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Buying into a medical practice or surgery center is a significant undertaking, particularly when it comes to finances. While navigating the financial aspects can seem daunting, implementing these strategies can help lay the foundation you need to begin your journey with confidence and clarity.Â
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Here are the main financial components you need to consider as a physician before embarking on the path toward medical practice partnership.
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What is a practice buy-in?
What does it mean to buy-into a medical practice or surgery center? Acquiring a stake in an established and successful medical practice or outpatient surgery center means that you own a portion of the practice and enables you to benefit from the practice’s earnings alongside your own salary.
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A buy-in also gives you a voice in the management of the practice and allows you to concentrate on providing excellent care for your patients, without the challenges of launching a new practice or being the sole owner of an existing one.
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How will I pay for a buy-in to a practice or surgery center?
How you pay for your buy-in is unique to your financial circumstances and will affect you long-term. It is important to understand your options and go with what makes the most sense for you and your goals.
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Payment structure
Payment structures vary for each medical practice buy-in and should be a part of your consideration process. The two most common types of vesting are:Â
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- Time vesting: You will be granted the stock after you invest for a certain amount of time. A common structure of this is to receive some stock after one year, and your full stock after four.Â
- Productivity vesting: A partner is granted stock once they reach a certain milestone or complete a certain task.
Paying for the buy-in
Once you have understood the vesting type and decided to buy in, you will need to determine your approach to payment. Here some of the most common ways:
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- Deduct from your salary. It’s typical for buy-ins to be deducted from your salary. This means you’ll see a specific amount taken from your paycheck over a designated period. This arrangement can be advantageous as you’ll be using lower, pre-tax funds for your payments.
- Pay with cash. If you have the savings available, you might think about using cash to cover the buy-in or part of it. Making a one-time payment upfront can help initiate the buy-in process. However, many physicians, particularly those just starting out, may lack the funds needed for such a significant cash investment.
- Partner with a lender. Specialized lending institutions can assist you in purchasing a stake in the medical practice. Loans can cover part or all of the buy-in amount and can be an excellent choice for making an immediate investment.
- Explore seller financing. This is an alternative for certain physicians, though it is less common and may be subject to additional regulatory constraints for surgical centers.
Financial preparation for practice ownershipÂ
Buying into a medical practice involves a substantial financial commitment. Before entering into a partnership, it’s important to evaluate your personal finances to ensure that you’re prepared for this investment.
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If you intend to finance your buy-in through a loan, lenders will examine your financial situation to assess your eligibility for borrowing. The personal financial choices you’ve made may influence how you approach financing your buy-in. Here are some elements of your personal finances that you should consider before making this investment.
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Personal financial statement
A personal financial statement is a document that can help a person track their financial and wealth situation at a specific moment in time, and can be used when applying for more complex credit or financing. It typically includes a breakdown of assets and liabilities to find your net worth. You can learn more about how to create your personal financial statement here.Â
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Personal debt-to-income ratio
The debt-to-income (DTI) ratio is a percentage that measures your monthly debt obligations relative to your gross monthly earnings. Your debt-to-income ratio (DTI) helps lenders determine if you can afford to take on additional debt, such as a practice loan. If your DTI is too high, you may not be approved for a loan, or you may not receive the best interest rate. You can calculate your personal DTI by dividing your monthly debt by your monthly, pre-tax income.
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Credit score
Credit scores are a key factor that lenders evaluate when determining your loan eligibility and terms. A higher credit score can result in reduced interest rates and optimal repayment periods, which can significantly reduce your total interest costs.Â
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If your credit score needs improvement, don’t worry, it is possible to increase your credit score. Here are some quick tips to get you started:
- Pay your bills on time. Payment history, which accounts for 35% of FICO credit scores, is the most influential factor in assessing creditworthiness, as on-time payments suggest responsible future debt management.
- Lower your credit utilization. The second most influential factor, amounts owed, accounts for 30% of your FICO score, and high credit utilization may signal to lenders that you’re at risk of defaulting, so paying down balances can help reduce this risk.
- Become an authorized user. If you’re new to building credit, becoming an authorized user on a relative or friend’s account with a high limit and good payment history can quickly boost your credit score, although its impact will have less of an effect than those with established credit.
- Review your credit reports. Regularly reviewing your credit report is important for identifying factors that may impact your score, such as late payments or errors, and you can dispute mistakes to improve your score. You’re entitled to a free annual report from each of the three bureaus, and many banks offer free credit monitoring for ongoing updates.
- Limit requests for new credit. In FICO scores, new credit accounts for 10% of the score, and opening multiple accounts in a short time can signal to lenders that you’re a higher risk borrower, so it’s best to avoid applying for various types of credit simultaneously.
- Self-report favorable payment history. Programs like Experian Boost and UltraFICO allow you to enhance your credit score by adding favorable payment histories from rent, utilities, and telecommunications to a thin credit record, but only if these payments have been made on time.
- Don’t close old credit accounts. Closing a credit account can negatively impact your credit score by increasing your credit utilization and reducing the length of your credit history, as it decreases your available credit and may later affect your score when the account is removed from your report.
Using a lender
If you intend to work with a lender, involve them early on in the buy-in process. You don’t want to be offered a partnership only to face challenges in obtaining financing swiftly. Establishing a relationship with a lender beforehand can make the partnership process more efficient when you’re ready to invest in a practice.
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If you are ready to start this phase of the process, you can get connected with a practice finance specialist here.Â
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Buying into a medical practice or surgery center partnership
The path toward practice partnership is an exciting step in your career, but also a decision that should not be made lightly. Although this process can be complex, with the right planning, tools and support, the process can be a smooth transition toward practice ownership.
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We created a full guide to walk you through the medical practice or surgery center buy-in process. Access the free guide here.Â
