MEDICAL PRACTICE ACQUISITION STRATEGIES
Dear Physician – Do you have a transition strategy in place?
Whether you are a sole practitioner, a partner in a group practice or an equity investor, every medical practice needs a comprehensive transition strategy. We find many practitioners find they need one in an unanticipated crisis. If you are starting up your practice, it’s a great time to put these strategies in place. If you’ve been in practice for decades and haven’t given this thought, now is the time to create a transition strategy and schedule yearly reviews. Divorces, sudden illness, death, change of practice focus, desire to free up personal time, retirement, buy-ins, mergers…all of these require specific transition strategies. We don’t get text messages prior to these events. Be prepared is how we advise our clients.
Tinsley Medical Practice Brokers has hands-on expertise in all areas of medical practice transitions. Numerous times, our physicians found waiting until the last minute to create a transition strategy doesn’t work well. We recently witnessed the value of a million dollar medical practice evaporate in a period of several weeks after the sudden death of the physician and the absence of a comprehensive transition strategy. As the family fought over the practice, the patients scattered and a tremendous portion of the practice value was lost. Most physicians do not realize how quickly this can happen. However, with advanced planning in place, a pleasant and financially beneficial and smooth transition can easily take place.
Solo physician practices
Individual physicians often pursue their practices with great focus and intensity. The good news is this extra effort can have a direct effect on the financial rewards of succession planning. This process requires realistic evaluation of your current and future financial needs and addressing the emotional effects of passing the practice on to a new physician versus simply closing it. At Tinsley Medical Practice Brokers, we evaluate which avenues best suits your individual needs and present you with these choices.
Three basic avenues for succession planning:
1. Slow down gradually and close the practice when the financial rewards are no longer worth the effort, selling equipment for nominal value.
2. Maintain a full-time schedule until the day of retirement and sell the practice to a recruited successor or potential buyer.
3. Recruit a successor early on, build the practice until it can support two physicians, and then sell the remaining half of this new multi-physician practice to a third physician.
The timetable for each of these three basic options depends on how long it takes to recruit a successor or find a buyer for the practice.
Option one is the quickest solution. Winding down and closing the practice will result in a decline in compensation and, ultimately, a nominal sale price. If we find an eager buyer while you are winding down the practice, it’s feasible to shift to a variation of the second strategy, selling the practice to a single successor upon retirement.
Selling the practice to one physician produces a FMV (fair market value) practice purchase. There is reduced compensation during the transition period because your one physician practice must support income for two physicians.
The timetable for option two varies based on whether we recruit a successor from a resident or fellowship program or a all ready practicing physician. The third option requires not only recruitment of two physicians, but also enough time between recruitments to successfully build a practice to accommodate additional physicians, so it takes twice as long as the second option.
If you decide to pursue an option that involves selling to a third-party, performing a certified financial/practice valuation is a must. This provides a realistic expectation and basis for negotiations that can’t be dismissed as simply a personal opinion of value. As Certified Valuation Analysts, Tinsley Medical Practice Brokers have been called upon to testify under oath to support medical practice valuations.
Due to our years in business, our networks are vast and include hospitals, physician groups, equity investors, and group practices as well as sole practitioner physicians. As your medical practice broker, we are able to solicit your practice for sale to a wide spectrum enabling maximum return on your time and investment in your medical practice.
Established multi-physician practices typically have succession plans that are driven by opposing interests of the entering and exiting owners, who might be shareholders, partners, or LLC members.
Succession strategies for group practices:
1. Physician buy-in and buy-out. Entering physicians desire the lowest possible buy-in and exiting physicians desire the highest possible buyout. That is not to say that either seeks an unfair deal, they simply have opposing goals. With this in mind, structuring a reasonable buy-in and buy-out is critically important and increasingly difficult in today’s changing healthcare environment. One big issue is assigning a value to practice goodwill. Does the practice have value in excess of its net assets?
2. Malpractice insurance and the tail. If a practice’s professional liability insurance is claims-made insurance, then the exit plans must include payment of the malpractice tail. Some insurance companies waive the tail in the event of the physician’s retirement. If this issue is not addressed, a significant dispute may arise among the physicians because the tail cost is rising along with malpractice premiums. Both the practice and the physician must be aware of the potential for uninsured liability if the tail is not purchased. Didn’t know this? Another reason to hire the experts.
3. Restrictive covenants. Actual practice retirements do not typically raise restrictive covenant issues. Physician practice owners should not pay practice buyouts to physicians who leave or retire only to set up competing practices. This issue must be covered in the transition documents. All of this is covered in great detail in Tinsley Medical Practice Brokers transition consultations.
4. Real estate. Leased space is usually not an issue providing leases are structured favorable for transition. However, owned real estate investment is often a large component of a physician practice and is usually not part of the professional corporation that serves as the practice entity. If the ownership is linked to the practice, then a buyout provision in the transition plan needs to be included. If not, the remaining physicians must be prepared to deal with the real estate owners as independent third-party owners.