What are the ways of buying into a company

Types of securities

DIALOGUE 1

Read and translate the following dialogue:

Task 1. Report the dialogue. Use the following reporting verbs:

Task 2. Work with a partner. Look at the dialogue and discuss what A. and B. say about the following subjects.

a. the ways to buy into the company

b. difference between ordinary and preferred stocks

c. difference between stocks and bonds

d. difference between securities and derivatives

Task 3. Say it in English:

1. цена покупателя

2. купить долю компании

3. опцион покупателя

4. прирост капитала, прибыль на капитал

5. выплата дивидендов

6. обыкновенная акция

7. нарицательная цена, номинальная стоимость

9. первоначальный платеж

10. котируемая компания (акции которой зарегистрированы на фондовой бирже)

11. запрашиваемая цена, цена продавца, цена предложения

12. обусловленное уплатой премии право купить или продать ценные бумаги (товар) по установленному курсу и в определенное время (до определенного момента времени)

13. дополнительные блага, привилегии, льготы

14. привилегированные акции (с фиксированным дивидендом)

15. опцион продавца [на продажу]

16. назначать цену; устанавливать расценки

17. ценные бумаги

18. привилегированное право служащего компании на покупку акции компании по сниженной или фиксированной цене

19. разница между ценами покупки и продажи ценных бумаг,

20. фондовая биржа

21. брит. акционер, владелец государственных ценных бумаг; амер. акционер; пайщик, владелец акции

22. преимущественное право акционера на подписку на вновь эмитируемые акции компании, выпускаемые с целью увеличения ее капитала

23. справиться, одолеть, решительно взяться за решение проблемы

24. приносить прибыль

25. попасть в затруднительное положение

26. выпускать (эмитировать) акции

27. заплатить текущую (действующую) цену

28. продать документ, дающий право на долю в прибылях

29. торгуемый финансовый инструмент

30. свидетельство, дающее своему держателю право купить акции или облигации компании по определенной цене в течение определенного периода

Task 4. Use Supporting Materials to continue the dialogue about securities, financial derivatives and hedging. Search for keywords NYSE, AMEX, treasury bonds, gilt-edged securities, blue-chips, FTSE, LIFFE, futures contracts, forward contracts, LIBOR, warrant, subscription right in the Internet to find further information about one of these items. Make use of helpful phrases from the dialogue above.

The best way to understand hedging is to think of it as insurance. Hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins, or other unforeseen disasters.

Portfolio managers, individual investors, and corporations use hedging techniques to reduce their exposure to various risks. In financial markets, however, hedging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk means strategically using instruments in the market to offset the risk of any adverse price movements. In other words, investors hedge one investment by making another. Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of «insurance» in one form or another.

For the most part, hedging techniques involve using complicated financial instruments known as derivatives, the most common of which are options, futures and warrants, whose value derives from and is dependent on the value of an underlying asset[13].

With these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative. Traders can use derivatives to hedge or mitigate risk by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out.

We’ve been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible[14]). Hedging a portfolio isn’t a perfect science and things can go wrong. Although risk managers are always aiming for «the perfect hedge,» it is difficult to achieve in practice.

Because risk is an essential element of investing, you should gain a fairly good awareness of how investors and companies work to protect themselves.

Many big companies and investment funds will hedge in some form. Oil companies, for example, might hedge against the price of oil while an international mutual fund might hedge against fluctuations in foreign-exchange rates.

There are many specific financial vehicles to accomplish hedging, including insurance policies, forward contracts, swaps, options, many types of over-the-counter and derivative products, and perhaps most popularly, futures contracts.

The 4 Ways to Buy and Sell Securities

One key aspect of investing that is sometimes overlooked is the way different securities are bought and sold. With the introduction of lower commission rates, loosening of regulatory regulations, and increased public interest in investing, the financial industry is booming with different avenues for buying and selling stocks, bonds, and mutual funds.

In North America, you can trade investment securities through the following four ways:

Key Takeaways

Brokerage Houses

One of the most common and easiest ways of buying and selling stocks, mutual funds, and bonds is through a brokerage house. Brokerage firms typically require you to open an account with them and deposit a certain amount of funds as a show of good faith. Brokerages are popular because they (rather than you) do much of the behind-the-scenes work, such as completing the necessary paperwork and ensuring timely dividend payments. Choosing the right broker is an important first step for new investors.

Full-Service Brokers

Historically, the primary way for investors to enter into the securities market was to simply contact their full-service brokers and have them purchase different stocks and bonds on their behalf. Because of the personal relationship that often develops between investor and broker, full-service brokers typically call their clients and provide recommendations for buying or selling particular securities.

Discount Brokerages

Discount brokerages have become increasingly popular with investors thanks to ever-decreasing commission fees. These brokerages, like large supermarkets, offer investors a huge selection at a low cost. However, investors have to do most of the work themselves. At almost all discount brokerages, you can buy stocks, bonds, or mutual funds either by calling one of the investment representatives—who will collect a commission—or completing the transaction yourself online.

Either way, you’ll need to enter an order ticket, which states the type of security you want to purchase (bond, stock. or mutual fund), the price you want to pay for it, the quantity you would like to buy, and the duration for which you would like to leave the order active (e.g., one day to one month). Upon proper completion of the order, the order is sent to the exchange, where the stock, bond, or mutual fund is bought or sold at whatever terms are on the order ticket.

Directly From the Business

More often than not, the method of transacting directly with the issuing company is more difficult than buying and selling securities through a broker; albeit transacting directly does have advantages.

When evaluating this transaction method, the first thing to consider is whether you are comfortable holding the securities yourself? When you buy stocks or bonds directly from the issuer, they will be held in certificates, either in registered or bearer form.

If your purchase is in bearer form, the issuing entity does not keep any records of transactions, which means that you are responsible for the safekeeping of the security. If you lose a security in bearer form, there is no way to retrieve it; the person who finds it is the proud new owner of your stock. This issue doesn’t arise with mutual funds because you don’t actually hold units individually.

Secondly, do you need access to the funds immediately? With the sale of mutual funds, you typically can receive cash three days after the transaction date. The wait for funds from the sale of stocks or bonds, however, can be significantly longer. For example, if you want to sell instruments that are in registered form, you have to sign the back of each certificate and send it back to the issuing company before you can receive any cash.

Lastly, how important is the price of purchase or sale to you? If you like to buy stocks, bonds, and mutual funds for the cheapest possible market price, dealing directly with an issuer may not be for you. When you buy stocks or bonds directly from an issuer, you will typically have to buy them at a price set by the issuer, and sell them back at another set price.

Given all of the above concerns, why would anyone want to buy and sell directly? Unlike brokerages which may require a minimum dollar purchase amount, businesses typically have few restrictions on the minimum number of units being purchased. Additionally, you don’t need to have an account, which sometimes requires a minimum balance and penalizes long-term investors with inactivity fees.

Banks

Although most banks don’t sell stocks, they do offer mutual funds and bonds. That said, their selection will be limited to funds offered by the bank itself or through its partners. On the plus side, ease. You can simply walk into just about any corner bank and purchase mutual funds or bonds on the spot.

A bank representative should be able to tell you the different characteristics and minimum purchase amounts of the products available.

Person-to-Person

In theory, you can buy and sell securities individually (outside of an exchange). Suppose that a friend has a stock that you would like to buy, or a relative who needs the funds immediately would like to sell you a bond. It can be done, but beware of scams, such as false certificates.

With most stocks and bonds, as the buyer, the other party will have to sign the certificates over to you. If you’d like to sell, you only have to sign the back of the certificates, which can then be sold to another party. In either scenario, after the security certificates are signed, they must then be sent back to the company, to be re-registered under the name of the new owner.

The Bottom Line

There are many ways to buy and sell securities; each comes with its own advantages, challenges, and risks. Whether you decide to deal with a full-service or discount broker, issuing company, bank, friend, or relative make sure that you’ve done your homework and identified the route that is best for you.

How to Start Investing in Stocks: A Beginner’s Guide

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Legendary investor Warren Buffett defines investing as “the process of laying out money now in the expectation of receiving more money in the future.” The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.

Key Takeaways

Click Play to Learn How to Start Investing in Stocks

What Kind of Investor Are You?

Before you commit your money, you need to answer this question: What kind of investor am I? When opening a brokerage account, an online broker such as Charles Schwab or Fidelity will ask you about your investment goals and what level of risk you’re willing to take.

Some investors want to take an active hand in managing their money’s growth, while others prefer to “set it and forget it.” More traditional online brokers, like the two mentioned above, allow you to invest in stocks, bonds, exchange-traded funds (ETFs), index funds, and mutual funds.

Online Brokers

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Discount brokers used to be the exception but are now the norm. Discount online brokers give you tools to select and place your own transactions, and many of them also offer a set-it-and-forget-it robo-advisory service. As the space of financial services has progressed in the 21st century, online brokers have added more features, including educational materials on their sites and mobile apps.

In addition, although there are a number of discount brokers with no (or very low) minimum deposit restrictions, you may be faced with other restrictions, and certain fees are charged to accounts that don’t have a minimum deposit. This is something that an investor should take into account if they want to invest in stocks.

Robo-Advisors

After the 2008 financial crisis, a new breed of investment advisor was born: the roboadvisor. Jon Stein and Eli Broverman of Betterment are often credited as the first in the space. Their mission was to use technology to lower costs for investors and streamline investment advice.

Since Betterment launched, other robo-first companies have been founded, and even established online brokers like Charles Schwab have added robo-like advisory services. According to a report by Charles Schwab, 58% of Americans say they will use some sort of robo advice by 2025. If you want an algorithm to make investment decisions for you, including tax-loss harvesting and rebalancing, then a roboadvisor may be for you. Also, as the success of index investing has shown, you might do better with a roboadvisor if your goal is long-term wealth building.

Investing Through Your Employer

If you’re on a tight budget, try to invest just 1% of your salary into the retirement plan available to you at work. The truth is you probably won’t even miss a contribution that small.

Work-based retirement plans deduct your contributions from your paycheck before taxes are calculated, which will make the contribution even less painful. When you’re comfortable with a 1% contribution, maybe you can increase it as you get annual raises. You’re unlikely to miss the additional contributions. If you have a 401(k) retirement account at work, then you may be investing in your future already with allocations to mutual funds and even your own company’s stock.

Minimums to Open an Account

It pays to shop around some and check out our broker reviews before deciding where you want to open an account. We list minimum deposits at the top of each review. Some firms do not require minimum deposits. Others may often reduce costs, such as trading fees and account management fees if you have a balance above a certain threshold. Still others may offer a certain number of commission-free trades for opening an account.

Commissions and Fees

As economists like to say, there ain’t no such thing as a free lunch. Though many brokers have been racing recently to lower or eliminate commissions on trades, and ETFs offer index investing to everyone who can trade with a bare-bones brokerage account, all brokers have to make money from their customers one way or another.

Depending on how often you trade, these fees can add up and affect your profitability. Investing in stocks can be very costly if you hop into and out of positions frequently, especially with a small amount of money available to invest.

Remember, a trade is an order to purchase or sell shares in one company. If you want to purchase five different stocks at the same time, this is seen as five separate trades, and you will be charged for each one.

If you plan to trade frequently, check out our list of brokers for cost-conscious traders.

Mutual Fund Loads

Besides the trading fee to purchase a mutual fund, there are other costs associated with this type of investment. Mutual funds are professionally managed pools of investor funds that invest in a focused manner, such as large-cap U.S. stocks.

An investor will incur many fees when investing in mutual funds. One of the most important fees to consider is the management expense ratio (MER), which is charged by the management team each year based on the number of assets in the fund. The MER ranges from 0.05% to 0.7% annually and varies depending on the type of fund. But the higher the MER, the more it affects the fund’s overall returns.

You may see a number of sales charges called loads when you buy mutual funds. Some are front-end loads, but you will also see no-load and back-end load funds. Be sure that you understand whether a fund that you are considering carries a sales load prior to buying it. Check out your broker’s list of no-load funds and no-transaction-fee funds if you want to avoid these extra charges.

Diversify and Reduce Risks

Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment’s performance severely hurting the return of your overall investment. You could think of it as financial jargon for “Don’t put all of your eggs in one basket.”

This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.

Stock Market Simulators

People new to investing who wish to gain experience trading without risking their money in the process may find that a stock market simulator is a valuable tool. There are a wide variety of trading simulators available, including those with and without fees. Investopedia’s simulator is entirely free to use.

Stock market simulators offer users imaginary, virtual money to «invest» in a portfolio of stocks, options, ETFs, or other securities. These simulators typically track price movements of investments and, depending on the simulator, other notable considerations such as trading fees or dividend payouts. Investors make virtual «trades» as if they were investing real money. Through this process, simulator users have the opportunity to learn about the ins and outs of investing—and to experience the consequences of their virtual investment decisions—without running the risk of putting their own money on the line. Some simulators even allow users to compete against other participants, providing an additional incentive to invest thoughtfully.

What is the Difference Between a Full-Service and a Discount Broker?

Full-service brokers provide a broad array of financial services, including offering financial advice for retirement, healthcare, and a host of investment products. They have traditionally catered to high-net-worth individuals and often require significant investments. Discount brokers have much lower thresholds for access, but also tend to offer a more streamlined set of services. Discount brokers allow users to place individual trades and also increasingly offer educational tools and other resources.

What Are the Risks of Investing?

Investing is a commitment of resources now toward a future financial goal. There are many levels of risk, with certain asset classes and investment products inherently much riskier than others. However, essentially all investing comes with at least some degree of risk: it is always possible that the value of your investment will not increase over time. For this reason, a key consideration for investors is how to manage their risk in order to achieve their financial goals, whether they are short- or long-term.

How Do Commissions and Fees Work?

The Bottom Line

It is possible to invest if you are just starting out with a small amount of money. It’s more complicated than just selecting the right investment (a feat that is difficult enough in itself), and you have to be aware of the restrictions that you face as a new investor.

You’ll have to do your homework to find the minimum deposit requirements and then compare the commissions to those of other brokers. Chances are that you won’t be able to cost-effectively buy individual stocks and still diversify with a small amount of money. You will also need to choose the broker with which you would like to open an account.

How To Buy Into A Business? 14 Steps to Buy a Business

June 19, 2019 By Hitesh Bhasin Tagged With: Business

You can either start a business enterprise from scratch with the help of your own ideas or you can buy an established or a start-up business. Developing a company from the ground-up will obviously have some difficulties whereas you save yourself from the earlier troubles and hassles of setting up by buying an established business entity.

Remember if you do not have the necessary finance then it is easy to acquire one for an established business rather than a new start-up because financial institutions are ready to back an established business rather than new entities.

Buying into a business has a lesser risk factor as the business already shows potential by generating steady cash flow, has established its brand value and is having a strong customer base. Financially the deal is more secure as an entrepreneur is looking at actual records of profit and loss and not at probable estimates that can vary very easily.

Before you actually make the decision for a buy-out it is imperative that you consider all the angles diligently so that you do not have to regret your decision. Remember it is better to be safe than sorry hence look into both pros and cons so that success is within your grasp.

Table of Contents

How to Buy Into a Business?

1) Figure out your ideal business

Thinking about buying a business and doing the deed are two different things. You just cannot randomly make a purchase when the whim strikes you. Are you looking for something particular related to your expertise or are you interested only on the management side and want an established business with existing good revenues?

Consider the type of business you are looking for and make a choice about which avenues to pursue. Figure out your ideal business and be sure of your decision if you are looking for ways to buy into a business.

2) Look for the right business

It is important to decide beforehand what you are looking at. Remember it is a huge decision and will have a direct impact on your life. Are you looking for a small business or a larger enterprise?

The larger one will obviously create more hassles but will also yield better and higher revenues compared to the small entity. Do you want to move on to another location or are you looking for something that is in or near your city?

The location of a business enterprise matters a great deal as the local labor can reduce your costs and increases your profits at a higher rate. You also have to think about other financial aspects of a deal along with the taxes that are levied in that region.

Are you looking for a particular industry because of your skills or you will opt for the one that looks promising to you? Are you looking for a traditional business with set hours or do you want to invest in something with hustle and bustle so that it can prove a new challenge?

Look for the right deal if you are looking for ways to buy into a business because it is a life-changing decision.

3) Investigate your options

Investigate the business entities that are in the market for a sell-out. Find out about their owners, business dealings, profits and loss, and market reputation. Try to find out whether the owner is selling because of financial difficulties or he is on the verge of retirement or he wants to start taking part in another opportunity.

Determine your best option and then talk to related people so that you can make a viable choice.

4) How much risk is involved

At the onset, everything looks great as you can see the dollar signs in your eyes. Better be sure of the risk involved if you are looking for ways to buy into a business.

Are you prepared for every eventuality because there is always a risk factor that you must consider before going through the motions?

5) Conduct a viable research

Investigate local enterprises if you are looking for an entity near your home or send out feelers to several other places where you have good contacts. Talk to accountants, lawyers or known employees that will know about the type of business opportunities that you are interested in.

Talk to your friends who have started business entities and are ready to move on to new pastures. If you come across some information then it is better to make further inquiries and talk directly or indirectly to the owners depending upon the situation.

You can also take online help to conduct research via legitimate portals so that you can be sure about the legitimacy of the business entity if you are looking for ways to buy into a business.

6) Hire a business broker

Sometimes taking professional help is the best course of action especially if you need detailed information about several entities and also about every aspect of the business you are interested in. That does not mean that you cannot conduct your personal research, in fact, it is recommended that you do so before hiring someone.

The concept of professional help is very much in demand nowadays as they have a wide network that can prove a blessing for you. Hire a business broker if you are looking for ways to buy into a business. He will pre-screen various business entities; find the ones you are looking for and help you in negotiating better terms.

Remember you have hired a business broker for your help, listen to his suggestions but make a final choice by yourself. Do not let anyone push you into doing something that you are not comfortable with.

7) Take care of your due diligence

Have you zeroed on something that looks promising to you? Are you desperate to make the deal so that you can call the business your own? Yes, your emotions are going haywire and you just want to complete the formalities and move on, but wait a minute and slow down.

Exuberance is good but anything over the top can prove disastrous hence do your homework. Remember everything that shines is not gold.

The business that is looking so great can have underlying issues that you are not aware of, hence take care of due diligence if you are interested to buy into a business.

8) Assemble your acquisition team

This is the time to assemble your acquisition team if you are looking for ways to buy into a business. If you are working with a broker than well and good, ask him to make necessary inquiries.

That does not mean that you will be relying only on the business broker, no gather your team members and give them their necessary work. Take the help of an independent business firm that has a credible reputation for proper valuation.

It will give you a detailed report about the value of the business and its worth in the current market. Make sure that the clients of the existing business will not leave with the owner when he is replaced as it can have a serious impact on future dealings.

9) Take the help of a professional accountant

Take the help of a professional accountant if you are looking for ways to buy into a business. He will be able to go through the written financials and evaluate whether everything is up to the mark or not. A professional accountant can dig deeper and come up with things that look fishy or unclear.

You cannot leave anything to chance because the business might have been going through some financial crisis that you are not aware of and you might find yourself with liabilities later on. Hire an expert in this field to be sure of everything because the time for diligence is before making a deal.

10) Necessary funding

Do you have the necessary funds to make a purchase by yourself or will you need financial backers? Buying a business is an expensive option and be sure that you are prepared with the necessary funds. You cannot decide midway that you still need a lot of money to complete the purchase.

You must have a rough estimate hence be prepared with the amount before going through your deal to buy into a business. After settling on a price you should immediately take a step back and contemplate whether you will be able to meet the difference by yourself or need help to do so.

11) Financial sources

You will find several financial sources that can help you to acquire the required finance but be sure of the pros and cons before you make a deal to buy into a business. You can take the help of an autonomous financial advisor to make sure that the funding source you have chosen is worthy or not.

An entrepreneur has the choice to approach Angel Investors. They will be financial investors in the business and the running of the business will remain with you.

The pros are that in case the business fails you will not have to worry about the debts and the cons are that you will have to share a large part of the profit with them. Another option is Seller Financing where you will have the option to pay gradually over a fixed time.

The advantage is that you gain the necessary time and will not have to shell out the full amount at once whereas the disadvantage is that you will have to pay interest on the amount. The third option is of business loan where you take out the loan via bank or another lender.

Be sure of every aspect before you go through the deal.

12) Make a creative offer

If you have found the business of your dreams and are ready to make a move then better make a creative offer to buy into a business. If he is appearing reluctant with the finance then offer few options so that the deal can go through.

Make sure that your eagerness does not cause you too much financial trouble. Remember business is all about risk as no risk no gain. If you consider it a good deal then go with it.

13) Find an attorney

It is important to find and hire a good attorney so that he can help you in preparing the necessary documents. He will make sure that the deal is written in a precise manner and it favors you and not the person who is selling his business.

Find an attorney who is an expert in business sales as he will be aware of intricate details that a general-purpose attorney is not if you are looking for ways to buy into a business.

14) Drafting the agreement

You are ready with all your preparations and now is the time to draft the agreement. You need one of the best attorneys at this time that will make the deal in your favor. Remember a legal document is binding hence be sure of the wordings before signing on the dotted line.

You have hired an acquisition attorney for this purpose but be certain that his reputation is good in the business settings. Make sure that you have understood every line of the written terms because you cannot leave anything to chance.

Sometimes things come back to bite you after the sale hence be vigilant in your efforts if you have decided to buy into a business.

When an entrepreneur decides to buy into a business entity he is looking at certain advantages. An established brand name and immediate revenue streams are his most important consideration besides the already existing strong customer base.

The process might look costly and time-consuming at the onset but the challenge to take forward helps in overlooking small obstacles. Remember to buy the right one for you so that it becomes the best possible fit.

Back your decision with confidence so that you can expect to reach desired levels of success with your hard work and sheer capabilities.

Everything You Need To Know About Buying Into A Medical Practice

Rather than starting your own practice, it is much more common to take a job where there is a potential buy into the practice. Today’s post is going to go through everything you need to know when you are thinking about buying into a medical practice.

Be warned. Today’s post is going to be a long one but a fun one! The post is really geared for those who are in smaller to medium sized groups who are thinking of buying more than 10% stake in a medical group.

Let’s learn about valuing a medical practice.

Typical Language When Buying Into A Medical Practice

Most contracts for employment are going to be quite vague when talking about buy into the practice. This gives the employer plenty of wiggle room. After all, what if the new hire does not work out and is not a good culture fit.

My shortness contract for employment that I was offered was 2 pages long. The longest was around 25 pages long.

Somewhere in your contract should be a statement about if partnership is available. There also should be an explanation of when you are eligible for that discussion. A usual language for this section may be the following:

“Upon completion of 2 years of full time employment with the medical group, the physician employee will become eligible to potentially buy shares in the medical practice if gross receivables is at least 2.5 times salary paid over this time period.”

It can even be vaguer than this. My most vague contract simply stated:

“Upon completion of the third year of full time employment, employed physicians may begin discussions about buying shares in the medical group.”

You can see that this is a very open ended statement. Just make sure that somewhere written in the contract is language that you are eligible for buy in and you know how it might leave you open to financial difficulty.

Stability Of Your Industry

There is a ton of change in the medical profession that is ongoing.

When taking a job, you absolutely should look at the stability of your industry and your location before buying to a medical practice.

For example, if you are a dermatologist and every dermatology group in town was bought by a private equity firm and the owner of the group is 60 years old…you can not help but wonder that just maybe the owner is going to look to cash out for retirement soon and sell to private equity.

Contracts are important. If you are a critical care group, what is the current working relationship with the hospital. How long are those contracts for? It is very common for large groups such as Team Health or Sound Physicians to take over contracts from smaller privately held groups.

The only concern I would have is if the contract was coming up for renewal around the time for potential buy in for partnership. It would not be ideal to buy into this critical care group only to find out 2 months after you bought in that your group was losing the contract with the hospital.

If you are reliant on something else for your groups revenue you need to know that relationship and what the contract is like. This is very true for ER groups, critical care groups, hospitalist groups…basically any group that does not have control over the setting of where you are seeing patients. These groups are also not worth a ton of money since sadly they are easy to replace in desired cities.

What Type Of Medical Practice Are You Buying Into

Let’s split the types of medical practices into 3 stages.

Growth Medical Practices

Growth practices are more in the expanding phase rather than a mature phase in terms of finances. For example, let’s say there is an allergy clinic with 5 locations. They now opened 2 new locations in the past 3 years, that would be a practice in the growth phase. Expect valuation of this company to be different than the other two phases of companies.

The same can be said for a smaller surgical group that bought a new piece of expensive hardware that they expect to bring in extra revenue.

These large financial purchases may affect the net cash flow and earnings significantly on paper.

Mature Medical Practices

The financial numbers are pretty well known, and you can easily estimate what next years income is most likely going to be assuming no major changes.

These types of practices often have a very standard fee that they give to everyone with a pre drawn up contract. It is going to be hard to buy in at a different valuation unless you bring something very unique to the table.

Distressed Medical Practices

These practices are those that are either not growing, shrinking, or closing. Distressed medical practices are often only worth what the hard assets are worth. For example, if a medical spa is closing its doors, the business is only worth what the resale value is on the medical equipment.

These businesses can be wonderful opportunities for already established businesses to buy additional equipment cheap. Other than that, I would stay away from these types of practices. Patient lists are worth almost nothing. I personally would not spend more than maybe a thousand dollars for the mailing list of all the previous patients.

Lets Talk Money

Accounts Receivable

This is one of the first things you will be exposed to when evaluating buying into a medical practice. Account receivable is usually only available to those who are immediately available for buy in. This is not going to be provided to you prior to this. No company is going to open their books to someone who both members is not seriously considering partnership. You will not have access to this prior to signing an employment contract.

First thing to know is what Medicare multiple is the group using?

The reason for the high value is because every insurance contract is totally different. My contracts for radiology services (x rays) in the office pays as low as 30% Medicare, and as high as 150% Medicare depending on the insurance plan.

**Just throwing out a made up example**

Why Do We Care About Medicare Multiple

In accounts receivables you will see outstanding balances broken up into 30 day increments. Once you hit 120 days then its just 120+ days outstanding.

The first 30 to 90 days may look like there is a ton of money outstanding. If your company is using a 3x multiplier, that 90,000 on the books in the billing platform may actually be only 30,000 that is realistically going to actually be income.

Know How Much Bad Debt Is Outstanding

You want most of your accounts receivables to be current when buying into a medical practice. This means that you are still back and forth with insurance companies and/or just waiting for patients to pay. I consider current anything less than 90 days. Anything beyond 90 days gets much less likely to recover. Anything more than 120 days and you are likely to never see a dollar from those patients.

You want the majority of the debt to be current. Ideally >90%.

Buying Into Accounts Receivables

This is much less common unless you are buying a medical practice outright from a retiring doctor. Most buy in agreements for ongoing practices do not have you buy into account receivables.

How to Value The Company

This is going to vary widely based on specialty and as you will see below, it is hard to come to an agreement even among professionals when buying into a medical practice.

Keep in mind that the larger the group, the less valid this article may be for you. A large multispecialty group that has 200 doctors may simply say, this is the cost of buying in the medical practice, this is the estimated pay out, and it is what it is.

Lets though take a look at a few ways we can figure out when buying to the medical practice.

Sales price based on gross revenue

My least favorite way to value a company.

Revenue alone means almost nothing. Yet, most publications that discuss how to sell a medical practice often mention this first.

Why revenue means almost nothing by itself is because you need year over year growth rates and you need a breakdown of expenses plus free cash flow.

If the business brings in 1 million dollars in gross revenue, then having 500,000 in expenses is a big difference than a company that has 950,000 in expenses.

Personally, I would not even consider buying into a medical company solely on gross revenue. You very well may be getting a raw deal because they most likely do not want you to focus on the other numbers and want you to be in awe of the bigger gross revenue number.

Run like the wind from someone who wants to sell you something based on gross revenue and not focus on the other aspects above.

Sales price based on earnings

Often the go to for valuing a more mature company when buying into a medical group. When you look at a public company you will see something called a P/E ratio. This is the price per net income after tax.

Lets say that a medical practice has 1000 shares of their company.

What Is A P/E Ratio

The price of the business =P

The net earnings of the business = E

It is simply the price of the business divided by its earnings. That is it.

The higher the ratio, the higher investor sentiment is for growth of the business. The lower the ratio, the less excitement there is about growth in the business or ability to recoup the investment in the future.

Use this ratio to determine if your buy in seems reasonable. This P/E ratio is going to vary widely based on the phase the company in is as below.

For example, if you are being asked to buy in at a ratio of 40, that means it is going to take much much longer to recoup your investment if massive growth does not occur.

I personally would not buy into a small private practice company with a P/E ratio higher than 5. Otherwise, I could just grind it and start up my own business without the buy in.

When Price To Earnings Does Not Work

Businesses that are in a growth phase, it is not reasonable or practical to use price per earnings. After all, earnings may be negative in the initial start up period.

Price per earnings will most likely not be a good way to value these types of companies. Instead using one of the following:

Growth Eating Into Earnings

So, if I tried to sell my company based on last years numbers, my price per earnings would look absolutely terrible.

Instead there is a metric called Internal Rate Of Return

Internal Rate Of Return

Lets take an example of a free standing ER that buys a CT scan.

This gives an IRR of 19.86%! The higher the number the better. Some would argue that anything that is higher than simply investing in the stock market is a good number. Personally I look for IRR of around 20% at minimum since I am taking much more risk with this investment compared to buying a mutual fund.

This IRR needs to potentially be taken into the equation when valuing a company that has made large purchases and waiting for that payoff to occur.

*Note that this method has two flaws. One large flaw is that projected revenue from the one time purchase can be way off from expected, leading to a dramatically different IRR. The second is that business can depreciate these assets on their taxes which is not taken into account with this equation.

Discounted Cash Flow

This method helps determine the value of the investment based on future cash flow. Often times this may be the best method to consider when buying into a company.

Lets take a job offer that I had 4 years ago.

Discounted Cash Flow is finding the present value of expected future cash flow at a discounted rate.

Tomorrows Dollars Are Worth Less

Answer: Inflation exists and there is a cost of capital allocation. Tomorrows dollars are worth less than today.

We have to discount this cash depreciation in our calculation based on inflation and where we might also get better returns (like a S&P 500 fund).

Example:

There is a cost of allocating this capital in the business, this capital could have been invested somewhere else like a S&P 500 fund. Lets assume that S&P 500 fund may make 10% returns on the average over the same 5 years looking forward.

Taking Growth Into Account When Buying Into A medical Practice

Keep in mind that when using discounted cash flow, my above example assumed no growth.

Even with little growth the value starts to change

When factoring in growth in my practice, which since it is so new has been hovering at lets say 50% per year. Even if I halved that to lets say 25% growth year over year, take a look at how dramatic the value changes when we start accounting for growth. This is also why hyper growth companies are hard to value (looking at you Tesla). How long will that ridiculous growth continue?

Be Conservative Financially

Medicine is a small world. In light of many changes in the field, such as ability of VC money to own practices, health insurance plans starting up their own practices, and independent practice for non physician providers, I would have a hard time not discounting the investment if I was buying into a group. This is why I use a timeline of 5 years rather than 10 years.

You need to figure out if your company has any moat, and if not, I would discount that heavily. What I mean by a moat is protection from simply being made irreverent next year.

For example, if I was an ER group and our buy in was coming up but so was our contract renewal soon after with the hospital…I would be very wary of that buy in. You very well could buy in and have the hospital go with a “cheaper” group.

This happened to an Anesthesia group in Texas about 3 years ago. A lower bidder came in and got the contract with the hospital for anesthesia services. The doctors were apparently asked to sign on to the new group at a lower pay rate and if not they were replaced with CNA’s or new doctors entirely.

That group had a valuation with many partners who owned shares in the company. The valuation of their group almost overnight took a massive financial blow once they lost the hospital contract.

It happens all the time, and it can happen to your group.

How I got Screwed…Or A Blessing In Disguise

My group hired a lot of new graduates at the same time I was hired and when it came time for me to join the group, all of a sudden my group decided to more than triple the buy in since we added a lot of value / profits for the company.

I shot myself in the foot by working so hard that I created a ton of profits for the company which then gave it a very high valuation. Now I was faced with an almost 6 figure buy in since I had no clause of a discounted buy in after adding value to the practice.

It Gets Way More Complex

This post is already nearing 4,000 words and is long enough. Just know that valuing a medical practice gets much more complex. There can be a “goodwill” component or brand worth. There may also be other factors like buying into a laboratory that runs labs for the practice. Other factors are how many shares are you being offered of the medical practice and what does that mean in terms of dividend payments. That will be another post for another day as I just scratched the surface of buying into a medical practice.