You are negotiating your buy-in to a practice that you have worked at for years. What do you want to consider?
First, you want to ensure you have an accountant who is experienced in reviewing books and records. Not all financial advisors know how to engage in due diligence and “read between the lines.” Your financial advisor should be able to sift through the expenses and determine how much of them are personal expenses run through the practice by the owner versus legitimate business expenses that should be shared. This changes your expected return on investment if they expect to continue to run those expenses through the entity, and may necessitate restructuring the entity to limit your risk of personal liability for tax audits as a result of wrongful expense deductions. It will also help you to determine what your true profit entitlement should be, and right size distributions. Also, if the owner bases the buy-in on a multiple of their own take home pay and expense reimbursements, this could change the equation.
Next, you want to ensure the partnership buy-in is for a share of everything. What are you buying into? Practices might not operate through a single entity, and the owner might have one or more separate entities that provide space, services, management, marketing, licensing of intellectual property and/or supplies to her own practice. There may be legal reasons for separating them out as well, in addition to tax benefits. This means that the profits you can expect to share in from the practice entity are artificially deflated because she is increasing expenses for the entity you own by paying herself! Different entities that are associated with the practice might include a separate medspa, laboratory entity, surgery entity and, of course, real estate ownership entities. Negotiate a piece of each one, or at least your pre-established rights to invest or vest in ownership in each over time. If there aren’t any others, a simple clause guarantying your right to acquire expansion entities associated with the practice will suffice.
Most importantly, you want to make sure that you are making more notwithstanding the amount you are paying to become an owner. Just because you are paying lots of moolah does not mean you shouldn’t be doing so on day one. You will, after all, be entitled to a piece of the profits you never had access to, including testing, the profit they made off of you as an employee and other people’s services. To do so, though, you need to spread out your buy-in over as long a period of time as possible, in monthly installments. The other associated issue is how you are paying. Are you paying with pre-tax or after-tax money? If you pay with “after-tax” money, then you are getting paid your salary or dividend, which is subject to tax and withholding obligations depending on its tax classification. One dollar paid to you does not equal one dollar net of payroll taxes, deductions and other withholdings. You then have to reach into your pocket for the difference, and end up paying more than the actual purchase price, because Uncle Sam skimmed off the top. You may also end up running to a bank, and paying that bank interest on the loan on top of interest to your partners in exchange for spreading out the payments over time. Your best bet is to negotiate a pre-tax buy-in, which essentially means that the practice re-distributes profits internally by allocating some of your share to the other owners. This may be in the form of a percentage re-allocation or a management fee. No taxes or withholdings are taken out of that, and it is risk free to you because it is only payable to them if it is there. If the re-allocation is not enough to cover the installment owed, then they should simply agree to defer the deficit from month to month until the excess is there. To further reduce the risk, you should negotiate a minimum guaranteed salary or dividend so that only the money left after payment of that to you is available for the re-allocation.
Many other factors exist, but these are threshold issues to evaluate when determining and negotiating whether the opportunity makes sense.
