Recently, there has been more activity from hospitals and large groups interested in buying medical practices. My firm has performed a number of practice valuations for physicians who want to know the value of their practice as a benchmark for negotiating. In the process we have seen ways that physicians were able to improve their bargaining power — leading to better rewards.
Here are a few tips to consider:
1. Find more than one bidder.
We recently did a practice valuation for a solo internist in a small southern Texas City. She had been approached by an entrepreneurial local physician who was interested in establishing a large group practice that could increase its profitability by adding a number of ancillary services. As we were providing her with the valuation, she was contacted by the CEO of her admitting hospital. They were interested in providing a ready-made practice for a physician just completing her residency and interested in practicing in this community. Our client now had two potential buyers. The bidding for her practice increased its value to nearly 40 percent more than our valuation had reported.
So, if you are contemplating the sale of your practice consider the following tactic: Contact your most likely prospects to let them know that you are considering the sale of your practice and wanted them to know about it before you sell.
•Hospital(s). Let your key hospital administrator(s) know of your plans. They may be forming a group or may want to provide this practice to someone interested in practicing in the community. They may or may not be interested in your staying on as a salaried physician.
• Your competitors. Contact each group or solo practice in your specialty. Let them know of your plans. A likely buyer could be one of these practices that wishes to expand by bringing in a new physician to take over your practice.
2. Your EHR system has value; paper charts do not. We did an evaluation for a solo ear-nose-throat (ENT) physician who had not converted to an EHR system. He had a healthy practice in an upscale New York City suburb. However, some interested ENT physicians walked away when they discovered the paper charts. They recognized the immense task of converting these charts — one by one, as these patients came in — to an EHR system.
3. If you own the practice facility, prepare for two sales.
Do you own your practice building or have ownership of your office space in an office condo? If so, you now have two sales to make. Here are your options:
• Sell the practice and lease the space. This overcomes resistance to ownership at this time. It also means that you are now the landlord. Following the sale, you could have your property in the hands of a property management company, who would collect rents and maintain the facility.
• Sell the practice and lease the space, with an option to buy at a future date (say five years). If the physician does not exercise the option, you can continue as a landlord or consider finding a buyer interested in investing in rentable space.
• Sell the practice and sell the space. If the practice buyer is not interested in ownership of the facility, consider finding a buyer. This makes sense if you are not planning to remain in the community.
4. Remain as an employed physician.
Part of an agreement to purchase your practice may be the preference of the buyer (particularly in sales to hospitals) to have you remain at the practice as an employed physician. There are now two negotiations to consider:
• The sale of the practice
• The employment agreement.
When the hospital becomes the owner of your practice, there is no guarantee that the future performance of the practice will provide you with the same rewards as when you were the owner. We have witnessed hospitals doing a weak job of billing and collections, resulting in reduced collections and weakened net revenues. We suggest negotiating for a compensation plan based on your performance not the performance of the new owners. The model for a fair compensation plan is one based on relative value units (RVUs).
An example of this form of compensation follows:
This family physician produced approximately 10,000 RVUs per year.
The physician’s take-home income was $200,000 (i.e., $20 per RVU).
Therefore this physician deserves being paid $20 per RVU, and not have to depend on the billing effectiveness of his employer.
5. Provide transitional marketing services.
One option is to sell the practice and turn it over to the new owner, who has to introduce himself to his new patients and to other members of the medical community. As part of the sale, the established physician adds value to the sale if he/she stays on for 90 to 120 days, and introduces the new physician to the patients and with the new physician, visits practices of referring physicians and other important members of the medical community, as well as key hospital administrators.