Selling Out

Photos in this post are from a recent trip to the beautiful city of Seattle

As I have mentioned previously, I am a partner in a large physician-only specialty group. My specialty – like many in medicine – has seen a lot of sales of groups to large national management companies. Let’s look at a hypothetical example of a physician named Jim.

Currently Jim is production based and making about $540,000/year gross, which after overhead/billing expenses is about $500,000/year. Out of that he pays his own expenses such as malpractice, health insurance, etc. He has a corporate profit sharing ($54,000/year) plan.

Jim’s group is discussing selling his practice. Initial offers are in the $1.6-2 million/partner range (depending on the multiplier negotiated). In exchange he would sign a 5 year agreement to work for about $400,000/year (including paid malpractice, subsidized health insurance, +/- small retirement match) with a clawback of the buyout if he left early. Jim will have been a partner >1 year at that point so he would owe long term capital gains only on the buyout money.

Jim weighs whether this makes financial sense for someone like him in the early stages of his career. If Jim took $1.2 million (roughly the post-capital gains amount he would be left with) and dropped it in to VTSAX, it would be about $4.8 million at age 55 (assuming 6% growth).


Contemplating taking the leap

In exchange for this Jim would be trading some a lot of autonomy. Jim would also be taking a decrease in income ($500,000/year to $400,000/year, but that $100,000 would be at the top of the federal/state tax bracket = taxed at 50%). Jim would also lose his corporate profit sharing plan (only the standard 401k plan is offered as an employee of the new company). Jim could of course leave after five years and pursue another partnership track job or a better employed job, but that would mean uprooting his family.

Jim’s group has been hesitant to sell to this point in spite of massive interest from multiple national suitors. Jim’s group values autonomy and is very “principled” in terms of how they want to practice. People in Jim’s position can often be conflicted if the job currently is pretty good in every way – good money, fair lifestyle, and fair internal governance.  However, from a purely financial standpoint Jim may think $1.6-2 million dollars each in a tax advantaged buyout would make a lot of sense. In spite of the number of years of practice he has in front of him, he may think he would be okay with being a cog in the machine and an employee of a large company for the long term security that the sale would provide.

Of course, ultimately any sale of the group would require an affirmative vote of the majority of Jim’s partners.

Any thoughts from my readers on this hypothetical scenario?


Our debt paydown plan

All photos from our most recent trip to Kauai

 

I have had a few questions from readers about our budget and how we prioritize debt repayment. Here is a snapshot of our current debt and plan:

A picture of our indebtedness

We are essentially doing a modified version of the Dave Ramsey debt snowball strategy. The lion’s share of our debt repayment effort is being funneled into my wife’s student loans (refinanced with a five year variable rate repayment through Sofi). We chose to refinance my student loan (also through Sofi) to a longer term (at the expense of a higher rate) so as to be able to pay more towards my wife’s loan and pay it off sooner. This was done for both psychological reasons (e.g. the sense of accomplishment that will come with paying off one set of our loans) and for more practical reasons – getting rid of one set of student loans significantly improves our cash flow/decreases our monthly mandatory expenditures.  Once her loan is paid off we will take a month or two and pay off our auto debt and then refinance my student loan to the lowest rate/shortest term possible.

So in about two years my wife’s student loan and my auto loan will be paid off, at which point we will use the money we were paying for her loan and the car loan to help pay down my student loan – to the tune of $13,000/month. In 2021 our only debt will be our mortgage.

We have gone back and forth about what to do with this extra $13,000/month once we only have a mortgage left. Dr. Cory Fawcett makes a compelling argument for paying off your mortgage as soon as possible in this scenario in his book The Doctor’s Guide to Eliminating Debt. I would tend to agree with him. It will only take us three years from that point to fully pay off our mortgage and be totally debt free – at age 40. Since we are very aggressive with our investments (100% equity) due to risk tolerance and our young age/career longevity, I view this equity as being the equivalent to the bond portion of a portfolio. Since we would only be 40 at this point, we would still have a decade or  more to aggressively fund our kids’ 529s and our brokerage account. If we decide to go part-time at this point it would be easy to do so given our monthly expenses would now be $17,000 per month less than they previously were.

In some sense there is probably no right answer as long as that money doesn’t get funneled into lifestyle expansion. In the same way that I believe we have good risk tolerance (this will surely be tested at some point by a bear market), we also are quite debt averse. This no doubt influences our decision making.

Even with this aggressive debt repayment plan we conservatively expect to have $2,500,000 in our various investment accounts by age 42 (assuming 6% returns, no increase in salary over this time). From that point on the asset side of our portfolio really starts to take off.

Projections

 

What are your thoughts on debt repayment vs. investing?