Considerations for selling a medical practice depend on whether the seller is retiring, financially distressed, or making a strategic move.
There are successful strategies to employ and key steps to be taken when selling a medical practice.
In the short-term, the coronavirus pandemic has placed many medical practices in dire financial straits and selling a practice may be unavoidable. In the long-term, small medical practices have been selling to larger medical groups and health systems for years, and that trend is likely to continue.
The considerations for selling a practice depend on the seller, says Barry Posner, JD, BS, a partner at Kudman Trachten Aloe Posner LLP in New York City. "There are three kinds of sellers: there is the seller who is retiring, there is the seller who is in distress, and there is the seller who is selling into growth or selling strategically."
Succession is a primary consideration for the sellers who are retiring, he says. "For retiring doctors, if it is a one-physician practice, more than likely they are going to pass the practice to a successor or somebody who they have trained. But those situations are getting more and more rare."
For distressed sellers, they can either align themselves with a buyer that can make them more profitable, or they can become employees or contractors of a larger practice group, Posner says. "It often comes down to cost savings. They may have high-cost equipment. They may have high-cost rent. Selling the practice relieves distressed doctors of those burdens. That way, they can get back to practicing medicine and let other people deal with the business of medicine."
More commonly, there are practices that just are not as profitable as they used to be, and they want to make a strategic move to become more profitable, he says. "The way you achieve more profitability by selling to large practice groups or health systems is by getting cheaper purchasing by volume, sharing high-cost equipment such as CT scans, and lowering back-office costs through centralized billing and collections."
Determining the value of practices
Revenue is a pivotal element of a medical practice's valuation for sale, Posner says.
"Medical practices are generally valued off a multiple or fraction of revenue. The most common general practices would be in the 0.5 to 0.7 times their annual revenue range. As you get to higher end specialties, you can go to 0.8 to 1.0 times annualized revenue. The 0.5 or 50% of revenue valuation would be typical for an internist, podiatrist, and general practitioners. As you get to shorter supply specialties such as neuroradiology and oncology, you can get to a higher multiple," he says.
For example, if a practice was crafting a deal on a calendar-year basis for 2020, and the practice had $2 million in revenue, and the negotiated percentage was 70%, the value of the practice would be $1.4 million.
Avoiding the biggest pitfall
The most daunting pitfall when selling a medical practice is avoiding buyers that have weak financial standing, Posner says. "There are some very fine health systems and large practice groups that are well-funded and well-sponsored either through private equity firms or physicians who have been very successful over the years. I have seen examples that go the other way."
To avoid a financially troubled buyer, owners of medical practices that are up for sale need to have a strong team in place to help them, he says. "The biggest pitfall is ensuring that the medical group that you are selling into is financially sound. Due diligence is critically important. And the way to conduct due diligence is by getting your accountant, your lawyer, and business broker or banker involved in the process as early as possible."
Prepping a practice for sale
To sell a medical practice successfully, physicians need to lay solid groundwork for the sale, Posner says.
"Prepare, prepare, prepare. Get your lawyers and accountants lined up early. Get your documentation together—whether it is your payer contracts for reimbursement, your licenses, or your financial statements. All the documents that would be typically requested by a buyer should be prepared and at your fingertips. When you are asked, you should be able to hand over documents immediately," he says.
Delays due to ill-prepared sellers can have adverse consequences, Posner says. "I am a believer that time kills deals, and the quicker you can respond to due diligence questions from a prospective buyer, the better off you are."
Christopher Cheney is the senior clinical care editor at HealthLeaders.
Improving profitability is one of the primary drivers in decisions to sell a medical practice.
Revenue is a pivotal element of a medical practice's valuation.
Sellers should conduct due diligence to make sure a prospective buyer has sound financial standing.