Before selling your medical practice, establish an internal buyout fund

June 1, 2010

As an attorney and a consultant to thousands of physicians across the country, we are constantly astounded by the attitudes of physicians regarding the sale of their medical practices. Most often, we hear the complaint that doctors do not feel they can sell their practice for any significant value.

As an attorney and a consultant to thousands of physicians across the country, we are constantly astounded by the attitudes of physicians regarding the sale of their medical practices. Most often, we hear the complaint that doctors do not feel they can sell their practice for any significant value. They generally do not feel the practice is worth anything, especially if they do not have younger partners to buy them out.

Even in medical practices that are larger and have a significant number of younger physicians, most doctors maintain the same complaint. While they may typically have a right to a few months of payments from accounts receivable (AR) after they retire, this is a pittance compared to the value they have brought to the practice over the years. We would agree with them in this assessment - a few months of AR certainly does not compensate a physician for 20-plus years of building a practice and its reputation.

So what can you do about it? Unfortunately, the most common advice physicians seem to get from their advisers is some version of, “Grin and bear it.” We all know, advisers say, there is no white knight that is going to come in and buy your practice for a seven-figure sum, especially if you may be retiring that year or in the near future. In fact, we’ve seen very few physicians who have built a solid plan for a lucrative buyout based on their existing advisers’ help.

In this article, we hope to do a number of things. The first is to give you hope that there are ways to, in essence, sell your practice for millions of dollars - this is, if you plan and prepare for retirement now. Second, we plan to give you a couple of quick ideas about how such a sale could occur.

Let’s look at three concepts that may allow you to sell the practice for millions when you retire.

Plan - and plan early. Common-sense advice is absolutely correct; for instance, neither an outside party like a management company nor insiders such as younger doctors will suddenly cut you a seven-figure check as you are about to retire. If your buyout plan is to simply go about your practice as a physician and see patients with no forethought businesswise about how you will sell your practice when you retire, you will get virtually nothing for your practice. On the other hand, if, at the outset of your practice (10, 20 or even 30 years before you retire), you begin properly funding a buyout vehicle for your practice upon retirement, you are almost assured of getting a multi-million dollar check upon retirement.

While we will see a couple of alternative techniques below, the key point is simple: Buyouts of medical practices need to be planned; they need to be funded over time; and they need the commitment of the physician many years prior to the actual sale. The best thing you can do to ensure that you will receive millions upon your retirement for your practice is to focus on this issue today … and implement a plan as soon as practicable.

Use a nontraditional, or “hybrid” benefits plan to fund the buyout. Most likely, traditional retirement plans are the only ones you have heard of. These include qualified plans such as pensions, profit-sharing plans, 401(k)s, 403(b)s and, for these purposes, SEP-IRAs and Keoghs. What are nontraditional plans, or “hybrid” plans? These may be implemented in addition to the qualified plans. We have addressed these specific plans in past articles.

As an example here, let’s consider nonqualified plans. These plans are relatively unknown to physicians, even though most Fortune 1000 companies make them available to their executives. While many of these plans in public companies involve company stock or stock options (which, of course, do not work in a medical practice environment), many use structures that a physician can easily employ in a practice.

Because they are not “qualified,” these plans can be offered to only a few employees, such as the physicians, or only to partner physicians. Most importantly for this discussion, there are many ways this type of plan can create a large buyout fund for retiring physicians, including the following:

A. Requiring each physician to put a certain dollar amount or income percentage into the plan. The plan’s funds then grow over a period of years and, as each older physician retires, they have a right to a certain percent of the plan assets. Of course, this would be in addition to their qualified plan (i.e., pension plan) as well.

B. Building vesting requirements into the plan so if physicians leave the practice, they may/may not lose their benefits in the plan. This would allow remaining doctors to benefit from their share.

While the alternatives are numerous, just by implementing a plan using A and B, a medical practice could create a multi-million dollar buyout fund over a five- to 10-year period.

Use a Captive Insurance Company (CIC) to fund the buyout. Captive Insurance Companies (CICs) for medical practices are typically implemented for their risk management and asset protection benefits. As described in other articles, certain small CICs can enjoy beneficial tax treatment, allowing the physician owners an opportunity to build tax-favored wealth, as opposed to giving profits up to insurance companies. In addition to these benefits, the CIC can be an ideal source of buyout funds for retiring physicians.

In many cases, a CIC will have significant reserves left to invest and build each year it is in existence. Over 10 to 20 years, the CIC could accumulate very large amounts. If a buyout formula is layered into the stock agreements of the CIC, this can be another source of buyout funds for doctors when they retire from the practice as well.

Proper planning is key

These are just two of a number of techniques physicians can employ to “sell” their practice lucratively when they retire. As mentioned above, the key is planning. There are no outside buyers willing to pay you millions for your practice anymore. If you want such a buyout, you must plan for it yourself.