ABC Shareholder Report Buy-In and Pay-Out Issues Christopher J. Evans, DHA, FACHE, CMPE Health...

ABC Shareholder ReportBuy-In and Pay-Out Issues

Christopher J. Evans, DHA, FACHE, CMPE

Health Capital Advisors, Inc.

December 18, 2003

Background

ShareholderSurvey

Discussion

ABC: Buy-In, Pay-Out Issues

Buy-In andPay-Out

PracticalMatters

This meeting is about movement and results

Possible outcomes include:

Ongoing, focused discussion on specific topics

Decision to suspend discussion of specific topics

How to present information to all shareholders

Background


ShareholderSurvey

Discussion

Buy-In andPay-Out

PracticalMatters

ABC engaged Health Capital Advisors, Inc. (HCA) to provide internal planning analyses related to evaluating and modifying the terms of the existing shareholder agreement regarding overall shareholder compensation and the process for determining the value of ownership shares.

Background

Phase One of this analysis was

A) The administration of a shareholder survey

B) Determining the elements of value of the organization

Phase Two is the discussion of buy-in and pay-out issues via the survey results and the practical methods ABC may use to create its desired model for shareholder transactions


ShareholderSurvey

Discussion

Buy-In andPay-Out

PracticalMatters

Elements of Value: Results

ABC’s value resides in its net tangible assets plus elements of going concern

This is due entirely to the uncertainty of future net income of the firm

Please see initial report for details on these findings

Background


ShareholderSurvey

Discussion

Tangible Assets• Furniture, fixtures, equip.(FFE)• Accounts receivable• Supply inventory on hand• Cash on hand

Intangible Assets• Assembled workforce• Operating systems• No goodwill

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Net Value of 100% of ABC = Assets - Liabilities

Background


ShareholderSurvey

Discussion

Assets at Fair Market Value• Furniture, fixtures, equip. $4.8M• Accounts receivable $640K• Supply inventory on hand Est. Annual Expense / 9• Cash on hand Varies• Assembled workforce Est. Annual Expense* / 52• Operating systems $50,000* Staff only

Liabilities at Face Value• Total liabilities $4.7M

Buy-In andPay-Out

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Discussion

For how long is ABC, as it currently exists, a going concern?

What can be sold?

What might be purchased?

What liabilities exist that negatively affect the purchase price?

What about the future stability of ABC?

Background


ShareholderSurvey

Discussion

Buy-In andPay-Out

PracticalMatters

Shareholder Survey Results

Do you believe the current compensation model for shareholders is the right one for this partnership?

Definitely Yes 10% 1

Probably Yes 40% 4

Unsure 10% 1

Probably No 30% 3

Definitely No 10% 1


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion


How could it be improved or what key areas need attention or investigation?

Base salary process needs clarification, adjustment

Needs to reward people more appropriately

Works well as it is

Generally correct, but needs adjustment

Distributions not timely

Investigate other models

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDo you feel that the partnership should reduce shareholder compensation in order to build cash reserves for future capital (equipment and practice expansion) needs?


Probably Yes 30% 3

Unsure 20% 2

Probably No 20% 2

Definitely No 20% 2

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDo you believe that the current level of shareholder compensation will continue over the next several years?


Probably Yes 30% 3

Unsure 30% 3

Probably No 30% 3

Definitely No 0% 3

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ShareholderSurvey

Background

Discussion


What factors will influence positive or negative changes?

Change in Metronet benefits structure, population, alternative contracting forms

Change in ABC benefits structure

Declining fees

Metronet losses may be offset by fee for service patients and operational efficiencies

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDo you believe that the the partnership should take steps now to ensure that partner compensation remains strong?


Probably Yes 40% 4

Unsure 10% 1

Probably No 0% 0

Definitely No 0% 0

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ShareholderSurvey

Background

Discussion


What ideas that come to mind on what the partnership should do?

Have a set, activity-specific formula for base salary with equal bonuses

Evaluate strengths and weaknesses, begin advertising?

Carefully account for overhead and income

Begin to establish a larger profile in the community

Maintain high quality

Address improving attitudes as the key to pt. retention

Ensure agreed-upon plans are implemented

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDo you believe that, given equal productivity, employed dentists and shareholders should receive equal compensation?


Probably Yes 20% 2

Unsure 10% 1

Probably No 40% 4

Definitely No 20% 2

This is a problemIt sends a bad

culture message to employed dentists

and creates illogical compensation arrangements

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDo you believe the current compensation model for employee dentists is the right one for the partnership?


Probably Yes 50% 5

Unsure 10% 1

Probably No 30% 3

Definitely No 0% 0

Buy-In andPay-Out

PracticalMatters


ShareholderSurvey

Background

Discussion


What aspects of the compensation system for employed dentists could be improved, or what key areas need attention or investigation?

Poor base salary determination, poor incentive plan

It’s the same as shareholders - it’s about right

It works well, it should be evaluated periodically

Needs to reward people more appropriately

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsIn what year do you plan on retiring?

2011 20% 2

2012 10% 1

2013 10% 1

2015 50% 5

After 2005 10% 1

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsIn what phase do you see yourself primarily in the your professional life?

Practice establishment - Stabilizing income stream, equity, and career stability: 40% 4

Practice expansion - Enhancing patient base size, net income, increasing practice value: 50% 5

Practice conversion - Cashing in on equity, decreasing liability, securing practice value: 10% 1

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsIf you see the practice expanding, by what methods do you think the practice should grow?

Hiring new employed dentists 70% 7

Contracting with independent dentists 20% 2

Purchasing or merging existing practices 30% 3

I do not see the practice expanding 30% 3

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ShareholderSurvey

Background

Discussion


Do you think you will retire completely from practice or would you be interested in a part or full time, employed dentist status?

I am planning to retire completely 0% 0

I would consider working full time 10% 1

I would consider working part time 90% 9

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsDoes the current method for paying-out shareholders need revision?


Probably Yes 30% 3

Unsure 30% 3

Probably No 0% 0

Definitely No 0% 0

Buy-In andPay-Out

PracticalMatters


ShareholderSurvey

Background

Discussion


What aspects of the pay-out method could be improved, or what key areas need attention or investigation?

Not aware a pay-out method exists

There is no true method in place

Unsure of the specific of the existing method

Would like to see some other ways

Yes, as it exists (however it exists) it needs revision

A building-wide bonus based on annual profits (?)

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsShould the partnership recognize that a pay-out for the death of a shareholder is the same as the pay-out for a retiring shareholder?


Probably Yes 40% 4

Unsure 20% 2

Probably No 10% 1

Definitely No 0% 0

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsShould a pay-out for a shareholder who leaves the partnership and continues to practice (compete) in Forsyth County be different than for the other reasons?


Probably Yes 50% 5

Unsure 0% 0

Probably No 20% 2

Definitely No 0% 0

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsIs tax planning a key concern for you in the pay-out process?


Probably Yes 20% 2

Unsure 10% 1

Probably No 0% 0

Definitely No 0% 0

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion

Shareholder Survey ResultsShould the partnership create a mechanism to fund the pay-out of each shareholder through retaining earnings, deferred compensation, or an insurance product (recognizing that this will mean somewhat reduced shareholder compensation in the short-term)?


Probably Yes 40% 4

Unsure 30% 3

Probably No 20% 2

Definitely No 0% 0

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion


Would any of the following be of value to you in planning and understanding how to fund pay-outs of shareholders?

Discussion with your accountant? 80% 8

Discussion with Insurance and/or Tax Expert 100% 10

Facilitated group discussion to derive

a group consensus 70% 7

Other 20% 2

American Association Of Dental Group Practices may have someone to consult

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ShareholderSurvey

Background

Discussion


What factors are important to you for someone to buy into the status of shareholder in this partnership?

Buy-in according to fair market value 70% 7

Buy-in price recognizes and compensates theefforts made by the founding shareholders tobuild the business 80% 8

All assets are equally distributed 40% 4

Each shareholder has equal status 20% 2

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ShareholderSurvey

Background

Discussion


What factors are important to you for someone to buy into the status of shareholder in this partnership? Cont.

Non-founding shareholders have a “Class B”status with restricted rights to voting and/orcompensation 80% 8

Some assets are not included 50% 5

New partners should sign non-competitionand/or other restrictive covenants 90% 9

Buy-In andPay-Out

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ShareholderSurvey

Background

Discussion


What factors are important to you for someone to buy the status of shareholder in this partnership?

Candidate's personal compatibility 90% 9

Clinical skills, generally 100% 10

Special skills fill a gap in the practice 90%9

Leadership ability 70% 7

Entrepreneurial interest 40% 4

Performance and productivity 100% 10

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ShareholderSurvey

Background

Discussion


What factors are important to you for someone to buy the status of shareholder in this partnership? Cont.

Research skills and an interest to use them 40% 4

Teaching skills 20% 2

Willingness to spend extra time to makethe practice a success 90% 9

Would lose this person if they do notbecome partner 20% 2

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ShareholderSurvey

Background

Discussion


Other final thoughts?

New shareholder buy-ins could fund pay-outs $ for $

The buy-in price should not necessarily be the same as the pay-out price

Do research on other compensation models

Quantify and reward those in the practice who contribute to the viability of our organization

Buy-In andPay-Out

PracticalMatters

Definitions - see next page for text

Fair market value

Control

Minority Interest

Marketability

Stock

Asset

Liability

Equity


ShareholderSurvey

Background

Buy-In andPay-Out

Discussion

PracticalMatters


ShareholderSurvey

Background

Discussion

Definitions

Fair market value (FMV) – The amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts.Control – The power to direct the management and policies of a business enterprise.Minority Interest – An ownership interest less than 50% of the voting interest in a business enterprise.

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ShareholderSurvey

Background

Discussion

Definitions

Marketability – The ability to quickly convert property to cash at minimal cost.Stock – Shares of corporate capital.Asset – Tangible or intangible property of a business enterprise.Liability – Debts owed by a business enterprise.Equity – The owner’s interest in property after deduction of all liabilities

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Buy-in and Pay-out Topics

Philosophical issues firstMarriage or divorce

Win-win or win-lose strategy

Control issues

Resolving compensation issues before value issues - they are inseparable

Shareholder

Employed dentists

Deferred compensation decisions

Buy-in and pay-out options


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

Issues of Control: Voting RightsAppoint management

Determine compensation and perquisites

Set policy and course of direction for business

Acquire and liquidate assets

Select people, award contracts

Change corporate documents

Effect of ownership distribution (10% owner)

Shareholder agreement language

PracticalMatters

Post-Buy-in Compensation (detail to follow)

Ownership distributionEqual owner, equal pay

Productivity distributionHigher production, higher pay

Ownership and productivity distributionBlending of ownership and productivity

Note: Factoring in citizenship, patient satisfaction, and other factors are important in any model


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters

Post-Buy-in Compensation

Ownership distributionEqual owner, equal pay

Total collections less total overhead (including equal specialty-specific owner base salaries) = net to distribute equally to equal partners

Does not reward important productivity differences by volume or practice focus

Generally good only for homogeneous groups


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters


Productivity distributionHigher production, higher pay

Total collections less total overhead (including equal or productivity based, specialty-specific owner base salaries) = net to distribute based on provider-specific collection distribution to the net

Good for diverse groups


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters


Ownership and productivity distributionBlending of ownership and productivity

Good for diverse groups with great variations in individual production practice foci, specialty base compensation, and other complex factors

The goal in any compensation system is to reward individuals according to the shareholders’ desires while maintaining a strong and productive workforce.

Lastly, be careful what you incentivize people to do.


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters

Buy-in Options

A) Net tangibles only

B) A + going concern intangibles

C) B + net present value (NPV) of partnership distribution for 2-3 years

D) B + Amount for Class B Stock (voting privileges)

E) Others?


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters

Pay-out Options - Philosophy

Is pay-out different than buy-in?Under all circumstances?

Is it an obligation or an option?

Is the pay-out to be controlled by the shareholder agreement language?

Should the agreement specify a formula, process, or simply state FMV?

Will ABC seek to create a mechanism in advance to fund the pay-out?


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters

Pay-out Options

A) Net tangibles only

B) A + going concern intangibles

C) B + net present value (NPV) of partnership distribution () for 2-3 years

D) Dollar for dollar match with most recent buy-in?

E) Independent appraisal at FMV

F) Others?


ShareholderSurvey

Background

Discussion

Buy-In andPay-Out

PracticalMatters


ShareholderSurvey

Background

Discussion

PracticalMatters

Buy-In andPay-Out

Issues of the Deal

Deal termsTiming

Financing (seller, buyer, third party)

Pretax via salary reductions

After tax via amortized payment

Tax implications for seller

Restrictive covenantsYes, no, maybe (under what circumstances?)

Liquidated damages in lieu of covenants


ShareholderSurvey

Background

Discussion

PracticalMatters

Buy-In andPay-Out

Issues of the DealFinancing security

Purchaser insurancePurchaser’s life is insured

Overhead disability coverage

Seller’s collateral

Liability

Seller protectionUnsecured payment

Security interest in assets

To keep the seller whole if something

happens to the buyer

Mechanisms of the sale agreement to

keep the seller whole

Discussion Items and Next Steps

Make Key Decisions regarding Existing Shareholders

Compensation concerns including deferred comp arrangements

Practice marketing/development/security

Control issues regarding shareholders

Pay-out issues including funding of pay-outs

Consensus on philosophy regarding employed dentists

Other internal issues between shareholders


ShareholderSurvey

Discussion

Background

Buy-In andPay-Out

PracticalMatters

Discussion Items and Next Steps

Make Decisions regarding New Shareholders

The candidates for shareholder status, including future candidates in 12-24 months

The path to follow for setting price

Terms of the deal

The seller requirements necessary

Financing options for the purchase price

Where to put the proceeds of the sale


ShareholderSurvey

Discussion

Background

Buy-In andPay-Out

PracticalMatters

ABC Shareholder Report Buy-In and Pay-Out Issues Christopher J. Evans, DHA, FACHE, CMPE Health...

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