Q: I am an internist who has been working with a cardiologist for five years. When it came time to discuss a partnership, the
cardiologist said he wanted to charge me for "buying into" the practice, i.e. paying for the "goodwill" that he has built
through the years since he started the business. Isn't goodwill an outdated concept? What about my "sweat equity" and recognizing
that part of the value of the practice is due to my five years there?
A: This is a good example of why buy-ins should be negotiated in advance. Employees generally do not earn "sweat equity" in the
ownership of their employers' businesses, even though much of a business's value is often built upon the labor of employees.
The concept of "goodwill" as part of a practice's intangible value is still alive and well—mostly in cases in which there
are "dividends" to ownership above compensation for labor. For example, for an internal medicine practice in which buying
it would yield the purchaser an extra $500,000 in annual income, it inarguably has "goodwill" value. It takes an expert medical
appraiser to determine the practice's actual value, as well as negotiations to agree on the actual price.
Answers were provided by Steven I. Kern, JD, of Kern Augustine Conroy and Schoppmann in Bridgewater, New Jersey; Keith Borglum
of Professional Managment and Marketing in Santa Rosa, California; and Judy Murray and Angela Buelsing of Clayton L. Scroggins
Associates in Cincinnati, Ohio. Send your practice management questions to mepractice@advanstar.com .
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Comments from our Readers
Carl Rupe, Charlotte's Premiere Health / Charlotte, NC, UNITED STATES
Posted Aug 07 2009 01:18AM
PART 2 The internist, in this example, should not take offense at the group's position. The internist, in the beginning, got paid a significant amount of money at the expense of the existing partners. Over time, the internist generated enough revenue to pay for himself or herself's employment expenses, but not enough for the required overhead. After some number of years, the internist generated enough revenue to cover employment expenses, overhead, and some contribution to the group. The practice covered the expense of hiring the internist, the operating expenses, plus the cost of money over a number of years and should expect a return on their investment. The internist, after buying in, should have a say in operations and management, and earn a partner's distribution based on production ratios.
Carl Rupe, Charlotte's Premiere Health / Charlotte, NC, UNITED STATES
Posted Aug 07 2009 01:21AM
PERT 3 It is far better to join an established group with an existing clientele, market identity and infrastructure than doing it on your own from scratch. To demonstrate the value that the practice buy-in offer represents, compare the buy-in with the costs of a startup. Take out a $ 500,000 - $ 700,000 loan. Sign a long term lease for medical space with upfit expenses. Purchase equipment, expensive medical software, computers, supplies, insurance. Hire staff with their attending personnel issues. Get credentialed with various insurance plans and make arrangements for billing and collections. How many patients have you seen? ZERO. They don't know who you are, may not even know you exist, and aren't willing to trust their health to someone they don't know. You own your own practice, but now you are BLEEDING month, after month. Hope you have lot's of money in the bank for six months to a year... sometimes more. You may not survive. This is true for ANY startup business - medical, retail, restaurant, or service company. "Build it and they will come" does not work - without a lot of effort, planning, and money. None of those skills have anything to do with your talent as a physician. Is this the risk and the burden that you want to carry? A buy-in with an existing medical practice, whose office is friendly and well run IS A TERRIFIC VALUE. Help the practice grow to where it may be advisable to add another physician. As a partner, you will be asked to contribute $ 20,000 to $ 70,000 a year to cover that new physician's intitial compensation, until the new physician is able to generate sufficient revenue to cover employment expenses plus overhead. When that physician has proven him or herself and would like to join, you will understand the VALUE your pending offer represents.
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Posted Aug 07 2009 01:18AM
