #179480 Reply
    Liked by Tim
    ENT Doc ENT Doc 
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    I sure as heck wouldn’t give my practice away.

    Click to expand…

    No one is saying you’d have to give it away.  But I wouldn’t expect a hospital or other entity to pay more than asset value for a practice necessarily.  So what is the practice actually worth then to an outside entity?

    Is this the Buffett letter?

    http://www.berkshirehathaway.com/letters/1983.html

    First paragraph of the appendix is what I was talking about above re: feelings about the company vs actual economic goodwill.  Two types of goodwill exist, at least as alluded to in this thread.

    #179507 Reply
    Avatar Tim 
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    Splash Refinancing Bonus
    But I wouldn’t expect a hospital or other entity to pay more than asset value for a practice necessarily. So what is the practice actually worth then to an outside entity?

    Click to expand…

    Purchase price of a buy-in is the only thing that matters.

    A hospital might pay more or less. If it’s more, it’s goodwill. If it’s less, it’s a write-off.

    Due diligence is understanding what you are paying for and its value to you now and in the future. If you are a key component that adds value, you will have more room to negotiate. If you are one of 20, then that’s going to be alot more difficult.

    #179535 Reply
    Avatar jacoavlu 
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    I’m not sure that’s the letter. I remember it being more of a lay discussion but I could just be remembering wrong.
    No one is saying you’d have to give it away.  But I wouldn’t expect a hospital or other entity to pay more than asset value for a practice necessarily.  So what is the practice actually worth then to an outside entity?

    Click to expand…

    That’s a good question. We’ve never put a value on it because we’ve never been in a position to need to consider it. The “asset” is essentially the future revenue from the practice work which comes about from the contracts.

    Goodwill may also come in to play for instance if, in the new world of the 199A deduction, one wanted to flip their practice from an S corp to a partnership and avoid a two tiered structure. In this case the S corp has to be dissolved. And in this a fair market value of the practice goodwill has to be established, to determine a capital gain that comes about from the liquidation of the corp.

    Goodwill may also be an argument as to why an S corp physician practice may justify not paying out all of it’s service income as salary, but rather part as distribution of profit. The argument being that the income of the corp partly comes about as a result of the inherent goodwill of the practice. At least that’s what our CPA once told me.

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    #179541 Reply
    Liked by Tim
    ENT Doc ENT Doc 
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    The “asset” is essentially the future revenue from the practice work which comes about from the contracts.

    Click to expand…

    You bring up interesing points regarding why someone might value a practice one way or another.  I’m not sure about your specific situation, but couldn’t the contracts and employment be obtained elsewhere in the marketplace or services be done internally by just hiring someone?  If that’s the case then the contract has no marginal value and isn’t an asset.  If I’m a hospital buying a zero asset based practice you have to be paying for something, because presumably you’re just going to turn around and pay the old practice expenses (including yours) if they buy your practice.  Additional value used to come from buying an outpatient practice and then simply being able to charge more for the same services due to the facility fee they could apply.  That arrangement no longer exists under the new outpatient payment rule.

    In this case the S corp has to be dissolved. And in this a fair market value of the practice goodwill has to be established, to determine a capital gain that comes about from the liquidation of the corp.

    Click to expand…

    This would make a good practice finance article.

    #179581 Reply
    Avatar jacoavlu 
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    I’m a radiologist. Of course if the hospital wanted to employ radiologists they can just cancel the contract. They don’t have to buy my practice. But if some other radiology group wanted my practice tomorrow (and exclusivity contract with hospital and valuable third party payor contracts) they’d have to buy it from me and my partners. Someone is essentially buying a job. The same may be true for similar hospital based providers, pathologists, anesthesiologists, ER.

    If the hospital cancelled the contract and we had to dissolve the Corp well I would assume there’s little capital gain because the practice goodwill goes away without the contract. But if I sold the practice and associated contracts to someone else then we have to establish a FMV for practice goodwill that was sold to compute the capital gain.

    Here’s an article from Peter Reilly at Forbes that talks some about personal goodwill and practice goodwill. His stuff I almost always find interesting.

    https://www.forbes.com/sites/peterjreilly/2011/09/25/dentists-employment-contract-kills-personal-goodwill-argument-ninth-circuit-rules/#6abd089f477f

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    #179587 Reply
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    Avatar Tim 
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    It’s a lot easier to buy a smooth running business or unit than to build it. It can take years and still fail.

    #179649 Reply

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