An equity partner is someone who purchases an ownership stake in a business. Equity partners have a financial interest in whether or not a business succeeds, so they are typically involved in the decision-making process and have a say in the business strategy. An equity partner shares in the business’s profits and losses, and their income depends on whether it is successful.
In the medical field, people frequently ask, “What is an equity partner?” because there is an increased trend for private equity firms to purchase and consolidate doctor’s offices and long-term care facilities.
What is an equity partner?
An equity partner buys a percentage of a business in exchange for a share of the business’s future profits. Equity partners inject capital into a company, which enables a medical practice, start-up, or other business to grow.
For example, a small medical practice may want to upgrade its medical records software and office space but lack the funds and expertise to do so. By partnering with a private equity company, physicians can focus on patient care and increase the services they offer patients. But this does come with risks.
Start-ups will frequently bring on equity partners to increase their access to capital and ability to grow. Equity investments enable start-ups to invest in technology and the specialized talent necessary to grow their businesses.
However, partnering with a private equity company is a complex process that comes with the expectation that the business will continue to grow and generate more profit. It also means that owners must turn over control and a share of the profits to an outside investor.
When a private medical practice acquires an equity partner, each physician loses at least some ownership of the practice. This option may intrigue some physicians because they are not comfortable managing the technological and business aspects of their practice.
Loss of Control
While equity partnerships provide access to more resources, they naturally come with a loss of at least some control. Even if an equity partner owns less than a 50% stake in the business, they still have the right and responsibility to question business decisions. Those accustomed to managing their businesses independently may find this challenging.
In many cases, private equity firms buy physician practices and consolidate them into large group practices. This trend has increased as the business of medicine has become more complex. The physician owners get paid for their share of the business and become employees.
Increased Scrutiny
Equity partners buy shares of a business because they anticipate that the company will make a profit. Since they want to maximize their potential profit, they may scrutinize business purchases and insist on changes in office protocols and procedures to increase efficiency.
Increased Growth
Equity partners want your business to grow and make more money, so they encourage partnerships that may lead to more clients. As equity-owned partnerships buy more medical practices and associated businesses, they own a larger share of the market. This gives them the leverage to increase prices.
What’s the difference between equity and non-equity partners?
Equity partners invest in a business and make strategic decisions that they hope will increase profits and market share.
Non-equity partners draw a salary and serve different roles in a business or medical practice. They do not invest capital in the business and, therefore, are not entitled to a share of the profits.
As non-equity partners move up the ranks in a business, they may be given the option to become equity partners. This allows employees to gain financial stability and experience without incurring the risks associated with being an equity partner.
Is becoming an equity partner a good financial investment?
Becoming an equity partner can be a good financial investment, but it comes with risks and benefits. Talk with a fee-only financial planner to determine whether the risk-benefit ratio falls in your favor. Benefits such as a share in a company’s profits, ownership and voting rights, and the potential for long-term financial gains must be balanced with the financial risks of investing capital in a business and the time it takes to participate in strategy discussions and financial planning for the business.
There is no one-size-fits-all guide to investment. Working with a wealth manager who uses a fee-only financial planning structure can ensure you make the best financial decisions for yourself and your loved ones. Ready to secure your financial future? Call us today at 866-395-1786 to get started.
