Best Practices

5 Co-Ownership Questions Recruits Ask

By Richard C. Koval, M.P.A., CMPE

Most candidates that physician practices recruit expect to become coowners. During interviews, candidates inevitably ask questions about the terms for future ownership. If you're in solo practice or if your group practice hasn't added a new co-owner recently, you may find these questions difficult to answer. Even if you're not sure exactly how co-ownership will be arranged, you can address the following questions in ways that most candidates will find satisfactory. However, because co-ownership is based on a mutual agreement, the employment agreement should not guarantee or include any of these terms.

Q: When would I become eligible for co-ownership?

A: Assuming we mutually agree to proceed, and your personal practice is mature enough to make co-ownership viable, I expect you to be considered for co-ownership after completing two years of employment.

Most practices use the employment period to confirm professional and personal compatibility and ensure the associate can afford co-ownership. In most cases, a one- to three-year period is involved, with two years being most common.

Q: What percentage of ownership would I receive?

A: I expect your share to be no less than that held by anyone else in the practice.

Most practices offer equal co-ownership. For solo practices, equal coownership is usually accompanied by senior-partner protections such as the ability to buy out the younger associate at any time during the buy-in period, and uncontested ownership of the practice identity and infrastructure upon the associate's termination. If instead you expect to maintain a majority share, you need to communicate this clearly to the candidate.

Q: What would be my buy-in cost?

A: It would be unfair to suggest a dollar amount at this point because we'd need to predict the value of the practice several years in advance, which is almost impossible. However, pricing will be commensurate with fair market value and ensure that the cashflow consequences make sense for you.

Pricing will be based on the practice value at the start of the buy-in, the percentage purchased, the candidate's level of personal productivity, the income distribution formula, overall profitability of the practice, and other variables. In most cases, the candidate will purchase a share of net equity/stock, collectable receivables and goodwill, with pricing based on common valuation standards. Ideally, compensation net of buy-in payments will be close to or exceed prior compensation as an associate, ensuring a positive return on the co-ownership investment.

Q: What payment terms would you offer?

A: Payment for stock must be arranged on a post-tax basis due to IRS regulations and would likely be paid over a five-year term with nominal interest. Consideration for receivables and goodwill would likely be arranged by an internal redistribution of income that reduces your taxable compensation, creating the equivalent of a pretax payment for those aspects.

This is the most common method for structuring buy-in payments, but other approaches are possible.

Q: How would you determine the co-owners' compensation?

A: We will divide profits mostly by individual productivity, perhaps with an additional component based on ownership.

This is the most common income allocation structure, but infinite possibilities exist. This factor will influence the new co-owner's receivables and goodwill values, along with personal cash flow. OM

Richard C. Koval, MPA, CMPE, is a principal and senior consultant with BSM Consulting, based in Incline Village, Nev., and Scottsdale, Ariz. For resources discussed in this article, visit the BSM Café at www.BSMCafe.com.