June 2000 Bulletin

Sell your practice for premium price

‘Many physicians do not have an understanding of what their practice value is. . . .’

Experts tell how to strategize a good sale

By Sandra Lee Breisch

You’ve built practice value throughout the years and you have a good idea of what your practice is worth in the market. But when it comes time to sell the practice, you may be surprised.

Some physicians are not well-positioned in the marketplace to command a premium price or even a fair price, notes Michael McCaslin, CPA, managing director of the health care group at Somerset Financial Services in Indianapolis, Ind.

"Many physicians do not have an understanding of what their practice value is and/or a strategic plan as to what stage of their career they’re going to execute a sale," McCaslin says. "An orthopaedist’s reason to sell should meet personal and professional long-term goals. That’s not always the case. In a crisis situation such as illness or divorce, physicians may settle for less.

If the seller wants to get what the practice is truly worth, the seller needs to figure out what practice strengths will enhance the sale—well ahead of any crisis."

Here are some tips from some practice management and valuation experts to help you strategize a good sale.

Begin the planning process for selling your practice from two to five years ahead of time. "Timing is everything," says McCaslin. "If you think you’re just going to sell your practice outright to someone and walk away, you’re wrong. The practice has more value if you’re going to be there for a two- to three-year transition. During that time period, you’re going to introduce the new buyer, perhaps a junior partner, to the community, referring physicians, hospital personnel and patients. So, there’s a little bit more value that a purchaser is willing to pay for if the seller is there to help them out with the practice."

If there is a junior partner who is interested in buying the practice within a specified time, the seller should have him or her sign two contracts: an employment contract and a formula-based buy-in contract, suggests Rick Holdren, president and CEO of RH Medical Group, Inc., Houston, a company that specializes in the sale of medical practices. "Whatever the buy-in arrangement is, both contracts should be signed at the same time," he says. "This eliminates the mistake of a ‘handshake deal’ about both the employment contract and the amount and date of the buy-in."

If orthopaedists really want to get an enhanced price when selling their practice, "there are some avenues—other than an outright sale—that might be available and attractive to them," says Robert J. Cimasi, a health care mergers and acquisitions and practice valuation expert and president of Health Capital Consultants, St. Louis. "For instance, they could integrate their single specialty orthopaedic practice with other surgical specialties which, despite the recent bad press on the demise of PPMCs and some other large group consolidations, is still a very attractive alternative. In effect, if the orthopaedists are willing to give up a little of their autonomy and individual decision-making in order to be able to share economic risk and maximize their market leverage, they can exert more economic power in their given service areas which clearly is a value driver."

This is especially true in markets where the growing incursion of managed care has brought increased pressures on reimbursement for and utilization of orthopaedic services, Cimasi says. "Value is the expectation of the future benefit to be derived from the practice, and that value is diminished if the practice is threatened with shrinking fees and a loss of referrals."

Size up your practice with others. Do this by examining and benchmarking selected profile data for orthopaedic practices that have similar specialty services and geographic locations, notes Elizabeth Woodcock, a Medical Group Management Association consultant for physician practices. "The purpose is to evaluate whether or not your median income and expenses are average or below average. They should be better than average and indicate that you’ve got low overhead and high earnings. If not, you’ve got some work to do in improving these numbers to increase the value of your practice."

Your potential buyer will want to examine your profitability and management costs, production, capacity and staffing, accounts receivable and collection, managed care operations, patient base, referring physicians, satisfaction surveys, outcome data and any other key indicators for the practice, says Woodcock. "If any of these are not in order, focus on putting them in order by hiring the right staff."

What makes your practice more valuable to potential buyers? According to McCaslin, potential buyers may be more willing to pay a premium price for the best practice in the market. He says physicians should be performing their own internal practice due diligence well before they’ve recruited physicians to buy into the practice. This includes ensuring good management, up-to-date technology and facilities, ancillary services already developed, good staff and location, patient loyalty and a strong referral base.

"Purchasers also want to see a history of high earnings, potential affiliations or merger partners and their market positions, good compensation plans, direct contracting and managed care strategies, practice-style considerations, utilization review and quality assurance activities," he says.

One of the biggest mistakes is not hiring professionals to help facilitate a successful sale. "It’s wise to engage the services of a practitioner or company with the experience and expertise needed to evaluate the practice, list it for sale, negotiate with potential buyers, and complete the transaction," says Woodcock.

Here are some "red flags" that might prevent someone from buying your practice

Source: Michael McCaslin, CPA, managing director of the health care group at Somerset Financial Services, Indianapolis, Ind.

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