Why an ESOP May Be Right for Your Physician Practice
Since you started your practice, you’ve worked hard to build a legacy for yourself and the physicians you’ve added along the way. And when it’s time to start thinking about stepping back, you likely want that legacy to continue and flourish long after you retire.
You could sell the business outright to a private equity firm, which would provide you with a larger, instant infusion of cash and a faster exit from the business. But that may not preserve what you’ve built, nor would it likely provide job security for the other doctors and staff within the practice. One option that would accomplish these goals—while still providing a significant payout to the owner(s) as well as wealth generation for your employees—is an employee stock ownership plan, or ESOP. For certain types of practices, it can be a highly attractive succession planning tool.
An ESOP is designed to make it easy for an owner to sell the business to its employees while retaining value in the business. It provides a tax-efficient way to transfer ownership while preserving the owner’s legacy and maintaining the culture that’s developed over the years. Also, ESOPs can be an effective method for attracting and retaining talent.
What types of practices are best served by an ESOP?
Generally speaking, ESOPs work best for practices with at least 10 doctors and an established management team. Because an ESOP is typically a debt-funded transaction that comes with ongoing administrative costs, having solid management in place can help ensure a smooth transaction and efficient plan administration.
The typical doctor profile is one who is still a few years away from retirement. That’s because an ESOP doesn’t provide the instant liquidity that you’d get from an outright sale. Instead, you’ll receive a down payment with the rest of the equity paid out over time. All the while, you’ll still retain interest in the practice until you decide to retire.
Wealth generation, deal flexibility
An ESOP can also generate wealth for your employees. It allows the practice owner to provide employees with equity on a tax-free basis. Even after the owner’s exit is complete, employees can continue to build wealth either through continuing the ESOP or if the ESOP-owned company is sold down the road.
Because you’re providing employees with wealth generation opportunities, an ESOP can also be a competitive advantage in terms of recruiting and retention. Employees know that the longer they stay with the practice, the more their equity balance grows.
Furthermore, an ESOP can even help you grow your practice by providing a path for new doctors to establish themselves as part of the practice without incurring the upfront cost of buying into one.
ESOPs may also lead to improved employee performance. Because they have a stake in the practice’s success, employees act like owners and will proactively look for ways to improve efficiency and increase revenue.
ESOP transaction structures allow for flexibility to account for the unique position of the practice. A private equity firm, for example, is not likely to take a minority stake in a physician practice. ESOP transactions can involve as little as 30% of the practice being sold while still realizing the tax benefits. That also means that everyone involved in ownership doesn’t need to agree to sell together. If a practice is owned by two doctors nearing retirement age and staffed with 15 younger doctors, for example, you can structure an ESOP to buy out the two older doctors.
An outright sale often requires doctors to remain for a certain period to facilitate a smooth transfer of patients and a transition to the acquirer’s business model with minimal disruption. So, you’re still working within the practice, but you’ve given up control while putting your employees in a more vulnerable position. With an ESOP, however, you can maintain the current management structure, providing continuity and security for you, your staff and the patients you serve.
For the right-sized practice, an ESOP is an attractive way to maintain control until you’re ready to retire, as well as preserve your legacy after you’ve stepped away from the practice.
Managing Director, Healthcare Finance Group
Mr. Javaid offers nearly 25 years of investment, finance, and management experience with a variety of institutions both public and private. For the past 20 years, M…(..)View Full Profile >
Director, Corporate Advisory
As Director of the BMO Corporate Advisory Group, Steve Suckow supports nearly every facet of the Bank's ESOP practice. Leveraging as a C-suite executive of an E…(..)View Full Profile >
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