Don’t sell your practice short

What you need to know when you decide to sell your practice

By Lowell A. Davis

Are private medical practices bought and sold today? This is an important question to consider on different occasions. Retirement. Do I just send my patients a letter, close my doors, and liquidate my office furniture and equipment? Illness. Is this just an earlier retirement than I had planned for? Has a group practice approached me? Has a hospital approached me?

Private medical practices are sold all the time. It just takes time. The fact is that a private medical practice has a marketable value. This is because a private practice has cash flow, goodwill, and assets. And there is a whole body of professional standards and strategies that professional brokers use to assist physicians in a sale transaction.

The sale of any private practice offers three benefits:

To the selling physician: Monetary exchange for an ongoing business. Many physicians think that because they have HMO contracts, the patient base cannot continue. This is not true. Although any patient will go first to a doctor “on my insurance plan,” after that, patients will often stay with a physician with whom they have a relationship of care. This is the goodwill of the physician with the patient. And the IRS recognizes goodwill as a value.

Benefit to the buyer: An existing business and patient base does not cost as much to maintain as the cost to start from scratch. There is an often spoken assumption that patients will leave when the doctor leaves. This is not true. Patients often stay with a group when a doctor leaves. Patients will often stay and transfer to another doctor in the practice. This means that an ongoing practice that is bought, often for less than starting up a practice, has the benefit of immediate cash flow. This means that there is revenue to pay the bills, payroll, and operations. Starting up a practice costs more and it may take a year or two to generate a paying patient base to break even. Who wants that?

Benefit to the patient: many physicians think that when they leave all the patients will also leave. Some will for reasons other than a change in the doctor. But most will want to come back. “I don’t have to go out and look for another doctor that I don’t know and start all over.” A patient does not want to change everything. The doctor may be new but the practice location is the same, the staff often remains, the chart of medical history is the same. The exiting doctor has recommended the new doctor, so most patients will give the new doctor taking over the benefit of a first visit. Continuity of care is important.

Who are the buyers? There are two kinds of buyers: those who come to you and those to whom you market. Who would come to you and offer to buy? Many hospitals want to consolidate their market share of a region. Hospitals are looking for outpatient diagnostic patients, as well as a more predictable hospital census and procedure utilization. With recent regulatory changes, hospitals have been more aggressive in buying the private medical practice. In large metropolitan areas, hospitals have set up clinics all over the area. In smaller communities the doctor referral base is vital to a hospital’s survival.

The expanding private medical group may approach you. This type of practice wants to grow. The easiest way to grow is by acquisition. Larger private practices want patient “market” share and stability. They also are looking for economy of scale, hopefully providing more medical services more economically.

Two cautions: Don’t wait until you are desperate due to the financial condition of your practice (you are too deep in debt, or losing too much money). Don’t wait until you are too ill and cannot practice any longer. The second caution is, don’t try to sell it yourself. Get professional help. There are two kinds. A professional appraisal that tells what your practice is worth, and professional help in negotiating the sale. Most selling efforts fail due to the physician’s erroneous value of the practice, and trying to sell the practice directly.

Be patient. To negotiate a good sale to someone who approaches you will take an average of six months. To find a buyer and negotiate a sale may take as long as 12-15 months. Don’t leave a medical practice equity value for others when it is time for you to make a move. Exit with a crown and not a cane.

Lowell A. Davis is a consultant with Physician Practice Advisors in Houston, Texas. Contact him at ppag81@gmail.com or (281) 855-3027.