Selling Your Medical Practice: 4 Steps to Take First

August 19, 2014

Whether actively marketing your practice for sale, or curious about the process, here are four steps to help you make informed decisions about the future.

Whether you are actively marketing the sale of your medical practice or want to learn more about the process, here are four steps to take prior to selling your practice. These steps will arm you with the information necessary to make an informed decision and assist with realizing your goals.

Prepare an Internal Practice Assessment. It is critical to understand how your practice compares to the market. Key practice benchmarks may include:
 i.) physician and midlevel provider productivity - typically measured in work relative value units (RVUs);
ii.) physician compensation;
iii.) number of active patients;
iv.) patient visits per year; and
v.) average cash collections per patient visit.
By benchmarking these key metrics, you are able to accurately assess how your practice is functioning relative to other practices throughout the country.

An assessment of your practice's strengths, weaknesses, opportunities, and threats (SWOT) is also encouraged. Practices should put significant thought into identifying financial and operational strengths. These strengths may include:
i.) diversification of referral sources;
ii.) high ancillary utilization;
iii.) limited competition;
iv.) dedicated staff; and
v.) demonstated patient satisfaction and loyalty.
A practice does not need to "hide" its weaknesses from potential buyers. Buyers understand that improvement is necessary in all businesses. Often times, a practice's perceived weaknesses are opportunities for buyers post-acquisition. For example, a practice experiencing a disproportion percentage of Medicare billing denials would represent an opportunity to a buyer with better experience and knowledge with revenue cycle management.

Identify Owner, Discretionary, and One-Time Expenses. Hospital buyers tend to focus on the historical compensation of the practice's physician owners (this is similar to focusing on profit; however, most professional practices elect to distribute available profit). It is important to note that historical physician compensation impacts both the purchase price of the practice and the compensation package offered to the practice's physicians as part of the post-acquisition employment arrangement. In most instances, an offer will be made with respect to historical, normalized physician compensation. Therefore, it is critical to demonstrate a high level of maintainable physician compensation to your potential buyers.

In order to gain a true measure of physician compensation, a practice will likely need to normalize its operating expenses to account for certain discretionary and/or non-recurring items. Some examples of those expenses that are discretionary (or more accurately represent a form of owner-level compensation) are:
i.) travel;
ii.) meals and entertainment; and
iii.) automobile expenses.

Some examples of non-recurring expenses (i.e., those that do not occur every year as part of normal practice operations) are:
i.) legal fees that are atypical;
ii.) consulting fees; and
iii) certain capital improvements that are expensed as opposed to capitalized.
Additionally, if real estate is owned by a related party, the practice's lease rate would need to be adjusted to market rates as many owners elect to shift profits to their real estate company for tax considerations.

Prepare a Financial Forecast. In general, buyers are willing to pay more for a business with a history of strong financial results and a strategy for continued success and growth. A financial forecast would include the practice's performance targets and goals - both immediate and long-term - and demonstrate your understanding of the practice's position within the market. A financial forecast provides a roadmap for how your practice plans to address the threats and opportunities identified in the internal practice assessment.

As mentioned above, most physician practices distribute all available profit to their owners. Once your practice is acquired, this may or may not be true based on the proposed post-acquisition compensation model. It is important that the financial projection reflects the post-acquisition compensation in order to accurately assess future profit. If the financial forecast indicates future profits for the potential acquirer, then consideration for goodwill should likely be included in your practice's valuation.

Finally, potential buyers and their representatives will also undergo a forecasting exercise (likely in connection with a practice appraisal under a discounted cash flow analysis). You'll want to compare the projections and understand why differing financial expectations may exists.

Retain Experts. Potential buyers will have a team of business development experts, attorneys, business appraisers, analysts, and C-suite level executives with significant experience in acquiring physician practices. During the due diligence process, they will require the practice to produce detailed financial and operational data. Specific and detailed questions will be asked regarding the practice's historical trends and future outlook. You may be uncertain how to best answer these questions or whether it is in your best interest to answer at all. This will be a stressful time. You must manage this due diligence process and negotiate an offer while continuing your clinical practice.

By retaining experts, you obtain knowledge and experience that equals your potential buyers. Your advisers understand the valuation process and how buyers assess your practice. They have the requisite experience to answer the various questions and market your practice in way to maximize purchase price and / or post-acquisition compensation and assist your practice in reaching an agreement that represents your best interests.

Kyle Tormoehlen, ASA, MBA, is co-owner of Healthcare Transaction Advisors, a national provider of healthcare-focused M&A consulting services and provider alignment programs that foster collaboration between physicians, hospitals, health systems, and other healthcare organizations. E-mail him here.