What Physicians Need to Know Before Selling Their Practice

Ester Horowitz, for The Doctor's Office , January 15, 2009

Starting a medical practice today is not the same as it was 20 years ago. Today's younger physicians are opting for partnerships or buying established medical practices outright rather than starting one from the beginning. Although this is good for physicians who are considering selling their practices in the next few years, receiving both fair market value and right value can be a challenge.

The primary goal of the selling physician is to maximize the value of the practice two to three years before selling it. Common industry approaches focus on the selling process itself. A practice owner ready to sell his or her practice today may choose to work with one or more of the following:

  • A business broker who finds a buyer for you
  • An attorney who focuses on the sales contract
  • An accountant who focuses on final accounting and taxes
  • A business appraiser who evaluates your practice

Depending solely upon any one expert, or even a combination of experts, risks unplanned and uncoordinated support that may not be in the seller's best interest. Many have no industry knowledge and are focused on the sales transaction. This could cost the seller more than 20% of the selling price.

What buyers want
A practice has greater value when it contains elements that buyers want, such as fair market value and transferable goodwill. Therefore, the practice needs to position itself for sale by focusing on attributes that will raise these values in advance.

Because a transition period exists when a medical practice changes hands, compatibility between buyer and seller is important. Incompatibility can lead to miscommunication, misunderstanding, and litigation. Therefore, the motives and desires of the buyer are important to know.

Fair market value is a standard set by the IRS Code. This standard is used to help set practice prices and comply with fraud and abuse laws. Be aware that the practice price and the fair market value may not be the same. Understanding a practice's fair market value gives the seller a strategic ad-vantage that can make the practice more valuable to prospective buyers.

Finally, transferable goodwill is defined as intangible items that do not disappear once the owner phases out of the practice. Accomplishing transferable goodwill can be confusing to a practicing physician-owner when his or her perception is that the practice, the owner, and the reputation are one and the same. The professional corporation no longer needs to rely on this perception as a primary strategy; there are other options. Buyers will be focusing more on what is transferrable and buildable for their future.

Maximize value
If a practice owner is considering selling or merging his or her practice within the next 1,000 days, it would be prudent to find a firm that specializes in growing and maximizing the value of medical practices. The practice owner will most likely still be practicing and will need to continue the daily routine in order to maintain current value. This leaves little time to focus on the selling plan. Outsourcing the work to the right firm allows the practice owner to increase value while maintaining emotional stability within the practice.

The firm's expert will develop a strategic plan based upon the owner's future goals. He or she can also coordinate the processes between the attorney, the accountant, and any other vendor relationships. The practice owner should find a firm that thinks strategically. Such a firm is capable of seeing the broader picture, coordinating staff members toward a common goal, and blending daily routine with meeting selling goals. In addition, practice owners should seek a firm that possesses an entrepreneurial spirit. The buyer will need to feel confident that the practice is capable of successful growth once it is sold.

Selling a practice takes more than merely finding a buyer, having contracts made up, and determining the sale price. That approach results in more money being left in other people's pockets. Selling a practice requires consideration of the elements that go into making a practice more valuable and desirable.

Although this can take time, practice owners owe it to themselves not to turn the sale of their practice into a common transaction. After all, it is the owner's life that has been invested and the owner's future that will be affected.

This article was adapted from one that originally ran in the January issue of The Doctor's Office, a HealthLeaders Media publication. Horowitz is the owner of M2 Power, Inc., a strategic management firm that specializes in working with owners of health enterprises to gain greater income, wealth, and free time. Contact her at 516/409-0849 or by e-mail at info@m2powerinc.com for more information.

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