When silence isn't golden: How to have a say in your business deals

In the early 1990s, radiation oncologist David Moylan, MD, was offered a chance to invest in a semipro basketball team in Pottsville, Pa., called the Stingers. Dr. Moylan kicked in $2,500 to become one of about a dozen minority investors helping to start up the Atlantic Basketball Assn. team.

"It was relatively small sum, and there were various perks you had as an investor as far as premium seats and meeting the players," he said.

The Stingers might have been a fun investment for Dr. Moylan, but they weren't a profitable one. He lost his investment the first year. He lost another $2,500 he invested the following year. The team, and the league, eventually ceased operations.

Buying a small stake in something that sounds exciting and potentially profitable, only to lose money, might sound like a familiar tale. That's because it is. One financial adviser, Marc Singer, estimates that 80% of physicians lose money buying a minority stake in a business venture.

Another name for a minority investor is a silent investor, because the person putting in the smaller stake tends not to have a say in the direction of the business. The odds are so bad in making money from being a silent investor, some financial advisers say, that physicians should think more than twice about entering that kind of arrangement.

"Physicians have to be extremely cautious, because a minority or silent investor has virtually no rights. They don't control the operations, they don't control when the business can be sold, they don't control dividend distributions. And lack of control means a significantly diminished value of their interest in that business," said Singer, a financial adviser for physicians with Singer Xenos Wealth Management in Coral Gables, Fla.

"Doctors absolutely cannot afford to lose money on investments like they could 10 or 20 years ago," he said. "Incomes are declining, and as a result I have seen fewer doctors going into these private deals. They're realizing they're not infallible and they cannot afford to lose money."

But not every physician loses his or her investment. Financial advisers say successful physician investors follow some basic, commonsense guidelines from negotiating safeguards in partnership agreements to limiting investments to certain types of enterprises. The trick, they say, is being prepared before the money is handed over.

"It's a wild and woolly world. Some people really do make a lot of money with this stuff. It's just that some people also get stuck," said Joshua Kahr, who teaches real estate finance and investment at the Steven L. Newman Real Estate Institute at Baruch College in New York. "So you've got to ask questions. What would you ask if you were the patient? Realize you are with people who know a lot more about the subject than you do, and look at it from that framework."

Being prepared

The most basic rule in protecting your silent investment, experts say, is reading and negotiating before you sign a contract.

Frequently, physicians are buying limited partnerships in a business venture, especially if it's a start-up.

Kahr said he is shocked by how many investors enter into partnerships without really reviewing the partnership agreement. Important information including the investment's potential return and its risks typically will be disclosed in the agreement and could help the investor weigh the value of the opportunity.

The agreement also could include provisions to change control of the investment in certain situations. It is important to ask for this type of stipulation so the general partner can be ousted if he or she proves to be incompetent, Kahr advised.

Another stipulation that can be requested is a termination clause or something that spells out a time frame for the duration of the investment. It could be set so the investor can pull out his or her money when the asset reaches a certain value or lifespan.

"Otherwise it's just too easy for me to take your money and invest and then keep using your money ad infinitum," Kahr said.

It is also a good idea to get language into the agreement that stipulates when and how investors can sell their shares, he said. If the investment was made with a private placement, the investor is limited in how shares can be resold to the public. And if a stake was bought in a partnership, it could be locked up for a long period unless otherwise specified.

Kahr recommends having an expert review the agreement. A securities attorney or a financial adviser who works with these deals could be well suited to offer an opinion. "Partnerships are funky," he said. "You've got to take it to someone who really understands what they're reading."

With a review, an expert also might be able to expose other risks that are not spelled out in the partnership agreement.

L. Donald Guess, DMD, founder of a San Diego financial services firm that caters to physicians, says one of the riskiest aspects of general partnerships is that the partners share liability. His advice: "Avoid any contingent liabilities, where an action of some other person could affect you. Be sure, to the extent you can, that you limit your liabilities."

Dr. Guess said the philosophy at his firm, called xelan, the Economic Assn. of Health Professionals, is that doctors typically do better when they have control over what they do. "The doctor [who is] the happiest is the doctor who invests money in something he controls, he understands and something he has time to get involved with. What we've seen happen is that when doctors were minority shareholders, they had exposure and they did not have any ability to affect the outcome" of the investment.

For the majority of physicians, being a silent investor is probably an unnecessary risk, Dr. Guess said. "It's definitely a speculative thing, and if you don't need to speculate, don't do it."

With many of these investments, he said, the investor is almost completely dependent on the person who is running the partnership. "I suppose if you pick the right partners, it's a great deal," he said. But the hard part is picking the right partners.

Kahr recommends doing some research on the general partners behind an investment opportunity before giving them any money.

"If you want to invest with someone, talk to their previous partners," he said. Kahr said physicians should ask whether the previous investment made money and whether the general partners kept the limited partners well-informed about what was happening with that investment.

Even if the partners and the partnership agreement look good, it is still not guaranteed that the investment will be good.

For those physicians who insist on these investments anyway, Singer recommends putting the money into enterprises that match the investor's field of knowledge.

"They should only invest in these types of things, private off-the-beaten-track things, if they truly have an inside track," he said. "And where I've seen doctors [succeed with] the opportunity is where they can be directly involved in contributing medical knowledge into a product development."

If possible, Singer said, the physician should try to invest more knowledge and less money, rather than a lot of money and a little knowledge. "And don't put a lot of money into it just because it's your idea," he added.

He said it sometimes also makes sense for physicians to become minority shareholders in medical ventures that offer services such as MRIs or diagnostic imaging. He said these investments can work particularly well -- if structured properly -- for physicians who are directly involved with the venture through their specialty. But Singer warned that this type of investment is not foolproof and could raise legal issues under anti-kickback laws.

Kahr advocates a different approach when considering investment opportunities. He said the best deals for silent investors might be those that sound the least exciting.

"My general advice would be seek out private placements or limited partnerships that are boring," he said. That means going for a real asset investment such as putting money into a supermarket.

He said physician investors should ask questions if the opportunity sounds too good to be true. "What are they trying to sell you with? Are they trying to sell you on sex appeal or are they trying to sell you on the legitimate aspects of the investments?"

As a final safeguard, Singer recommends limiting how much of a physician's investment portfolio is committed to these types of investments. He said such deals should never be more than 5% or 10% of a doctor's investment assets.

Silent no more

Despite losing his investment in the Stingers, Dr. Moylan decided to stay involved with semipro basketball. But Dr. Moylan is handling his investment a bit differently now.

For one thing, Dr. Moylan is now the majority owner of his teams: the New Philadelphia Firedogs of the Eastern Basketball Alliance and the Schuylkill Syrens, a team in the alliance's women's league. He's involved in putting together the teams, stocking them with local talent to attract local ticket buyers. He's also tied them to the marketing of his Simon Kramer Institute of Oncology in New Philadelphia, Pa. The institute is located in a former high school that Dr. Moylan renovated, and the institute's gymnasium serves as his teams' home floor.

"Right now we're pretty much a break-even organization," he said. "I'd like to see it keep going as a service to the community. It keeps kids off the street, it's fun for all ages and it helps raise the profile of the institute.

"It's like any investment; it's high risk. Don't invest the rent money and don't give up your day job."