Editor’s note: This article is part two of a three-part series. Part one appeared in July, and part three will appear in September.
After selecting the appropriate business and tax structure for the group practice, two concerns facing group practices are (1) whether the associate is ready for and can pay for the buy-in and (2) ensuring that the buy-sell agreements consider all, not some, of the buyout triggering events.
Associate buy-ins
Associate buy-ins should be based upon predetermined performance standards measured over time. The standards include not only productivity, but also quality of clinical treatment, effort, working relationships with patients, referral sources, and total contribution to the practice. Associate buy-ins average two to three years for general practices and one to two years for specialists.
Associate buy-ins are usually internally financed because lenders will not lend on a fractional interest unless the practice entity and/or practice owner guarantee Dr. Junior’s loan. The risk for the practice or Dr. Senior is this: if Dr. Junior leaves and Dr. Senior is paid for the buy-in up front, the lender must be repaid if Dr. Junior defaults on the loan. If the practice entity for Dr. Senior guarantees Dr. Junior’s loan, Dr. Junior should get very little upon departure or default, and the time period of any guarantee should be limited.
Some advisors still advocate that Dr. Junior’s compensation as an associate be reduced and a portion of it held in escrow for a future buy-in. This practice is ill-advised, as there is usually insufficient profit attributable to Dr. Junior’s productivity to pay Dr. Junior a competitive rate and contribute any meaningful sum to an escrow account. In addition, the funds held in escrow are taxable as ordinary income to Dr. Junior each year.
No comments:
Post a Comment