September 10, 2021
Keys to Assure a Successful Buyout
“If there had been fewer lifeboats on the Titanic, then more people would have been saved.” - Sir Alfred Chalmers - Board of Trades
This was Sir Alfred’s analysis shortly after the Titanic sunk. His logic was with fewer lifeboats, more people would have rushed to those boats AND they would have been filled to capacity (which they were not). Thus, more lives would have been saved. Among all of the mistakes on that fateful day, perhaps the biggest was a lack of risk management. Very little effort had been devoted to preparing a solid exit strategy. A lesson learned for any venture: if it has a way in – it should have a tried, tested, and understandable way out.
Physician-owned real estate is no different. Too often, there is little-to-no strategy associated with ensuring a reliable and thoughtful exit for partners. In fact, groups often make decisions with good intentions that undermine their ability to fund a buyout at a physician’s retirement. Other well-intended decisions that hinder buyouts include:
Many see accelerated debt repayment as a prudent step towards financial freedom. That may be absolutely true when thinking about your own home but very different when considering a real estate partnership. The partnership’s ongoing success may be dependent upon leverage. As it pertains to providing physician owners surety of exit, accelerated debt repayment is like a soccer player rushing forward from their defensive position on the pitch to have a shot on net. The opportunity feels great at the moment but quickly wanes as the unguarded opponent scores an unassisted goal. The unintended consequences of the rush are not immediately apparent but can become significant and dire over time. Paying back debt more quickly builds equity faster, making it unsustainable for the real estate entity to buy out a retiring partner. It also makes the ownership proposition less attractive for new partners to buy into the real estate because the return on equity is depressed, further exacerbating the problem.
Real Estate Succession Planning
The practice is driving the real estate value. The practice is driving the real estate value. No, that was not a typo – just driving home the point! Unless you are doing everything possible to bring the partners of the practice into the real estate, you are jeopardizing the sustainability of the investment and your own financial well-being. Keeping the real estate investment to a discrete number of owners will invariably lead to fragmentation of the partners and difficulty in realizing a desirable capitalization event. Keeping the practice partners interested in the real estate as an investment is the key to guaranteeing the viability of your own exit – to make sure your lifeboat is waiting. Going back to the first point, rapid repayment of debt will make this objective much more difficult to achieve.
Risk management is the identification, evaluation, and prioritization of risks. To fully understand the risks, it is essential to forecast and analyze them such that they can be minimized, monitored, and controlled. Planning a sustainable exit strategy is not a guessing game. It is a science and the reason that CMAC Partners has built more exit models (lifeboats) for clients than for any other sector of our consultative services.
Many of these models have been made available to the CPOMP (Congress of Physician-Owned Medical Properties) Members or are available by emailing email@example.com. A look at these models will point you in the right direction and help you avoid the hidden icebergs as you set up your succession plan.