Case Study: Cardiology Group Accepts Buyout Offer from Corporate Aggregator

Setting:

Our client is a mid- career Cardiologist that was a member and mid-level owner of a group practice in Texas. His group became the target of a corporate, practice aggregator (aided by the senior members of the group). Upon learning the terms, he presented the “deal” to us, (the option that was presented to his group practice), to help him evaluate the impact on the financial freedom plan we’d developed and that we were already implementing. He was seeking assistance on how to cast his vote – the stakes were high.

As we reviewed the offer documents, it became clear that the deal was skewed heavily to benefit the large number of senior partners nearing retirement. While our client would receive considerable compensation for his partnership interest, it came with ‘strings attached’ – (1) a required, seven-year, employment contract (at a materially lower salary), (2) a statewide non-compete for the contract period, and (3) a Clawback provision to pay back the value received for his interest should he leave during that time. In a nutshell, if the group were to accept the buyout offer, the mid-level owners would indeed be inking a contract of the proverbial ‘Golden Handcuffs.’

There were other less explicit implications we helped illuminate:

  • The aggregator approach to make a practice more profitable is to: Do more with less, namely:
  • Not replace retiring doctors – fewer doctors, same case-load
  • Work longer hours
  • Use ‘temp’ doctors who don’t work weekend or night-time call shifts – therefore, more time ‘on call’ for the salaried doctors.
  • Cut costs across the board
  • There is a big difference between being a ‘partner’ and an ‘employee’ – just ask the former PriceWatersCoopers (PWC) consulting partners who became IBM employees when their partnership unit was sold to IBM.

As is our practice, we helped the doctor look at “the equations and the emotions” of his financial decision. ‘The equations” is the easy part and what we are trained to provide. Helping clients sort through the emotions associated with a financial choice requires accumulated wisdom and experience to think beyond the obvious.

  • The equations…
  • $1 million for partnership interest
  • $100K decrease in annual salary
  • Stepping back, one can see that the compensation for the partnership interest was essentially an advance of the salary reduction they were taking.
  • In other words, they were paying themselves for the partnership interest they’d earned.
  • The emotions…
  • Loss of ‘partnership’ level privileges/status
  • Tougher working conditions
  • Essentially a loss of ‘choice’ over the contract period regardless of the change in working conditions (without having to pay the $1 million back).
  • Reduced employment options at the end of the contract period.

The choices…

  • Decline the buyout offer, change groups (or start his own), and be able to stay in the area. In doing so, he would walk away from the $1 million value of his partnership interest.
  • Accept the buyout for his share, live with the contract, and re-evaluate at the end of the seven-year period. In doing so, he could invest and grow the $1 million, but he would not be able to save as much as originally planned. Market returns would dictate whether he was ‘ahead of plan’ or ‘behind plan’ at the end of the period.
  • Accept the buyout of his share, continue in the practice while trying to make the conditions better for himself while he rode out the contract period, explore alternatives during the contract period, and be willing to pay back the $1 million if he found an acceptable offer out of state which would possibly offset at least part of the payback, enabling him to still garner some value from his partnership interest.

How Did We Help?

  • Continued to fulfill our partnership role on this client’s life journey by helping him evaluate this ‘life happens’ event and the impact on his family’s anticipated needs, wants, and wishes.
  • Provided an objective, third-party review of the buyout offer.
  • Educated our client on the details of the offer and the choices it entailed.
  • Provided perspective for the ‘equations and emotions’ of this life choice.
  • Provided an objective sounding board as he evaluated his own goals, desire for freedom of choice, and future work opportunities.
  • Worked with the client’s tax preparer to adjust estimated tax payments for the payout and preserve the short-term funds needed to meet the 4/15 tax payment.
  • Helped the client adjust his planned annual savings to account for the after-tax buyout amount and the reduced ability to save over the next seven years.
  • Encouraged him to purchase Paid Time Off (PTO) from other doctors to help mitigate the impact of the additional on-call responsibilities.

Result:

In this case, our doctor chose to vote against the offer, however, he was not in the majority. With our guidance, we made adjustments to maximize the outcome (acceptance of the deal by the group), and he continues to evaluate alternative paths working in and around the constructs of the buyout provisions. Thus far, we have reviewed out-of-state positions, locum tenens work, teaching opportunities, charitable opportunities (doctors without borders), and a possible sabbatical.