In today’s competitive employment landscape, finding and retaining top talent is a constant struggle for healthcare practice owners. There’s a marketplace full of management service organizations (MSOs) and dental service organizations (DSOs) offering competitive salaries and benefits packages. That can make it difficult for practice owners (or even said MSOs and DSOs) to staff practices with associate clinicians who want to stick around for the long haul. Offering an associate buy-in opportunity is generally an attractive option to an associate deciding which practice to join.
In addition, practice owners eyeballing retirement may not be interested in an outright sale of their practice. Or, perhaps they’ve tried to sell to no avail. A buy-in arrangement with a strong associate may be an ideal situation from a succession planning standpoint.
While such arrangements can be tricky to structure for reasons discussed below, the associate buy-in can address the desire for associate clinicians to gain true ownership in the practice (and thus ensure commitment to the business) as well as establish a succession plan for practice owners looking to wind down.
What is an associate buy-in?
An associate buy-in in a medical, dental, or other specialized healthcare practice provides an opportunity for an associate-level provider (e.g., physician, dentist, or other licensed healthcare professional) to invest in the practice to become a partial owner. Investment is usually financial, but may involve some level of “sweat equity” as well. Often, the goal is for the associate to eventually assume greater leadership or ownership responsibilities.
For a buy-in to take place, the practice owner and associate must come to agreement on the terms of the deal. This is easier said than done. A valuation must first be placed on the business and then payment arrangements can flow from there. In a “phased buy-in”, the associate agrees to buy a percentage over a certain period of time. Then, the associate may have an option to buy out the owner's remaining interest at some time in the future.
How does an associate buy-in work in a healthcare practice?
What does an associate buy-in look like in practical terms? Here’s a couple of examples.
An experienced physician familiar to the practice owner might buy a percentage of ownership at the outset of an employment arrangement. Initially, they may pay 10-20% (or more) of the practice’s value with the option to purchase additional shares as time goes on.
As noted, the outright purchase of a share of the practice is generally limited to providers who have a relationship with the practice owner. As most business owners know all too well, partnership is truly a marriage, and most practice owners are looking to date before running to the altar with a total stranger!
Another, and perhaps more common, example could be a brand new dentist joining a private practice. The associate’s employment agreement might offer the option for a buy-in after working for a set number of years. After the stated time period has passed, the dentist will have the ability to exercise their buy-in option and begin purchasing shares, eventually making them a co-owner alongside other senior dentists or even the majority owner.
Key Terms and Structure in the Associate Buy-In Process
Initial Investment and Terms
Financial Buy-In: As noted above, buy-ins most often include some sort of monetary payment to the practice owner in exchange for a percentage of ownership. The amount required for the buy-in can vary significantly depending on the size and value of the practice, its revenue and/or profitability (or EBITDA), and how long the practice has been operating. This amount may be paid upfront or over a period of time.
Structure: The terms of the buy-in might be negotiated based on the associate’s experience, the practice’s financial status, and their expected role in the practice’s future. For example, a newer associate may pay a smaller buy-in amount and gradually increase their stake over time as they take on more responsibility.
Ownership Stake and Profit Sharing
Equity and Ownership: After the associate buys a share of the practice, they are granted equity (or an ownership interest) in the business. This means that the associate is now an actual owner of the practice, albeit they likely maintain a minority position in comparison to the owner’s majority stake, at least initially.
Profit Sharing: Along with the equity stake, the associate would receive a share of the practice’s profits, typically distributed on a quarterly or annual basis. The percentage of profits distributed to the associate would depend on the term of the buy-in agreement.
Key Factors in the Buy-In Agreement
Buy-ins can look very different depending upon the practice and providers involved. Here are some key considerations that will impact the structure and terms of your buy-in agreement.
Valuation of the Practice: To determine the buy-in amount, the practice’s valuation is crucial. This might involve a formal appraisal, looking at revenue, profit margins, patient base, and any other factors that influence the practice's worth.
Debt or Liabilities: If the practice has existing debt, the associate might have to assume a portion of the debt as part of the buy-in agreement. Alternatively, the buy-in amount could be adjusted to account for this debt.
Exit Strategy: The buy-in agreement often includes terms for how an associate can sell their stake if things don’t go as planned. This might include a buy-back clause where other partners (or the practice itself) can purchase the associate's shares at a predetermined price or valuation method.
Legal Considerations of an Associate Buy-In
In most states, healthcare practices must adhere to strict regulatory guidelines that govern ownership structures. For example, many states with corporate practice of medicine (CPOM) laws will restrict the ownership of medical practices to licensed healthcare professionals. This means that a buy-in might be subject to legal regulations that ensure only qualified individuals hold ownership stakes in the practice.
To put it in practical terms, in many states a dental hygienist will not be able to purchase a share of a dental practice. Similarly, in CPOM states, a valuable, yet unlicensed team member or office manager won’t be allowed to buy in directly to a professional entity. As such, the use of an MSO or DSO structure could make sense.
In addition, many buy-in agreements in healthcare practices include non-compete clauses, where the associate agrees not to open or join a competing practice in the same geographic area for a set period after leaving the practice. While there has been a shift in some states regarding the enforceability of a non-compete clause in terms of an employment agreement, practice ownership is generally treated differently and remains mostly enforceable if deemed to be “reasonable”.
Navigating the Buy-In Process
An associate buy-in of a healthcare practice offers an opportunity for both junior professionals and experienced owners to achieve their goals. Whether it is employee retention or succession planning on behalf of a practice owner, or fulfilling a dream of practice ownership on behalf of the associate, a strong buy-in arrangement can help ensure longevity of the practice.
However, as previously stated, these arrangements are often harder to negotiate than the parties initially realize. Considerations include practice valuation, how payment will be made (that is, use of a promissory note or loan arrangement and for how many years and at what interest rate), what additional duties/responsibilities may need to be taken on, and so on.
The list of legal, financial and operational considerations can be lengthy, thus it is imperative that both owners and associates alike work with their respective team of advisors to ensure consideration of all elements of the deal.
If you are an associate or practice owner trying to determine if a buy-in is right for you, reach out to our team to begin weighing the options and to better understand the process.
Comments