A doctor recently asked me about how to set up partnership terms. I don’t have much experience with this subject but here’s some research I did.
First, you need to determine your practice’s financial value of your practice. Your accountant can help. Once a price has been set, the new partner either pays the full amount up front or pays it over a few years, with or without interest. While the new partner receives no tax deduction for the investment, the selling owners must report any gain on the sale of the stock (the portion that they are selling to the new partner) as a capital gain.
The value of the practice is a major element of the buy-in agreement. Three main
factors – tangible assets, accounts receivable, and goodwill – are used to determine the value
of the practice and therefore the physician’s share or buy-in amount. The tangible assets are
the easiest to determine because they include cash, furniture, equipment, and other items with
measurable cash value. The accounts receivable are monies owed to the practice for services
already rendered. Goodwill is the value of the practice’s expected future earning power.
Theoretically, determining the amount that should actually be paid for the buy-in involves
multiplying the sum of these three values by the proportion of ownership interest that the new
doctor will receive in the practice. However, the absence of any single, reliable methodology for
calculating goodwill complicates the matter considerably.
There are several ways to go about determining buy-in value. Some practices pay for a
full-blown practice valuation by an outside consultant each time a partner buys into the group.
Even such “professional” valuations are imprecise, however, since there is no single generally
accepted methodology for calculating practice value. Thus most valuators use several
methodologies to construct a range of value. Other practices use crude rules of thumb or
comparable practice sales data to calculate goodwill. Some practices use a pre-determined
amount and phase in the buy-in over several years through salary reductions (“sweat equity”).
Some practices choose to ignore goodwill and tangible assets and instead base the value solely
on accounts receivable. Some include all tangible assets and accounts receivable and leave only
goodwill out of the formula.
Taken from https://www.acponline.org/system/files/documents/running_practice/practice_management/human_resources/income_dist.pdf