July 18, 2024
 
 
 
Question:
Hi Jennifer, 

I'm not interested in selling to private equity, but I am interested in creating some alignment mechanisms for my associate doctors and some key personnel.   Any ideas?  

Thanks in advance, 
Dr. P
 
Answer:
Well, you do not need to take investor money and hold formal board meetings to have alignment mechanisms built into your practice.  All you need is some forethought and, perhaps, some transparent bookkeeping (should you elect certain mechanisms...).  The most common three mechanisms, ordered by least complex to most complex are: 
 
  1.  Bonus Structure (we can go many different ways here...) - create a thoughtful bonus structure tied to achievable outcomes.   A positive bonus structure does not require any structuring or open access to any books, and can be used a positive roadmap for employee growth and alignment.  Creating a Bonus structure tied to "Profits" or "Revenue" may be problematic from a compliance standpoint for non medical personnel, and for medical personnel if certain federal laws are implicated by federal payors.   You also may be setting yourself up for a request/demand to open your books if you create a bonus based on overall practice value/growth.
  2.  Options Grant - Offering equity (usually of a management company) to key people as an "Option" is a common vehicle to use to allow key people to participate in the appreciation value of the practice/management company following their grant date.  One of the benefits of Options as opposed to the next option is technically the recipient does not become an owner until their vesting and exercise of the Option is complete. 
  3. Profits Interest - a profits interest is another "appreciation" tool, where the recipient is granted an ownership position at the grant time, and after their proscribed vesting and exercise conditions are complete their position is converted to equity.
Yes, I went quick on 2 and 3.  Yes, the mechanisms sound complicated, but in reality, both mechanisms work this way (to simplify) - recipient receives a grant that you can dictate how long they have to work, or what financial metrics the company may have to hit before the grant is available to the recipient.  In each case the recipient pays no out of pocket cost for the grant.   In each case, the grant can be revocable if the person is terminated.   And, importantly, in reality, both mechanisms are accessible for any practice owner interested in a growth model.  2 and 3 have different tax implications, and your accountant would be a big part in our selection discussions.  

Let us know if you would like some more information on growth mechanisms.   Happy to set a 15 minute call for listserv members to chat through.  Best way to schedule is to contact Taryn.