By The Forte Group at Morgan Stanley
Doctors continue to wrestle with the question of what will ultimately be their most advantageous business model. In some cases, hospitals looking for new sources of patients and referrals have sought to acquire high quality, well established private medical practices. Physicians who sell their practice frequently cite reduced reimbursements, more uninsured patients, increased government audits and the growing expense of information systems as important reasons for their decision. For now, most medical professionals are in a holding pattern, waiting to see the final provisions of the Affordable Care Act and new Medicare billing rules—and hoping to see values rise from an improving economy.
If you are thinking about selling your practice, here are some key things to consider.
1. There is no good solution for the last minute.
Plan five or ten years in advance and review your plan at regular intervals to be sure it continues to fit your needs.
2. Separate practice and property.
When it’s time to set a value on your practice, the two major components will be the practice itself and the office building, assuming you own it. It is generally a good idea to deal with them separately.
3. Diligence and patience can help maximize goodwill.
The value of the practice encompasses equipment, receivables and goodwill. For a well-established practice, goodwill should capture the value of the client relationships you have built over the years. As such, in most cases it will be the largest component of total value. Some of the things to consider in arriving at an estimate for goodwill include referral patterns, patient loyalty and even “brand recognition” that your practice has established within the community. In most cases, we recommend that doctors hire a valuation expert to help arrive at a realistic estimate of what the practice is worth.
4. Maximize the value of your property.
If you own your building, consider setting up a sale leaseback. This should be done when your retirement and/or sale date is still five to seven years away.
5. Don’t be a landlord once your practice is sold.
Hanging on to real estate that you no longer need can be expensive, inefficient and a headache.
6. Eliminate the front-end burden on new physicians—make it affordable.
According to the Physicians Foundation, the average medical student graduated with over $108,000 in debt in 2011. Also, recent graduates desire more work-life balance than their baby boomer cohorts, and therefore focus on the certainty of salaries. Retiring partners must make buy-in affordable enough to attract these young physicians.
7. Consider self-funding your buyout.
Here are examples of strategies that can be used to fund a buyout. Depending on the strategy you choose, it may take five to 10 years to build your fund.
Non-qualified deferred compensation
A non-qualified deferred compensation plan or agreement simply defers the payment of a portion of the employee’s compensation to a future date. Funds from junior members can be earmarked for future purchase of the practice.
A form of life insurance co-ownership that allows one party, often the employer, to help another person carry life insurance protection. Generally, the insured pays the portion of the premium attributable to the life insurance protection while the other party pays the portion attributable to the cash value buildup—which can act as a sinking fund to purchase the practice.
Employee stock option plans
Many companies use employee stock options plans as an incentive—to retain and attract employees. They are mostly offered to management as part of their executive compensation package, but the funds generated may be used to purchase the practice.
8. Think about whether you want to continue to have a role in your practice.
If so, be sure you and the buyer are on the same page when it comes to your responsibilities and the amount of time you will stay involved.
9. Allow enough time to prepare for the actual sale.
Here are things you may want to consider in the two to five years before you actually complete the sale of your practice.
- Files— organize and purge to build confidence in quality of the business by potential purchaser
- Bookkeeping— remove expenses that corporations wouldn’t likely show, those of a more personal or family nature
- Right-size— be sure the number of employees is right for efficient workflow
- Assess your strengths— build and promote ancillary profit centers
- A market specialty due to special training
- Community prominence, such as team physician to local high school
- Decide your desired plan for compensation— cash or productivity based models
- Turn-key cash sale, no further income
- Large payment up front, with a small income stream
- Small or no payment up front, with a significant income stream
10. Review Your Plan Often.
You don’t need us to remind you that your business is changing rapidly. For this reason, it’s important to assess your long-term plan on a regular basis, keeping the following considerations in mind:
- Does the plan still make sense for your life?
- Have the laws or the business itself changed?
- Know, and keep updated, the value of your business using more than one method of calculation
At the Forte Group, we have helped thousands of professionals navigate important transitions. Careful planning yields the greatest degree of success, and we are dedicated to the highest standards when it comes to preparing, executing and monitoring a strategy that meets your needs. If you are considering selling your medical practice, we understand that the proceeds of this transaction may have to meet your needs for the rest of your life. Our experience can help make sure that your life’s work gives you the retirement you deserve.