Nick Hernandez, MBA, FACHE

For many physician owners, their practice is like their child. As such, they invest the majority of their time and resources into ensuring the business stays healthy and has opportunities to grow and maximize its potential. Few focus on preparing for that inevitable moment in the future when they will have to hand their baby over to someone else.

 is a critical concern for a business of any size, it could literally be a matter of life or death for a physician practice. Physician-owned enterprises are particularly vulnerable because business discussions can be complicated or derailed by the emotions involved in addressing such difficult issues such as aging, death, and financial affairs. To ensure that the medical practice you worked so hard to build and nurture continues to thrive after retirement or death, you must develop a succession strategy that enables an orderly transition of both ownership interests and management responsibilities while minimizing complications between the partners. Additionally, your succession strategy must provide for economic support of all relevant parties involved.

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While there is no “one size fits all” succession planning solution, and the details will vary according to the distinct dynamics of your situation, the following are key considerations as you embark on developing a succession strategy:

 Ideally, it is best to begin this process as far in advance as possible. This will give you the opportunity to explore all of your options and prevent hasty decision making that can undermine the stability and value of the business. 

 This might be the most challenging aspect of this process for physician practices. As I have written about before, there are many considerations in the selection and grooming of a physician partner. You may have a physician in the practice that does not have the interest or skills to take over the practice. Therefore, to ensure that you place your practice in the best possible hands, I recommend making a rigorous and honest assessment of the relative strengths and weaknesses of all potential heirs. 

 in physician succession planning can be well worth your investment here. Engaging such an outside expert to conduct this analysis to help make objective and rational decisions regarding the best future interests of the practice and to de-emphasize emotional attachments (as well as any potential family politics) will ultimately be effective for the succession strategy.

It is also important to remember that management and ownership are not necessarily one and the same. Thus, it may be in the best interests of the practice to appoint an employee to take the business to the next level. Even if physician owners are not holding the business operations reins day-to-day, they will still retain an ownership interest and exercise the requisite level of control via various governance mechanisms (partnership meetings, executive control, voting shares, etc.).

the right legal structure for transferring your business.

 There can be significant financial implications and tax consequences with ownership changes. Furthermore, there are numerous legal methods for transferring your business. As a result, the experienced consultant you engage should be pulling in your accountant and attorney at the appropriate times so that together, the team can advise you on the correct direction and appropriate steps. No two medical practices are the same and you should be leery about professionals approaching you with any sort of template or preplanned outcome.

The best option for you and your business will indeed depend on a host of needs and circumstances particular to your practice. In the past, I have written on several transactional methods. Two common avenues are for physicians to 

 This creates cash for you to use as you ride off into the sunset. The sale would be based on fair market value (FMV) after a valuation is performed. Potential buyers include other physicians or practices, hospitals, or private equity-backed MSOs (management services organizations). Depending on how the sale is structured and what all is included, there could be various tax implications.

 prearranges the sale of the practice to another physician partner. This agreement enables you to maintain control until the occurrence of a triggering event that the agreement specifies. At that time, the buyer typically becomes obligated to purchase your remaining interests from you. There are many different ways that buy-sell agreements may be constructed and I cannot say I have ever seen two that are exactly the same, but this is a simplification of generally how they work.

 Though trimming expenses is always a key concern for physician practices, skimping on succession planning today can jeopardize financial security for you and your family and threaten the continued viability of the business you worked so hard to build. As you saw from the brief overview in this article, there are substantive complexities to managing this process. It is strongly recommended that you begin by contacting a seasoned consultant with experience in succession planning. As I mentioned above, that individual should be bringing in other professionals (i.e. attorney, accountant, financial advisor) throughout the process so that collectively a sound succession plan will be constructed.

Terminating the Physician-Patient Relationship

When you first begin working with the consultant, he/she should be devising a strategy based on your timelines. Some physician owners I work with want a rapid exit and thus we work to create a diligent plan that allows for such a departure from the practice. Other physician owners are looking at an exit some ten years from now. In those cases of a future planned exit, I recommend that the succession plan be updated every two or three years. There is so much change in the healthcare industry as well as local competitive factors and also internal physician partner dynamics, (not to mention any personal changes in your life), that a periodic review of the strategy is definitely warranted. Good luck! Your patients, referring physicians, and employees are counting on you to have a strategy to hand off the baton.

, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent. E-mail him

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Four tips for ensuring a smooth transition of ownership interests and management responsibilities while minimizing partner complications.

Setting a succession strategy for physician practices

While busy physician owners have many competing time pressures, succession planning is one of the most effective ways to give you peace of mind and ensure you are prepared for any unforeseen event or for retirement. When successful physician practice owners reach a certain age, it becomes imperative that they address the issue of succession planning. Many of them may have been dodging this particular conversation for years, yet they sometimes approach me with seemingly ironclad convictions about how they would like the succession to play out. That doesn’t mean that they actually know what they want. The physician owners may have met with their accountant or a financial advisor to learn about avoidance of future or current tax liabilities related to ownership changes.

To be honest, physician owners often contact me fully devoted to a set of myths, beliefs, and emotions that are almost always counterproductive in the early stages of the process. The first step by any qualified consultant should not be a discussion of strategies or tools. It should be a frank discussion of what the physician client really wants. That discussion requires breaking down some myths that are almost universal amongst physician practice owners and confronting not only the realities of succession planning, but also the emotions and physician dynamics that are powerful forces in many medical practices. 

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In physician practice succession planning, time is either your ally or your enemy. You can spend time planning for succession during your active business lifetime, or postpone planning and wait until the more chaotic, uncertain, and expensive succession planning occurs post-mortem, when the choice is no longer yours.

Reluctance to accept the realities of time can have disastrous consequences, especially since timing issues are often beyond an owner’s control. Just as the aging CEOs of major corporations are pressed by shareholders who demand a succession plan to protect their investments, so too a physician owner should implement a succession plan to protect the interests of all stakeholders. The lesson? Start early. Select your successor(s), and work with an experienced consultant to develop a succession plan before it’s an issue.

Really? To whom? When? For how much? Finding a willing buyer for any medical practice is rarely just a matter of hanging up a “for sale” sign. Buyers are not necessarily prepared to wait until the time is right in a business’s life cycle before making an offer. And it is even more difficult for solo physician practices.

The same issues of timing influence the way medical practices will be valued. Some physician owners have an idea of the worth of their practice based on revenues, fixed assets, profitability and a variety of balance sheet items. If you are not one of those, then a valuation of the practice may be needed at some point.

What the physician owners want is fair value paid by the buyer, as if that was a constant or objective number. Fair market value (as defined by the United States Board of Tax Appeals) is “The price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts.” The truth is that valuing a medical practice is a detailed process (as I have written about several times in the past) and when the time comes for a valuation, you should will need  an independent valuation of the practice, documentation of the business valuation data and methodology and perhaps periodic review of the valuation.

  A Successor Will Be Ready When I’m Ready

It is not surprising how many physician practice owners approach me wanting a succession plan without a successor clearly established. “Established” means more than simply identifying a successor. It’s also preparing that successor, which may require a long apprenticeship. The apprenticeship will certainly involve learning all the operational tasks required in the business, but it may require much more from both the successor and the current practice owner.

Growth is the lifeblood of any business. In most medical practices, growth comes not only as a result of outstanding clinical performance, but also the careful management and expansion of relationships with patients and referring physicians. A successful succession plan builds into the apprenticeship not only the mastery of business tasks but, equally as important, the building of business relationships. The outstanding taskmaster does not always turn out to be the best rainmaker, and that’s an important thing to learn when identifying a successor.

The physician owner may also have handpicked a successor that has very different ideas as to how the practice should eventually be run. Now the owner has to listen to new ideas about a successful practice he or she has built. It’s not easy. That’s why a consultant should stress a long apprenticeship as part of the succession plan.

Giving Up Ownership Means Losing Control and Income

Too many physician owners see a succession plan as “all or nothing”-that changing ownership necessarily means giving up control and reducing income. However, it is entirely possible to create a succession plan that transfers business ownership to an eventual successor without losing control or income or-as is vitally important to many founders -the continued opportunity to build a legacy.

It is possible for a physician owner to still run a medical practice and be paid for that role without the loss of title or any of the other satisfactions of operating an independent physician practice. However, the earlier a physician owner begins transferring ownership to a successor, the likelier it is for a succession plan to be a success, both emotionally and financially.

Think of a succession plan as a living document that records exactly how you want the next chapter of your business story to unfold – a tool designed to ensure your practice continues to thrive for many years following your departure. Know that once you’ve made the succession plan, it can change. New circumstances, unforeseen needs, or a new vision can all inspire changes to your finished plan. The good news is you can change course and make corrections as you go, especially if you see any vital errors. But you must also trust in the training process and in your successor’s decisions.

So relax. You have to give up the reins sometime. Let go of the responsibilities of leadership, and look toward your future. Decide what legacy you want to leave behind, both professionally and personally, and greet it with promise and hope by making a rock-solid succession plan. it is helpful to work toward deadlines for completing your succession plan. Allow yourself a generous amount of time to seek advice and carefully weigh the right decisions. 

People often say change is inevitable, but it is possible to cultivate a change for the better by planning in advance for your medical practice succession.

, MBA, FACHE, is the CEO and founder of 

, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent. E-mail him 

Think of a succession plan as a living document that records exactly how you want the next chapter of your business story to unfold. 

Four myths of succession planning for physician practices

The COVID-19 pandemic has undoubtedly hit practices hard. I have many physician clients that have either closed their practices temporarily to non-urgent patients or have gone the route of putting most of their patients on telemedicine visits. But the business of medicine is not taking a break, and as the world gets a better grasp on the virus, your clinic will once again be busy as you gear back up with treating your patients. Consequently, physicians are taking this opportunity of decreased patient load and less clinic hours to focus on strategic business initiatives they have been putting aside. Along those lines includes strategic planning, and if you have not done strategic planning in the past two years, then your practice is long overdue. The strategic plan, to be of long-term value, must be treated as an ongoing business process. It must evolve and change to reflect changing market and industry conditions.

As a physician owner, you are busy. You have an endless to-do list, a full calendar, and many people to talk to, making you wonder how you are going to get it all done. However, as the practice grows and the healthcare environment becomes more complex, the need for strategic planning becomes greater. Creating a strategic plan and thinking strategically are not about doing more. They are about focusing how you spend your time so that you are more effective in reaching your goals and getting to where you want to go. That said, no physician practice has an unlimited amount of time, money, or people resources. Strategic planning can help you make the most of the resources you have, allowing you to have more enjoyment in your work while you are doing it.

Here are eight reasons for getting your team together for a strategic planning session.

. You will create a clear vision for what success looks like in the future. If you don’t know where you’re going, how are you going to get there?

. You’ll identify priorities for the short and medium term. You can’t do everything at the same time, so focus on what needs to be done now and then do it well.

. You’ll get alignment and buy-in around direction and strategy. Having these conversations will move your team from implicitly being on the same page to explicitly being on the same page. The clarity will energize the whole team.

. You’ll create an opportunity to talk about key issues facing the business (competition, changing trends, etc.). You want to ride the waves, not get smashed by them. Being reactive throws off your plans, and takes your eye off your goals.

. You’ll create a clear roadmap for the rest of the organization. Your staff wants to know where the practice is going and how they can contribute. An engaged staff is 20% more productive than one that is neutral (or, worse, disengaged). Your staff wants to win and this is how you can help them.

. You’ll create space for people to share what’s going on with them and what they want to see as the future of the organization. It will open lines of communication and improve teamwork.

. You’ll empower others to take on tasks that will move the practice forward. As a physician owner, that means less firefighting and more focusing on what you do best: patient care, leading, and executing.

. You’ll create the culture, values, and behaviors that you want to foster within your practice. When your values are clearly articulated, your team will understand what you expect from them on a day-to-day basis. Culture and values are the glue that keeps a strategic plan together.

Strategic planning doesn’t need to take a lot of time away from the practice. The focus and the results will speak from themselves. Before the COVID-19 outbreak, we conducted a lot of strategy discussions with physicians onsite. Recently, we have shifted to doing these discussions virtually. They key is to have an outsider facilitate the meetings to avoid confirmation bias. Furthermore, the facilitator will be able to ensure your meetings stay focused, allow everyone time to share their thoughts, and ultimately leave you with a clear plan on how to move forward.

Medical practices which consistently apply a disciplined approach to strategic planning are better prepared to evolve as the local market changes and as the healthcare industry undergoes reform. The benefit of the discipline that develops from the process of strategic planning, leads to improved communication. It facilitates effective decision-making, better selection of tactical options, and leads to a higher probability of achieving the physician owners' goals and objectives.

Strategic planning can be a challenging process, particularly the first time it is undertaken in a medical practice. With patience and perseverance, as well as a strong team effort, the strategic plan can be the beginning of improved and predictable results for the business. At times when the practice gets off track, a strategic plan can help direct the recovery process. When strategic planning is treated as an ongoing process, it becomes a competitive advantage and an offensive assurance of improved day to day execution of the business practices.

Use of a consultant can help in the process and in the development of a strategic plan. As an outsider, the consultant can provide objectivity and serve as the "devil's advocate," as well as a sounding board. In the end, however, the plan must have the authorship and ownership of the physicians and managers who must execute and follow the strategic plan. It must be their plan.

Strategic planning, when treated as a work in progress, rather than as a binder on a shelf, or a file in a computer, provides a medical practice with a real and lasting competitive advantage. A living strategic planning process will help direct the business to where you desire it to be. Strategic planning is your medical practice’s road map to your vision.

Your practice will be better prepared to evolve with market changes, demands, and reform.

Strategic Planning: A lasting competitive advantage

Mergers and acquisitions can be an exciting part of physician practice transformations, especially if you're a physician owner who's received an attractive offer from a prospective buyer. Similarly, you may be the buyer of a physician practice who is eager to get the transaction behind you. However, while the future is without a doubt filled with promise, it's important not to get too ahead of yourself, as the next step in the process can be a lengthy one-due diligence.

I have assisted many entities (including physicians themselves, private equity firms, and management services organizations) with due diligence of physician practices, and can attest to the highly structured process of due diligence. There are myriad of items to review and question, which go beyond having a mere rough idea of what equipment is in the practice and whether there are any malpractice claims. 

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Due diligence is an important part of the acquisition process and represents the orderly investigation of any matter pertaining to business dealings. Essentially, it’s about understanding how a business really works. Since no two medical practices are the same, it's important that a diligent effort is made in order to obtain any information that would be relevant in the sale or purchase of a physician practice and its assets. A key aspect of due diligence is to examine the strategic positioning of the “target” medical practice. In mergers and acquisitions, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives.

While due diligence may seem like it only benefits one party, the fact is that due diligence helps both the buyer and the seller in the acquisition of a physician practice. It is the seller's responsibility to provide buyers, investors, and potential business partners with the information needed to make an informed decision. Yes, it means turning over extremely sensitive corporate documents such as profit and loss statements, business plans, payroll records, payer contracts, lease agreements, and so on.

From a buyer's perspective, due diligence gives them peace of mind that they're making the right deal and have all the information they need to make a good purchasing decision. This information can include learning more about the practice's existing patient base and referral relationships and either validates positive assumptions or alerts them about potential irregularities.

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From a seller's perspective, due diligence helps physician owners take a deeper dive into the financial integrity of their business and can also help them uncover the fair market value of their practice. As valuations and acquisition prices are intertwined, it's essential that physician owners, private equity firms, and management services organizations invest in quality due diligence reporting and services.

What is Included in Due Diligence Reporting?

First of all, it is important to note that non-disclosure agreements (NDAs) are standard. If you are a potential seller and you are not offered an NDA by the potential buyer (this includes with a broker if you have chosen to hire one), then a red flag should be alerted right from the start.

Every detail matters, from patient volumes and catchment areas, to existing relationships with referring physicians, to the workforce itself and what the competitive environment for that medical practice looks like. Good due diligence may validate your assumptions, but maybe more importantly, it can help alert you to any irregularities or possible issues in a business (or any aspect that may bring the value of a “target” medical practice down). Ideally, any issues would be surfaced before the due diligence stage, but sometimes things slip through the cracks, or may not be fully considered in the right context.

Here are a few key categories of due diligence reporting:

 – Most buyers spend the majority of their due diligence looking at and confirming financial reporting. All documentation and accounting information should be up to date and accurately portray numbers that were disclosed during the deal-making stage.

 – Understanding if the business being acquired has any potential liabilities is another important consideration in due diligence. This includes looking into current partnerships and contracts in place to ensure there are no irregularities before moving forward.

 – Cash flow management and long-term business sustainability are important aspects to due diligence. Careful analysis and previous years of data (e.g. patient volumes, procedures, billings and collections, etc.) will help potential buyers diagnose trends and decide if their investment is worthwhile.

 – Buyers will want to ensure what assets are in place and if they are in good working order, because if not, they will have to make investments after closing. Service agreements will be reviewed as well as any lease arrangements. Additionally, real estate (owned or leased) will need to be evaluated and discussed strategically with the seller.

 – Contracts on physicians and any other employees may need to be redone and thus the buyer will often have sensitive discussions with the seller during due diligence as it relates to those. All other employee-related items (e.g. benefits plans, 401(k), COBRA continuations, etc.) should be readily accessible as these can take time to review and make determinations on post-transaction changes.

Having said all that, it is important to note that not all due diligence investigations are the same, and surprises are to be expected. This can greatly impact the length of the due diligence process as well as the time invested by all parties. And, if due diligence drags on for too long, one or both parties can lose interest in the potential transaction at stake.

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The due diligence process is a must, but it's inherently filled with conflict. This conflict usually arises with a first-time seller who is hesitant to turn over sensitive information and who may be untrusting of the buyer, especially if the buyer is a competitor or if the transaction was unsolicited by the potential seller. These are keen reasons why it may be of interest for the seller to engage the services of an independent consultant.

Due diligence will always be an important part of mergers and acquisitions, especially as deal stages come to a close. By knowing what to expect when preparing for a successful business transition, you'll be able to provide accurate and timely reporting that increases the value of your medical practice while helping you address irregularities if and when they arise.

Accurate and timely reporting increases the value of your medical practice.

Author | Nick Hernandez, MBA, FACHE

Founder & CEO at ABISA, LLC

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