What to Consider Before Selling Your Practice

Maybe you’re considering joining the ranks of hundreds of other practice owners who’ve sought refuge by selling their practices? Be warned, however, that unless you are fully prepared for the changes to come, your escape plan could wind up being a big regret.

Becoming employed may seem like a logical decision for physicians at their wit’s end. Many doctors want out of their private practices, while hospitals — looking to expand their referral networks and competitive advantage — are eager to buy. It seems like a win-win situation.

Know this: After a hospital purchases your practice, it’s almost inevitable that your office will have a much different look and feel. It will no longer be a small business, but rather a piece of something much larger. That’s not necessarily a bad thing as long as you’re ready for it.

During the process it is very important that you keep your eye on the most important ball, your business – With the distractions created by information requests, meetings, and negotiations, it is easy to lose focus on the business while engaged in a sale process.  However, there is no more important time to keep the business strong and to drive toward increased productivity and profitability than when you have a potential buyer on the hook.  A trend of increasing revenue and profits, no matter how modest, makes a business more appealing to any buyer.

Asking and answering the following questions can help you achieve the future you’ve been planning.

1. What are your strategic goals? Buying up practices might be part of the hospital’s goal of participating in one of numerous health reform initiatives, such as the accountable care organizations. Or the hospital may be setting into motion some long-term growth strategies. Knowing what role your practice will be expected to play gives you insight into the potential changes ahead, or what strategic initiatives you’ll be asked to take on to help the healthcare system meet its goals.

2. Is there anything ugly in the history of the corporation you are uncomfortable with? Identify any potential issues early – Most issues can be overcome if a buyer and seller are willing to work together to find a win-win for all parties involved.  If there are any skeletons in the closet or other matters which may complicate the transaction, it is best to identify them early in the process so that you and the buyer may have as much time as possible to sort them out.  Eleventh hour surprises are never good for a transaction.  Having a good team, including your accountant and lawyer, and avoiding a bad one, will be critical to a successful transaction… Don’t hire a general practitioner when you need a specialist.  Retain an accountant and an attorney who has expertise in transaction law and in mergers and acquisitions negotiation.  Working with seasoned transaction professionals is the best way to ensure that all of your bases are covered and that your interest remains at the forefront of the negotiations.  We recognize that good advisors will cost money.  However, keep in mind that a seller’s legal and accounting fees are often more than offset by improved deal terms and the benefits of an expeditious process.

3. How much authority will I retain? Many hospitals have learned post-acquisition that running an ambulatory practice is much different from running a hospital — and they aren’t very good at it. That means some hospitals may want you to continue managing the day-to-day operations of the practice, even though you’re ready to relinquish that responsibility. Conversely, some hospitals may place someone without any ambulatory experience in charge of operations. Therefore, before any paperwork is signed, you need to have a frank discussion about this and establish a post-acquisition management strategy.

4. How will staffing change? The hospital may have plans to use your existing ambulatory practice to recruit new physicians. If so, your solo practice may soon become a 10-physician, multi-specialty practice. It’s also likely that some of your support staff positions may be eliminated to prevent duplication. Will the buyer try to place your former employees in new jobs within the hospital system? What authority will you have to hire and fire staff after the sale is finalized?

5.  What is the realistic value of my practice? Practice values are typically comprised of three categories: tangible assets (real estate, office equipment, furniture), accounts receivable (all revenue owed to the practice at the time of the sale) and goodwill (practice reputation, trained staff, established patient base, revenue potential). While determining the amount of the first two items is a pretty straightforward process, physicians tend to overestimate the value of goodwill. It’s also a concept that is falling out of favor for a variety of reasons, including the Stark regulation and anti-kickback laws. The selling price may not be the financial windfall you’re banking on to build a secure retirement.

6. How will I be compensated  and what would be the terms of the employment agreement? As a way of causing the least amount of disruption to patients, the purchasing hospital may want you to continue working at the practice for one to three years post-acquisition. This may be a problem if you plan to retire before then. The recent rise of performance-based payment models means that physician compensation is often based on a variety of methods, including salary, cost sharing and outcomes. Some physicians may find themselves making less income as a hospital employee.  The hospital may also want you to sign a non-compete agreement, preventing you from either seeking employment at a competing health system or returning to private practice — and taking your patients with you.

7. Do you have any leases which may need to be assigned?  Property leases are among the most important contracts requiring assignments in any sale, because the buyer cannot operate the business without the proper right to occupy the space. In asset purchase transactions, most buyers will not assume major liabilities of the businesses they are acquiring including equipment leases.  When estimating your net proceeds from a potential sale, you should consider carefully all of your outstanding liabilities and how much it will cost to pay them off at closing.

Unlike payer or vendor contracts that can be canceled after a year if things aren’t working out, acquisition agreements cannot be undone once they’re finalized. So the stakes are very high for you to completely understand every aspect of the contract. You should seek the help of a consultant or lawyer who has physician practice acquisition experience.

Kristina Drzal Houghton, CPA, MST is a partner with Meyers Brothers Kalicka, and director of our firm’s Taxation Division.