A TAX-ADVANTAGED EXIT STRATEGY FOR MEDICAL PRACTICES
In this episode, host David Mandell welcomes Bob Goettling, a seasoned investment banker and legal expert with over 30 years of experience in healthcare transactions, to discuss the emerging relevance of ESOPs (Employee Stock Ownership Plans) for physician practices. Goettling shares his professional journey, from early M&A work to helping physician groups explore monetization options, including ESOPs as a potentially powerful but underutilized tool.
(Video Available May 28, 2025 at 6 AM Eastern)
Bob breaks down the core structure and history of ESOPs, describing them as trust-based leveraged buyouts that allow physicians and employees to own their practice while benefiting from significant tax advantages. He explains how the Bloom Organization itself became an ESOP nearly a decade ago, and how his team has since developed a tailored hybrid ESOP model for medical practices, especially as interest in private equity has cooled due to rising interest rates and negative post-deal experiences.
While ESOPs offer clear advantages—like retaining control and optimizing tax outcomes—they also come with complexity. Goettling stresses the importance of choosing the right advisors and ensuring a strong internal management structure. Not every practice is a good fit; size, structure, and strategic alignment are critical factors. The episode offers high-level insight into how ESOPs work, who they benefit, and what red flags to watch for in considering this alternative to traditional M&A routes.
TAKEAWAYS:
Takeaway 1: ESOPs offer a unique exit strategy for medical practices that can provide substantial tax benefits and preserve control for physicians.
Bob Goettling explains that ESOPs, or Employee Stock Ownership Plans, are a leveraged buyout vehicle designed to benefit employees and owners. “Doctors right now, I don’t care whether it’s through ancillary income and in a surgery center, through professional revenues, through the practice, any money they put in their pocket at the end of the year is ordinary income. They’re paying ordinary income tax rate.” Through an ESOP, physicians can convert this ordinary income into capital gains, which is taxed at a lower rate. Goettling also highlights a more advanced tax benefit: “If you take a certain amount of those proceeds and invest them in something called a 1042, you defer 100% of taxes, so not even capital gains.” This means that physicians can sell their practice and reinvest the proceeds in a 1042-qualified security, deferring all taxes indefinitely.
Furthermore, the tax-exempt status of an ESOP can significantly enhance the practice’s ability to pay off any debt incurred during the transaction. “Because you’re a tax-exempt entity, you’re able to pay back the financing with pre-tax dollars. So the whole million dollars, you’re able to pay to the bank the first year, a million, the second,” Goettling says. This allows the practice to pay down debt more quickly and efficiently, which in turn can free up more resources for future growth and acquisitions. The unique tax benefits of ESOPs make them a compelling option for medical practices looking to monetize their assets while retaining control and independence.
Takeaway 2: ESOPs are particularly suitable for larger medical practices with strong management structures that are looking to maintain control and independence.
Goettling emphasizes that ESOPs are not a one-size-fits-all solution and are best suited for practices with 15 to 20 doctors or more. “I think you have to have size higher than that. And so the number I’ve been using, that we’ve been pretty much using is 15 to 20 docs,” he notes. The size requirement is not just about the number of physicians but also about the practice’s management structure. Goettling explains, “When you find a group, and we see a group that has a board, typically a physician board, but has good management, has a CEO, has a CFO, and the board acts like a real board of directors. They don’t need to understand every detail. But they’re presented to the big picture questions, they answer them, which determines the direction that things go, but they don’t try to get into the details.” Practices with this level of management and governance are more likely to successfully navigate the complexities of an ESOP and benefit from its long-term advantages.
In contrast, practices that are smaller or have a more centralized, micromanaged structure may struggles with the ESOP model. “In an ESOP, you don’t have that, because you’re not selling to somebody who has that expertise, you’re selling to yourself. And so either you better have it, because it’s not going to, once you do the ESOP appear the next day out of nowhere, so you better have it or you better have a plan for how you’re going to bring it in,” Goettling states. This underscores the importance of having a well-organized and business-savvy team in place to manage the practice effectively post-ESOP.
Takeaway 3: The complexity of ESOPs is a significant barrier, but working with specialized advisors can mitigate risks and ensure compliance.
Despite the potential benefits, the complexity of ESOPs is a major hurdle for many medical practices. Goettling warns, “The first one and the biggest one is the complexity. As I said earlier, David, and this is, I tell my doctor clients this all the time when we talk about ESOPs, that as a one-year lawyer before I got out of that as an M&A guy, you would think that I would get an ESOP pretty quick. In all honesty, and again, it was probably two or three years into our ESOP before I really understood all the way it worked in that.” The involvement of the IRS and the Department of Labor adds another layer of complexity, as both agencies heavily regulate ESOPs to ensure they are used correctly.
To overcome these challenges, Goettling stresses the importance of working with experienced advisors. “Getting the right counsel, I’m not talking about legal counsel, financial and all that, is so very, very important. And to that end, and I get myself in some trouble, a lot of times it’s very rarely your brother-in-law, the accountant or the attorney, you need to go to somebody who this is all they do,” he advises. Specialized investment banking firms and legal counsel with extensive experience in ESOPs are crucial for ensuring that the transaction is structured correctly and that the practice remains compliant with all regulations. “We’ve partnered with an investment banking firm that does nothing but ESOPs. So that just is a way to show that it is very, very important to get the right counsel,” Goettling concludes. This expertise can help practices avoid costly mistakes and fully leverage the benefits of an ESOP.
INSIGHTS
- ESOP stands for Employee Stock Ownership Plan and enables employees to become beneficial owners through a trust structure.
- Originally introduced in the 1950s, ESOPs gained traction in the 1970s due to government incentives.
- Goettling and his team at Bloom implemented an ESOP for their own firm nearly 10 years ago and now advise physician groups on doing the same.
- Tax benefits are significant: ESOP sellers can defer or eliminate capital gains, and the entity itself becomes tax-exempt.
- ESOPs allow physicians to monetize their practice without surrendering control, unlike private equity deals.
- The model is ideal for larger practices (15–20+ physicians) with existing governance (boards, CEOs, CFOs).
- Complexity is a key barrier—ESOPs involve oversight from both the IRS and Department of Labor.
- Hybrid ESOP models can account for partners, junior doctors, staff, and even future hires.
- Mistakes often stem from poor advisory choices; experience with ESOPs is essential to avoid pitfalls.
- ESOPs can be a game-changer for practices looking to stay independent while scaling strategically.