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The Exit Strategy to Owning a Practice

Published April 23, 2021

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You’ve helped countless patients lead better, healthier lives. You’ve created a smooth-running operation staffed by a great team. You’ve achieved what you set out to do–you’ve built a successful practice. Now what? If you’re looking to retire or for a new challenge and are thinking of selling your practice, here are a few things to keep in mind.

Be prepared

Unlike opening a practice, which can take anywhere from three to twelve months, selling a practice can happen quite quickly. Your buyer might have been scouting for a practice to purchase for a while and might jump at the opportunity when you put yours up for sale. So, plan a year ahead and be ready to move fast, just in case. Also be aware that there may be many interested parties for your practice. Or none. It will depend on your specialty, your competition, and a little luck.

Who are the buyers?

The buyer will depend on the nature of your practice. If it’s just you and your staff, the likeliest buyer would be another single doctor looking to set up shop on their own or a nearby hospital system looking to expand its patient roster. Note that in order to avoid running afoul of Stark’s law, hospitals are only able to pay fair market value for the assets of your practice. Anything higher could risk charges of “paying for referrals.” Private equity firms have also been making acquisitions in the healthcare space, but they tend to favor larger, multi-provider operations and medical facilities.

How to find a buyer?

In order to sell, you need to find a buyer. And that can be difficult. You need to exercise some discretion here to avoid scaring off your patients, as well as doctors who refer patients to you. Your potential buyer could be a colleague, a coworker, or an employee. If you want to explore this avenue, be sure to get anyone you speak with to sign a Non-Disclosure Agreement (NDA) – to avoid any gossip. You can also try using a broker who specializes in medical practice sales. Or you can try a targeted mailing campaign directed at likely demographics. There isn’t just one way to find a buyer. You’ll have to consider the different approaches and decide which one makes sense for you.

Don’t take your foot off the gas

If you’re selling because you’re preparing to retire, don’t slow down just yet. Healthy, growing practices are more attractive to buyers than stagnant or declining ones. So, don’t reduce your hours or your patient volumes. Any potential buyers will want to see evidence of a thriving operation that’ll be easy to take over and run themselves. There are a number of things you can do to optimize your operations and put your best foot forward.

Reduce costs

The easiest way to improve the financials of your practice is to reduce your expenses. Your main expense is likely payroll, so start there. Cut out overtime. And check the workload of your staff – is everyone needed full-time? Or can some positions be moved to part-time? Are there any other expenses that can be trimmed? Have you reviewed your vendor agreements recently? Ask them if there is room to reprice (while letting them know you’re reviewing your operations and are looking around for other suppliers).

Look at all of your expenses and see where you can make some cuts. A number of small cuts can add up to big savings.

Increase revenues

The easiest way to increase your revenues is to see more patients. If you don’t have any room to do that, make sure you’re collecting all the revenue you should be. Collect all copays and coinsurance. Review your accounts receivable and see what’s collectible and what isn’t – this is something you need to do anyway as any potential buyer will take a close look at your receivables because they’re an indicator of how efficiently your practice is run.

Check the numbers

Know what your practice is worth but don’t overvalue it. Try to look at it as if you were the purchaser – would you pay the price you’re asking? Many failed sales are the result of an asking price that was too high. Consult a practice valuation expert or run the numbers yourself.

Your practice can be valued a number of different ways: comparable sales, valuation multiples, assets, and discounted cash flow are the methods most often used. You can read more about them here. You should be familiar with how your practice is performing financially and have a good idea what the next few years will probably look like, so doing this analysis should be relatively straight forward for you.

Get pre-qualified

Unless the buyer of your practice is a hospital or a financial firm, they’ll likely need to take out a loan to buy it. The Small Business Administration (SBA) works with lenders to help borrowers access business loans of up to $5.5 million, but they require both the buyer and the seller to qualify for the loan. The buyer has to qualify, and the valuation of the business has to be justified – the business has to produce enough cash flow for the borrower to be able to make the loan payments.

You can approach lenders and get prequalified for an SBA loan. Doing so ahead of time will smooth the selling process – you don’t want to find a qualified buyer only to find out your practice doesn’t qualify. If you’re unable to get SBA approval, your asking price might be too high.

Another option is owner-financing, where you play the role of the bank and extend financing to the buyer. The buyer signs a promissory note and makes regular payments to you over a fixed period. Usually, the price of the practice will be amortized over a long period of time (say 30 years) and the buyer will make these regular payments to you. After a shorter period of time (say 10 years) the buyer pays you a final lump payment.

There are a number of advantages to this approach. By cutting out the middleman, you streamline the process, making it faster and easier to complete the sale. This can be useful if the buyer has less than pristine credit and is unable to get bank financing. You can also make more money this way as the total amount of payments to you will be higher over time than if you took a single large payment at the time of sale. And there can also be tax benefits to an owner-financed sale, with the seller having greater leverage to allocate the purchase price in a way that’s advantageous to them. When the buyer and seller agree on the allocation, the IRS generally respects the allocation, when reasonable. In addition, the payment stream from the buyer would be taxed at a lower tax rate than a large, lump sum payment would be because the seller will stay in a lower tax bracket than they would if they received a large influx of cash from the sale.

There are disadvantages as well, the biggest being that the buyer may be unable to make the payments and could default. Another disadvantage is that it will take many years for you to actually receive the sales price, potentially limiting your options on redeploying the money realized from the sale. Finally, make sure you understand the applicable laws in your State that govern sale financing. For example, each State has Usury laws that specify the maximum amount of annual interest you can charge on a loan.

Note: No matter which type financing you pursue, make sure you discuss it with your lawyer, accountant, and/or financial advisor.

Tax considerations

As touched on above, selling your practice has tax implications that you should consider beforehand. The allocation of the purchase price (stock sale vs. asset sale) and how your business is incorporated will affect the taxes you owe on the sale. Consult your accountant ahead of time and work through the different potential sale structures to figure out which one makes sense for you. Knowing this before you have a buyer in hand could help you avoid unanticipated problems or disagreements.

Document everything

If and when you’ve got a commitment to buy, get everything in writing. Be sure to consulate with your lawyer. Disagreements and misunderstandings can arise, and you can avoid serious issues if everything is well documented. Your final step should be a walk into the sunset, not a walk into court.

Prepare for the payday

Finally, it’s important to think about what you plan on doing with the money. Are you prepared to handle a large inflow of cash? Or what would you do with the payment stream from an owner-financed sale? Selling your practice is a major wealth event in your life. If you sell for a lump sum, you’re going to have a large amount of money that you need to put somewhere. Having an idea of where you might put it ahead of time will help make the process go smoothly and allow you to enjoy the fruits of your labor.

 

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