There’s two ways to build wealth over time. One way is to earn a high income and save a significant percent of that income. The second way, which is not mutually exclusive of the first, by the way, is to own an asset, an appreciating asset to have equity in a business that becomes more valuable over time. Now in a perfect world, you can both earn a high income and own an asset perhaps related to that income that will one day be worth a significant amount of money. Physicians are uniquely positioned to at times take advantage of these two prongs at the same time, but they frequently don’t realize it. Hedge funds, venture capital companies, private equity. They’re all well versed in the ways of using equity to translate into big dollars. But I want to break this down a little bit for our physician listeners to make sure that you understand you can take the same principle and make it work
The year 1988, the situation is
There’s this guy, his name is Arnold Schwartzenegger. He’s recently had a block
Hit with the Genesis of the Terminator series. He’s established
Himself as a, a real bonafide action hero, and he doesn’t need to really take a risk in order to continue to make a lot of money and be well-respected in Hollywood. However, an interesting opportunity came his way that presented not only a chance to expand his repertoire, but also give him a significant amount of financial upside. And here’s what happened. There’s this movie twins where Arnold Schwartzenegger and Danny DeVito are twins separated at birth. And in order to corral the star power for this movie that would be required between Schwartzenegger and DeVito. It was not possible for both to be paid the market rate of what they would do of what they would command in general. So there was a deal struck between DeVito Schwartzenegger and the producer at the time, so that they could get Hollywood backing. They said, instead of being paid a salary, we’re going to essentially take this on contingency as a lawyer might say, or we’re basically gonna take equity.
And a percentage of the profits generated from the film would be split between the two actors in the producer for Schwartzenegger. This was about a 20% total coming to him alone. And what ended up happening was he, he did this movie you know, and was paid nothing for it, but in the long run, this movie grossed over $200 million in box offices, which back in the eighties was a princely sum. And so $40 of it came to Schwartzenegger. So here’s the point. If you’re in a situation where you can defer gratification and take equity upside in a certain business, a certain venture, a certain opportunity, the rewards that you reap can be significant significantly more than if shorts, had, you know, made, say a $10 million salary for this movie, which would have been perhaps a reasonable number at the time. He actually four exed that number by creatively, going for equity instead of salary.
So why am I telling you this story? There’s two levers in life to be able to build wealth. One is income. One is equity or what I’ll also call assets. Income can eventually turn into assets, but there are times at which you can actually get both at the same time. And for physicians, this is definitely true. Any physician, once you graduate med school, finished residency and our board, and you can go out and earn a great income anywhere. And that’s an easy thing to do. It doesn’t require a lot of creative thinking or even risk. Really. It’s actually almost guaranteed barring some kind of unfortunate event around, you know, your death or disability, God forbid, but what takes a little more forethought and requires a little more critical thinking creativity and taking on some risk for yourself is finding equity opportunities where you can have not only an income, but an asset to go with it.
Now, the reason that this is helpful is the point of an asset. That means it’s something that’s valuable to you. It’s a share of a business or perhaps multiple businesses that over time will perhaps pay you an income, but will also have this value associated with it that can grow. And as the business, the underlying business becomes more and more valuable, generates more and more profits. The asset becomes more and more valuable and you can have your cake and eat it too. In many instances, if you’re willing to proactively look for these types of opportunities this could be represented in a buy-in for a medical practice, for example, or a surgery center, or even something like an apartment building or residential real estate, a single family home. Any of those instances, you’re owning a slice of an asset that we hope will appreciate over time.
And in addition, it pays you as you go. So just a real quick example of how this could look. There are opportunities in some anesthesia groups, for example, you can actually go either way, they’ll say, we’ll bring you in and we’ll pay you a three 75 salary and you can just make that, you know, for forever or as long as we can afford to pay you that number, or you can come in and make two 50 K with no bonus for three years. And that gets you essentially the sweat equity. And then at the end of that three-year period, as long as everybody likes each other and the partners vote to allow you in, then you are granted a slice of the pie, a piece of equity a percentage of ownership of the underlying anesthesia practice. And what this means is when you become a partner, now your salary goes up from two 50 to say four 25 or whatever the number is depends on profitability and other things.
And so you’re earning your high income. You also own this asset. And in addition, there there’s two things that happen as a business owner, you get distributions distributions of profit from the business periodically. It could be quarterly, it could be monthly depending on how your business does. So you might make four 25 as as your salary. And then you might get quarterly distributions of an additional who knows 15 to a hundred thousand dollars. It totally depends on the profitability. And so your total income in this instance is actually much higher. In addition to that income bump, there’s this slice of the pie that you own that is worth money. So generally a slice of equity would be valued at a multiple of profits. And without getting too down into the weeds, we’ll just say, you know, the profit is a million dollars a year for this anesthesia practice and you own a 16% sliver of that anesthesia practice.
So that means if there’s a million dollars a year, $160,000 is coming to you per year in terms of profit. Now that’s great because you’re making an extra 160 on top of the, you know, whatever your salary is. So your income has increased and in the future, it may become necessary for whatever reason for your partnership to sell to another group. Maybe there’s a geographic expansion. Maybe there’s a whatever problems with one of your big contracts and you need to sell the ownership. What that means is another group will come in and buy that million dollars per year of profit at some kind of multiple say, it’s like six times profits. What that means is $6 million. If it’s $1 million per year of profit, $6 million is the total value of the business. And remember you own a 16% sliver of this business that you’ve earned into.
And so that 160 K a year, times six, if we do some quick math here, let me get out. My calculator 160,000 times six is 960 K. So this represents the value of this asset to you. So again, you’ve got the income piece, the income is happening along the way. As an owner, you also have a profits piece, the 16% of whatever the bottom line is, is coming your direction. And then the potential for the liquidity event at the end of the line, if that happens now, it would be great to really never even need to cash in your chips to another group. And perhaps when you’re an aged anesthesiologist, you do an internal succession plan and a new doctor coming in, buys your shares at a similar valuation. And so, as I said, there’s this Mexican for building wealth, not only on the income side, but also the value of the business.
So something to think about as you’re looking at, first of all, as you’re looking at job options, Trinity’s understanding, is there an asset, is there an equity opportunity associated with this job opportunity? It’s great to have well high salary or even to have a high percentage of collections or good income potential. That’s really great, but that’s not that uncommon. And frankly, equity opportunities. Aren’t super uncommon either, but sometimes they require a little more work. And in addition, it’s important to point this out. They require you to take on some risk because great to say, Hey, do I want an extra million dollars at the end of the line, in addition to a higher salary? Like, yeah, everyone wants what’s the downside. The downside is that when COVID happens and you, you have to lay off a bunch of CRNs or, you know, one or two of them, if you’re employed physicians, you have to furlough the owners, the owners of the business, which means in this case, you, the equity shareholders, they have to bear those financial losses.
They probably have to cut their salary, profit distributions, go to zero. There’s a chance. Yeah. You might actually even need to put more money into the business out of your own checking account to keep it float. That’s the reason that equity earns a high rate of return potentially is because there’s risk. There’s no place in the market where you can have a free lunch. At least when those things exist, they quickly disappear because everyone shows up for the free lunch and then the food, right. It runs out, but in a medical practice, you’re taking on the risk of you know, paying the salaries, paying the rent, trying to maintain that favorable contract with your sites of service and in exchange for all that extra work that you do, you can earn a higher salary and you have a valuable asset. So just understanding that this component is out there can be really, really valuable if you’re in pain management, looking for surgery, center opportunities, perhaps practice buy in that can be valuable.
Maybe other ancillary opportunities, or maybe it’s something totally different. Maybe it’s collaborating with one of your peers to, you know, work on a new device or technology or a service associated with you know, the medical field or whatever. There’s any of these opportunities that I’m describing, create this dynamic, right? Where there’s an asset, the asset that can not only pay you profits distributions, but yeah. Also have a value in and of itself that as profits grow over time can create a significant liquidity event. So in the context of financial independence, here’s the point. Here’s why I love the idea of physicians owning and growing an asset for themselves. Not only is it a really nice way to potentially augment your income over time, but it gives you this like the, the, what we’ll call the, the hail Mary effect. Like there’s a chance that it could turn out really, really well for you.
And you know, again, it’s, it’s a two-edged sword, but if it’s a business that is well run and that you can own a piece of, and you can buy in at a fair valuation, it’s always worth considering will this hasten my journey to financial independence, will this allow me to play for the love of the game to work? Because I want to not because I have to more quickly than if I didn’t have this asset. So hopefully this will expand the way that you’re thinking about, you know, any fellows who are looking at a couple of contracts right now and thinking, well, here’s the income on offer a here’s the income on offer B think again about what is the equity opportunity? What is the profits upside and the potential, what we’ll call a liquidity event. If you had to sell this slice of the business in the future, how much could it be worth and factor that into your decision, especially when there’s a trade off, you know, understand what is the trade off and can I afford it?
But sometimes those trade-offs can be very lucrative if you can afford to defer that need for a higher stable income in the near term. So that’s all I’ve got for today. This is a little bit of a shorter episode. Hope you enjoyed it. If you’re out there and you’re looking at job opportunities, and one has higher guaranteed salary, and another has an equity component with a chance to buy in to a business and earn profits and have a potential liquidity event. And you want a second opinion drop me a line by email. We’d be glad to help you think about that. At the end of the day, seeing which of these opportunities is going to contribute most to your autonomy, to your agency, to your freedom as a physician is kind of what I’m, that’s my mission. So hopefully you’re able to discern, which is the right choice for you and understanding these times
And can really help as always thank you for tuning in the, with talking to you next week. If you liked what you heard this week, head on over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you wanted to leave a review in iTunes, that also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.