Preparing physicians for an equity transaction: strategies to maximize value and minimize risk

Despite economic uncertainty, the overall landscape for mergers and acquisitions in the health care space is more favorable than in recent years. Last year, there were several health care transactions that occurred, largely driven by the decline in interest rates and the projection of regulatory rollbacks with the new White House administration. An environment where there is more cash on hand and less red tape holding back profitability lends a hand to dealmaking, and physicians should be prepared if an opportunity arises.

Physicians anticipating a transaction must be aware of the legal, tax and financial ramifications in order to best protect their financial security. It is imperative that they start reviewing and implementing strategies well in advance of the transaction.

The time to take action is now — before the deal begins — and the clock is ticking.

Building financial awareness

Physicians and other clinicians spend their days focused on providing the best care for their patients, often stretched thin by administrative paperwork, only finding a moment to rest at the end of a long day. As a result, they typically do not have the time, or simply fail to prioritize their own financial health and well-being. However, when preparing for a significant transaction, doctors must build financial awareness to set themselves up for post-deal success.

A typical deal for a physician is structured using income replacement — where they will agree to receive a large lump sum of money in exchange for giving up a percentage of revenue in perpetuity. While there is excitement and exhilaration that comes with a lump sum figure, a harsh reality sets in when they realize the proceeds from the transaction are heavily taxed — whether as capital gains, ordinary income or a combination of both.

While capital gains tax rates are generally seen as more favorable than ordinary income tax rates, many high-income earners, like physicians, are often surprised to learn they could forfeit nearly a third of their gains due to taxes. For long-term capital gains, meaning assets held for more than one year, the federal tax rate is tiered at 0%, 15% or 20%, depending on the taxpayer’s income. Many states may also impose their own capital gains tax rates, which can reach as high as 10% or more, pushing the combined tax rate closer to 30% for top earners. Additionally, individuals with high incomes can be subject to net investment income tax, which is an additional 3.8% tax on investment gains for single individuals earning more than $200,000.

For physicians, understanding the nuances of capital gains tax is crucial for preserving wealth. Here are three steps to take right now to better prepare for a deal.

Preparing for a deal: Three steps to take

Implement tax planning strategies.

While it may seem daunting, there are opportunities to generate deductions to offset these long-term capital gains. Tax-loss harvesting is a strategy used by investors to reduce their tax liability by offsetting capital gains with capital losses. For instance, an investor can take advantage of this by selling underperforming investments. When properly implemented, tax loss harvesting can generate benefits to help reduce the tax liability.

However, after several years of strong stock market performance, there may not be many investments that can be sold at a loss. In these situations, high-net-worth individuals and family offices have been utilizing “tax-aware long-short” strategies that most wealthy physicians either are unaware of or don’t have access to. These strategies can generate consistent realized losses on a monthly basis regardless of the gains in your current investment accounts. This is achieved by using existing marketable securities (stocks, mutual funds, exchange-traded funds, bonds, cash, etc.) as collateral to structure an actively traded, long and short stock portfolio that can generate realized losses while maintaining defined risk levels. While this is a very unique and specialized strategy, it can be used only with personal (non-IRA/retirement) accounts and there are minimum account balance requirements.

I have many clients who are anticipating a capital gain transaction within the next one to two years, and we have been implementing “tax-aware long-short” strategies to accumulate realized losses that will eventually be used to offset the transaction gains and create significant tax savings benefits.

Prepare to invest the remaining proceeds.

Once physicians have their transaction funds, it’s paramount to ensure that these funds are properly allocated to achieve their specific financial goals. Simply put, it’s time to invest the remaining proceeds.

Over the past 10 years, the S&P 500 index has outpaced the historical average, returning an annual average of 13.3% with dividends. However, there is consensus among many financial firms that annual stock market returns over the next 10 years will be considerably lower. In fact, Goldman Sachs has estimated that the S&P 500 could be expected to post annualized returns of just over 3% over the next 10 years.

So, what should a physician do and where should they put this newfound money to work?

In the past, individuals and financial advisers have touted a strategy of 60% equities and 40% fixed income as sufficient to achieve long-term financial goals and properly balance risks and returns. However, in this current climate and going forward, a traditional 60/40 strategy may not be the optimal approach. The truth is: It’s hard to get access to growth and proper risk management simply through stocks and bonds alone.

According to Apollo economists, 87% of U.S. companies with revenue greater than $100 million are privately held. The only way to access the growth and benefits of these companies is through private equity. Unfortunately, these opportunities are out of reach for most individuals.

However, the right financial adviser who is partnered with the right advisory firm can open these doors and will have a window into where the “smart money” invests: alternative assets. Institutions like endowments, pension funds and family offices will typically have 30% to 50% of their portfolio allocated to alternative investment strategies like private equity, private real estate and private credit. Having allocation to these opportunities is critical to ensuring the transaction proceeds are properly invested to achieve the best possible long-term results. Over time, these alternative investments have outpaced stock market returns while experiencing less risk.

Get a coach.

Successful people recognize the importance of working with a coach. High-performing athletes, business owners and executives utilize coaches/strategists to help identify weaknesses and missed opportunities and give them the tools to achieve their goals. The same can be said for a physician who typically does not have the time, ability or desire to research and fully comprehend every potentially beneficial legal/tax/financial strategy available.

Physicians have spent countless hours in school to learn various skill sets and master techniques. Finance should be viewed the same way: It’s a skill. If there’s no time to learn and absorb the nuances and intricacies of a transaction, it’s time to outsource and work with a coach who has that necessary knowledge and expertise. An independent adviser who is partnered with a strong advisory firm will have the objectivity and competence to see a situation through a clear lens to maximize profits and lay a solid foundation for success.

Take action

In preparing for a transaction, one of the worst things a physician can do is nothing.

If a transaction is expected to close in 2025, the clock is ticking to implement tax planning strategies that will yield tax-saving benefits that can be realized in this calendar year. Physicians who begin thinking about these strategies after the transactions have been finalized are too late.

The time to begin is now. If starting this process is overwhelming, work with an independent adviser who will be a partner in driving your financial success and prosperity.

Christopher G. Stappas, JD, CFP, is a private wealth adviser at Summit Financial, LLC, one of the preeminent independent financial advisory firms in the country.