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?


2 Replies to “Selling Out”

  1. I didn’t run the numbers but financially you need to look at the difference in what you can put in your tax advantaged accounts over the years until retirement.

    Honestly, I really hope you don’t sell. If you are already doing that well while owning your own place in this environment, then I would sit tight. Practicing on your own terms is worth a lot of money if you plan to stay in clinical medicine.

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