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Constructing a Buy-In for a New Associate

Constructing a Buy-In for a New Associate. Presented by: Bruce S. Maller, BSM Consulting and Glenn Morley, Allergan Practice Consultant This presentation is for APC self-education. DO NOT USE EXTERNALLY. We’ll Be Talking About…. Basic Elements of Practice Buy-In Terms

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Constructing a Buy-In for a New Associate

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  1. Constructing a Buy-In for a New Associate Presented by: Bruce S. Maller, BSM Consulting and Glenn Morley, Allergan Practice Consultant This presentation is for APC self-education. DO NOT USE EXTERNALLY

  2. We’ll Be Talking About… Basic Elements of Practice Buy-In Terms Common Mistakes with Buy-Ins: • Offering Co-Ownership for the Wrong Reasons • Ignoring the Implications of the Buy-In • Letting Greed and Emotion Overcome Logic and Rationality • Overpaying Associate during the Employment Term • Relying on Precedent and Faulty Assumptions • Overlooking Proper Allocations of Tax Costs and Value • Relying on the Wrong Advisor 1. 2. 3. 4. 5. 6. 7.

  3. Basic Elements of Practice Buy-Ins Timeframe for Co-Ownership Offer Percentage of Co-Ownership to be Available Method for Determining Price of Co-Ownership Share Payment Terms for Buy-In Price Income Allocation Structure among Co-Owners Approach for Redemption of Ownership Interests

  4. Mistake #1: Offering Co-Ownership for the Wrong Reasons Genuine desire for adding a new partner in your business. Honest assessment of your motivations to offer co-ownership. A proposition of pluses and minuses. Willingness to adapt to changes resulting from a new owner.

  5. Mistake #2: Ignoring the Implications of the Buy-in Changes in the size of everyone’s “pie slice.” Personal cash flow and return rate for the new co-owner. Voting authority and control. Potential complexities upon dissolution of relationship.

  6. Mistake #3: Letting Greed and Emotion Overcome Logic and Rationality Subjective assessment of practice/share value. Buy-in components defined by extraneous factors. Control and the need to win. Avoidance of confrontation and communication.

  7. Mistake #4: Overpaying Associate during the Employment Term Goodwill value based largely on incremental net income. Implications of above-market compensation during employment. Dilemma for the high-overhead practice. Potential problems with extended employment periods.

  8. Mistake #5: Relying on Precedent and Faulty Assumptions Unique characteristics of practice compared to “rules of thumb.” Changes in practice often produce changes in value. Challenges from faulty or irrelevant prior transactions. Changing expectations of younger physicians.

  9. Mistake #6: Overlooking Proper Allocations of Tax Costs and Value Valuation assumes “equitable” allocation of tax cost/benefits. Majority of tax costs usually assumed by recipient of buy-in proceeds. Relationship of owner compensation and share value. Consultation with practice accountant.

  10. Mistake #7: Relying on the Wrong Advisor Bad advice is major factor in failed transactions. Typical dynamic of faulty advice. Experience in similar transactions is key. Options for guidance in buy-in issues.

  11. So What to Tell Our Clients . . . • Be sure you’re offering co-ownership for the right reasons. • Be aware of the implications involved in offering co-ownership. • Minimize the effects of greed and emotion in favor of logic and rationality. • Avoid overpaying your associate during the employment term. • Resist overreliance on precedent and ensure assumptions are valid. • Be cognizant of how value and tax costs/benefits should be allocated. • Choose a well-qualified advisor. 1. 2. 3. 4. 5. 6. 7.

  12. Case Study: Background Facts and Circumstances Dermatology Associates Single owner with a practiced focused on functional dermatology Associate physician (trained in cosmetic derm) employed in July of 2008 Associate paid 45% of collections Benefits paid in addition to the 45% payout Associate expected to become equal partner after 3 years No details of partnership included in employment agreement Senior physician not willing to give up control but anxious for associate to become partner Senior partner anxious to have partnership terms negotiated well in advance of July 2011 Practice has low overhead expense ratio (around 40%) Associate producing almost at parity with owner

  13. Case Study: Attachments for Review Benchmarking report and comparative Income Statement Overview of partnership considerations Five year financial forecast

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