Want to Sell Your Medical Practice? How to Create a Profitable Succession Plan
Whether you are a solo practicing physician or a member in a group medical practice, it’s wise to begin thinking about your medical practice succession plan long before the date arrives that you want to step away from the practice. Many physicians wait until the last minute to address the issue of medical practice succession. This can greatly jeopardize profits and create a stressful transition for both buyer and seller. With a carefully orchestrated advanced financial planning and medical brokerage team, a financially beneficial succession and smooth transition of ownership can be achieved. Utilizing pre- and post-transaction consulting services can spotlight which financial strategies best suit your unique goals.
Selling Solo Medical Practices
When individual physicians plan their financial future of their medical practice with intensity and thoughtfulness, this extra effort can have a direct impact on the financial rewards of succession planning. This process requires realistic evaluation of your financial needs. It also requires the forethought of the emotional effect of passing the medical practice on to a new physician versus simply closing the medical practice.
Typically, solo physicians have three options for succession planning:
- Slow down gradually and eventually close the practice. Equipment is usually sold for a nominal fee.
- Maintain a full-time schedule until the day of retirement or transition. And, then sell the practice to a recruited successor or a potential buyer. Marketing through a qualified medical practice brokerage firm helps to put your medical practice in front of a larger audience of qualified buyers.
- Build the practice and recruit a successor early. Build the practice so it can support two physicians, and then sell the remaining half of this new multi-physician practice to a third physician or medical investment group.
The timetable for each of these three strategic options depends on how long it takes to recruit a successor or find a qualified buyer for the practice.
The first option is the quickest. Winding down and closing the practice will result in a decline in compensation and, ultimately, a nominal sale price. If you happen to find an eager and qualified medical practice buyer while you are winding down the practice, you can simply shift to a variation of the second strategy, selling the practice to a single successor upon retirement.
Selling the medical practice to a solo physician produces a fair market value practice purchase. There is reduced compensation during the transition period because your one physician practice must support the income of two physicians.
The timetable for the second option varies based on whether you are recruiting your successor from a physician resident or fellowship program or recruiting a physician that is already in practice.
The third option requires not only the recruitment of two physicians, but also enough time between those recruitments to successfully build a medical practice to accommodate the 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, you should obtain a medical practice appraisal from an experienced financial and medical practice valuation advisor as a first step. This gives you a realistic expectation and a basis for negotiations that provides an unbiased and substantiated valuation and can’t be dismissed as a personal opinion of your medical practice value.
Finally, use other area resources. Discuss your plans with the hospital or hospitals at which you practice. Hospitals in underserved areas need to maintain their physicians. Hospitals in competitive markets need to maintain and build their physician and patient bases.
Selling Larger Group Medical Practices
Established multi-physician practices typically have succession plans that are driven by the opposing interests of the entering and exiting owners, who might be shareholders, partners, or LLC members.
Consider the following:
- Buy-in and buy-out. It is a natural desire that entering physicians seek the lowest possible buy-in and exiting physicians want the highest possible buyout. Therefore, structuring a reasonable buy in and buy out is critically important and often difficult in today’s healthcare environment. The biggest issue has to do with assigning a value to practice goodwill. Does the practice have value in excess of its net assets?
- Malpractice insurance. If a medical 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, there could be significant dispute among the physicians because the tail cost is rising along with malpractice premiums in general. Both the medical practice and the physician must be aware of the potential for uninsured liability if the tail is not purchased.
- Restrictive covenants. Medical practice departures that are real retirements do not usually raise restrictive covenant issues. Physician practice owners should not pay medical practice buyouts to physicians who leave or retire only to set up competing practices. This issue must be specifically covered in the transition documents.
- Real estate. Medical practices that lease offices from third parties may not be confronted with this issue. However, real estate investment is often a 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 medical practice, then a buyout provision in the transition plan should be included. If not, then the remaining physicians must be prepared to deal with the real estate owners as independent third-party owners.
Are You Ready To Transition Your Medical Practice
Are you considering selling your medical practice in the next 3-5 years? Or perhaps, you want to transition in the next 12 months. Are you in the market to acquire additional medical practices? Learn ways to optimize your efforts. Tinsley Medical Practice Brokers brings 39 years of medical practice financial planning and medical practice brokerage experience to the table.
For a complimentary consultation, please call: 512-619-0643 or email: firstname.lastname@example.org
Tinsley Medical Practice Brokers provides U.S. nationwide medical practice brokerage medical practice appraisals, pre- and post-transaction consulting, physician practice performance consulting services and physician financial planning for sole physician practitioners, group physician practices and medical equity investor groups.