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A Practical Approach to Selling your Medical Practice

bu005290By Amy J. Galloway, Esq. and Jeffrey M. Fauer, Esq.

Selling a medical practice has always been a very individualized experience, but a little planning and preparation can simplify the process and help you get the most out of your sale.  Experts suggest that a physician start planning the sale of his or her practice at least two years in advance.  During that time, some important factors to keep in mind are valuing the practice’s assets, placing a price tag on goodwill, finding the right buyer, and the fate of your patients and staff.

A.  What assets do you have to sell?

The initial step in selling a practice is identifying what exactly you have to sell.  The sale of your practice can be broken down into three main categories. The first is the “hard assets.”  Hard assets include items such as x-ray machines, examination tables, desks, fixtures, computers, medical equipment, drug inventory and any other tangible objects in your office.  The value of hard assets can vary significantly based on your area of practice.  For instance, the prescription drug or medical supplies inventories for a reproductive endocrinologist or an in-office surgical suite may have substantial value.

The second category of assets is your Accounts Receivable.  Accounts Receivable is the uncollected revenue for services rendered and billed by the physician or other billing health care providers.  At any given time, there is usually a substantial sum of money owed to the practice by managed care providers, government payors (Medicare/Medicaid) or self-payors which are assets on your books for months before payment is received.

The third category of assets is generally referred to as “goodwill.”  Goodwill is a little bit harder to define.  Goodwill is an intangible asset which ties into the practice’s reputation in the community. Accountants define goodwill as the purchase price of the practice, minus the fair market value of the net assets.  In other words, it’s the value of your practice above and beyond the hard assets and accounts receivable. Goodwill encompasses such factors as a favorable location, recognizable name, patient following, and the potential of the practice to continue generating business following your departure.

A well-trained staff may also represent constitute a valuable asset, even though you don’t “own” your staff and cannot generally assign your employment relationships.  You can do certain things to maximize your key staff staying with the new owner.  First, any physician, physician assistant or ARNP level employee should have an employment agreement that, at minimum, protects your confidential business information; such as patient lists and managed care provider contracts, from disclosure.  Ideally you also want fair and reasonable covenants prohibiting these key employees from competing with the practice if upon separation.  These agreements should be assignable.  Other key employees, such as valued nurses or billers, can be incentivised with “stay with us” bonuses that can be offered as part of the agreement.

B.  Who is your potentially best Buyer – – another physician or a hospital?

The next step in selling your practice is to identify your potential purchasers.  Knowing your customer plays a major role in getting the most out of your sale.  The three primary purchasers are other Physicians, Hospitals, and corporate medical entities.  Of the potential buyers, other physicians, specifically your junior partners or another physician within your specialty seeking to move into your geographic area, may make the best purchasers.

First of all, let’s face it, as a doctor you want to ensure that your patients will be left in good hands.  You’ve also spent years building your practice, and want to have some input into who gets left in charge.  If a hospital or corporation purchases the practice, you may not have any control over who takes your place and the price may be dependent on you remaining with the practice as an employee for a predetermined number of years – – without real management control.  “In many circumstances it’s simply easier to sell to another physician rather than a hospital due to the legal and regulatory cost requirements that a physician-hospital transaction would require.” says Jeff Gold, President and CEO of Blackmaple Group, LLC, a health care advisory firm.  “Dealing with other physicians generally has an implied trust factor similar to brothers in a fraternity.” says Gold.  On the other hand, when dealing with a hospital, trust frequently becomes an issue in the first hour of the negotiations.

By selling your practice to a junior “partner”, you can choose the individual you deem fit to take over.  Besides the benefits to you as a seller, junior partners can benefit from the sale in that they are in a superior position to fill your shoes.  For one, they already know what makes your practice tick.  Another reason is that the patients are familiar with them.  This assures the existing clientele that there won’t be any drastic changes in the quality of their healthcare.  Finally, selling to a junior partner prevents your staff from viewing the sale as a coup d’etat.  That said, a sale to a physician “partner” in your practice frequently requires the Seller to hold a promissory note for a portion of the purchase price because the buyer physician doesn’t have sufficient liquid capital to fund the entire purchase price.  That circumstance requires adequate protections in the transaction structure; such as guarantees and restrictions on expenses and dividends until the Seller is fully paid.

A sale to another physician in your practice specialty can be structured to provide an overlap period where you agree to assist in a transition and communicate with your patients about the new physician taking over the practice.  In these circumstances full disclosure of the financial condition of the practice is critical so there are no surprises when the new owner takes over that could cause disputes.  The selling physician needs to give the prospective purchaser access to the financial books, subject to written confidentiality agreements to protect the practice and its confidential information.  The actual sale documents also need to provide for sufficient consideration to be paid or escrowed before your staff or patients are notified of the sale and your succession plan.  Once you have a firm deal you can work with the contract buyer to approach key staff and memorialize any agreements to “stay with” the new owner.

C.  What is the role of goodwill in the sale of your practice?

Assigning the proper value to your assets is very important when it comes to getting the most profit out of your sale.  The book value (purchase price minus depreciation) is commonly used for valuing the hard assets.  Another option is fair market value which requires more due diligence but can result in a more realistic value or assets that have been depreciated for tax purposes.  Because hard assets, such as desks or other furniture, depreciate in a relatively short period of time, allocating a price to these assets in a timely fashion is very important.

Placing a price tag on goodwill, although critical to your sale, is a little more difficult.  Recent performance is one factor which plays a role in valuing goodwill. Selling your practice after a strong year might increase your profits significantly.  Another consideration is your reputation.  Having a strong reputation and clinical expertise can substantially increase the value of your practice.  “Clinical expertise is a primary factor in evaluating whether to purchase a practice.  Doctors want to work with other well-respected physicians in the community” says Jason Moon, Corporate Administrative Director for a large medical provider throughout Florida.

Recently though, some experts are ascribing little or no value to goodwill. “In this market, goodwill truly has become an obsolete term.  In a health care market where the patient has more and more choices of health plans, can self-select their doctor and plan, and opt-out during open enrollment, any physician who would pay a “goodwill” value as a percentage of revenue to the selling physician is ill advised, especially if this physician will not be retained for a period of eighteen months after the initial sale.” says Gold.  “If a physician believes that by buying another physician’s practice that they will gain volume through the acquisition of their charts without retaining the original physician— they will have made a strategic error and will have ultimately overpaid for the practice.”  Goodwill, as a percentage of the sale, will only work if the selling physician has a risk, in dollars, associated with the transference of the practice. The selling physician must be motivated to move his or her patients to the acquiring practice and must be incentivized to help the acquiring practice retain these patients through the open enrollment period and for a reasonable transition period thereafter.

D.  Summary

Selling a medical practice is no easy task.  However, having a basic understanding of the value of your assets and the potential purchasers can help ensure that the sale of your practice is profitable and not compromised by a lack of planning before you sell.  The particular structure and terms of the sale should be negotiated and memorialized with the professional help of your accountant and legal advisor.  Don’t hesitate to get an experienced attorney and/or practice consultant involved during negotiations.  It can save money and provide valuable input as to the best structure and terms for the sale.

Amy J. Galloway is a director at Tripp Scott (www.trippscott.com).  She can be reached at AJG@trippscott.com or 954.525.2500.  Jeffrey Fauer is an associate with Tripp Scott.  He can be reached at JMF@trippscott.com or 954.525.7500.

One comment

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