Exit Strategy: Tips On Selling Your Medical Practice

The number of physician-owned medical practices is declining.

In 2005, two-thirds of all medical practices were doctor-owned, but the number is now below 50%, according to the Medical Group Management Association. More physicians are looking to sell their practice in favor of being employed by a larger medical group or hospital. Some are tired of managing the business, whereas others are concerned about the impact of healthcare reform on their practice.

There is an uptick in the number of independent physicians looking to sell their practices, says Carol Carden, principal of business valuation at Pershing Yoakley & Associates, a healthcare consulting firm based in Knoxville, TN. "The way it is different from years past is that last time it was more primary care physicians selling, but now it is more specialists—cardiologists and orthopedists," Carden says. "It is being driven by the Medicare fee schedule because it will cut more and more into their margin."

Whether you are seeking employment or planning to retire, here's advice on getting your practice ready for sale.

Get your books in order
It doesn't matter whether you are selling to a hospital, medical group, or another physician; getting your books in order is one of the first steps physicians should take to prepare their practice for sale.

"Small businesses can put certain expenses through the business that may not be expensed in more corporate settings," says Amy Galloway, director of Ft. Lauderdale, FL-based law firm Tripp Scott, PA. Perhaps a spouse works for the practice on a part-time basis and has a car or cell phone expense on the books. Those types of expenses can impact the net revenue of the business. "One option is to clean up the books by removing expenses that are of a more family and personal nature," Galloway says.

If a physician plans on exiting the business within 18 months, removing those expenses from the books may be the best option so there are no expenses on the books with effects on net revenue that are difficult to explain.

Another option is creating a separate professional association for those expenses, Galloway says. Physicians should discuss with their accountant strategies to ensure that their books reflect as positively as possible how their practice is performing.

Physicians should decrease AR days and make sure their managed care contracts are current. It's important to show the buyer what the practice bills and collects during a 12-month period. "If you have a specialty like neurology, you likely have a very marketable and profitable practice. But if you haven't collected copays or decreased AR days, your books will have a low percentage of billing revenue, and you will get lower bids than what your practice is worth," Galloway says.

Showing what you bill versus what you collect can also help maximize the value of your practice. If the buyer is a corporate provider purchasing plastic surgery practices, for example, it might say your practice won't collect 50% of reimbursement from your managed care contracts. If you have historic data showing you collected 70%, you can command a better price, says Galloway.

Bottom line: Physicians need to determine the difference between their asking price versus asset value and goodwill.

Right-size your practice
Physicians should make sure they have the right number of employees for their workload.

"Because of the complexity and nightmare of billing managed care, many physicians have a lot of people in the office who aren't being fully utilized," says Galloway. Perhaps someone comes in on Tuesdays to handle Medicare billing, or a spouse helps out and is paid in cash. There are factors that can make it difficult to determine personnel costs for a trending 12-month period. Physicians should determine the job description and total benefit package for all of their employees.

"It may not mean downsizing staff, but being able to adequately describe how employees are utilized for the company," Galloway says.

Determine how you want to be compensated
It is important for physicians to determine whether their new compensation—most likely some type of productivity-based model—will be equivalent to what they are earning now, says Carden.

"If it is going to be equivalent, they probably won't get paid much for the practice itself because there won't be profit left over to generate value in the practice that they are selling," she explains.

Some physicians may opt to receive a smaller compensation package so that can get more money up front for the practice, Carden says. Knowing what their compensation will be will help physicians determine whether they want to take a larger payment up front.

If a physician plans to sell to a junior partner, he or she may have to fund that purchase, says Galloway. "The junior partner will pay for their share of the practice over time through collected revenue, so the physician won't get the full purchase price in cash," she says. Under that scenario, the physician may want to remain involved in the practice while he or she is still owed money to make sure the practice is being managed properly, Galloway says.

Know your strengths
Similar to selling a house, physicians want to ensure their practice's strengths are showcased. For example, using physician extenders such as nurse practitioners or physician assistants is a selling feature that practices want to highlight. "If they have ancillaries, they should promote that to who might buy it as additional sources of profit," says Carden, adding that if you don't have physician extenders, it doesn't make sense to add them. Any unique training or role in the community, such as team physician for the local high school, is also worth noting to potential buyers.

"Anything that really differentiates you from peers is what you want to bring to the forefront to make the sale as lucrative as you can," says Carden.

Ascertain the best time to sell
For the past few years, there haven't been as many hospitals buying physician practices as there have been in the past, but now that is trending back up, says Galloway. If a physician does plan to sell to a hospital or a new physician in the community, he or she should be prepared to stay on with the practice for a certain number of years after the sale.

Hospitals are buying the physician as much as the practice, and a new physician in the community may want a nine- to 12-month window to help transition patients, she explains. Physicians should also pay close attention to what is going on with the Medicare fee schedule to help them decide when is the right time to sell, says Carden.

Right now, "all of the things in reform are slanted for primary care," she says. "It is not as time-sensitive for primary care as for specialists. Physicians should do as much research as they can to see what is coming down the road because if the prospects are looking bad, it might be better to sell sooner than later."