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Profit-sharing Partnership

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  • Avatar aHiker 
    Participant
    Status: Spouse
    Posts: 5
    Joined: 08/09/2019

    Thank you all for your wonderful and insightful suggestions. My fiance was a little hesitant about asking probing questions about practice finances. But, having read all your posts, it seems fair to be demanding in terms of getting insights about how the practice/partnership is managed.

    The founding partner put his sweat and equity capital to build the business, and for obvious reasons he wants to earn passive income. And, my fiance has no qualms about that idea. To be fair to both founding partner and my fiance, what would be a fair split of net profit? Below is what my fiance came up with and it may not necessarily be similar arrangement with the other junior partner.

    Fiance’s gross collection (including PA’s in future) minus overhead expenses (including PA’s and scribe’s salary) = Net Profit

    Is 70/30 split of net profit, 30 going to the founding partner, a fair split?

    My fiance is quite ok with the first 2 years of guaranteed pay + sign-on bonus and other benefits. He wants to negotiate the compensation after partnership, and at this point he is not contemplating starting his own practice. Let’s just say he likes clinical aspect more than business aspect of medicine.

    Also, competing offer with a multi-specialty group is on the way. Not much details about compensation at this point.

    #238260 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 2282
    Joined: 03/01/2018

    the compensation arrangement is one thing, but also of concern needs to be exactly what the ownership situation is now, and anticipated in the future, and how control will work.

    How many of the current docs are actually Partners, and not just employees? What is the current ownership percentage? Is there a Partnership agreement available for review? Who gets to determine compensation and “bonuses”?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #238270 Reply
    Avatar BuckEYEGuy 
    Participant
    Status: Physician
    Posts: 1
    Joined: 08/12/2019

    I’ve been reading this forum for awhile but never posted.  I feel like I may have something to contribute on this issue and I’d throw in my thoughts.  I am in my 6th year of practice and a partner in a private physician group.  There seem to be a number of red flags that come up to me reading what you’ve posted.  It may still be a very good position but there are some things to think about.

    First, the overall situation you are describing is an employment with bonus structure and not true partnership.  “Profit sharing” to me is a structure used to maximize 401k contributions and I don’t typically use in describing compensation.  I have no issue with a set salary (250K) for the first 2 years.  It would be nice if this was also combined with a potential for bonus which would typically be a portion of collections above 2-3x his base salary.  However, things should change once he becomes a partner.  Partnership implies working in an equal capacity.  After the buy in, I would expect to make my collections minus my share of the overhead.  Usually this would be a set salary for each partner than a combination of bonus and corporate distribution depending on productivity.  I think you will be very frustrated in 7 years after employment and buy in if you are still have money taken off the top and given to the senior partner.  Animosity does not make for a good long term relationship.

    Second, J code drugs can generate an significant amount of income.  For those unfamiliar on example would be remicaide.  The practice would be reimbursed 6% over the medicare rate for handling/administration fees.   I would not expect to receive any of these proceeds as an employee.  However, after partnership, these should certainly be shared in the distributions.  This is definitely a situation to investigate.

    Third,  a buy in typically consists of three components — hard assets, accounts receivable, and good will (possibly).  It really shouldn’t be possible to say the but in is 100 K over 5 years at his point.  He may be able to give an estimate but who knows what his AR will be at the end of employment.  Also, what is included in the hard assets?  Does this included the building if he owns it?  Typically the real estate would be owned in a separate LLC and require a different purchase.  Does in include the infusion center?  These are all things you would want to know

    Ultimately remember that he will be making money during your fiancés time as employee, from the buy in and from reduced overhead.  I wouldn’t feel comfortable turning over additional revenue but if you are committed to a location and this is the best offer it may be something that is worth living with.

    The degree of transparency during negotiations is certainly an indicator of things to come.  We personally allow access to financials when an offer has been made to a physician after they sign a NDA.  Good to know what you are getting into and that there are no skeletons.  Most places will not be that transparent but I would not hesitate to ask questions.  You definitely would want to know the overhead not including the J code drugs (which will inflate the number) and the number of days in AR (which should be less than 30).  He should know those numbers off hand.

    Hope this provides some help.  Curious if this is in line with what others have experienced.

    #238519 Reply
    Liked by childay

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