At some point in a physician’s career in private medical practice, there likely will be an opportunity to sell the practice or merge with another physician group. With the health care environment changing, more physicians are considering sales or mergers.
Retirement is the number one reason for selling a medical practice, along with disability and practice security. Also, many physicians decide to sell when they tire of the stress of managing the business side of the practice. “Most people don’t understand what’s involved in running a practice,” says Mike Waters of Michael Waters, CPA in Cullman. “You can hire a good administrator, but the physician still has to deal with operating costs, declining reimbursements, and lawsuits by patients and disgruntled employees. It seems there’s always some kind of demon around the corner. At that point, selling to a hospital or another physician looks good.”
Gerry Kassouf of L. Paul Kassouf & Co. agrees that many physicians want to eliminate administrative duties. “Doctors enjoy the patient responsibilities of their practices, but in today’s world, with so many regulatory requirements, administrative duties deter from good patient care,” he says.
When a physician decides it is time to sell, it is important to maximize the value of the practice. “It’s like any other business,” Waters says. “You want to make the practice as efficient and attractive as possible. You should benchmark the practice against the best standards so you’ll be in a better position to sell.”
Kassouf says accounts receivables must be in good order and credit balances should be handled appropriately. “You also must get overhead in order. That’s the way the practice works,” he says. “In preparing for the sale, personnel must be appropriate for the level of the practice and for other services provided, like X-ray and ultrasound. Also, supplies and inventory should be appropriate and available for use and should be properly valued.”
The selling physician should also be prepared to disclose all pertinent financial information. “The seller must be as transparent as possible,” Waters says. “The seller also should expect a sale price that is lower than he or she thinks the practice is worth.”
When selling to a hospital, Waters says the seller must execute greater care with setting the sale price. “It must be true market value,” he says. “If the government thinks there is inducement to get a physician’s referrals, the physician will have a problem. A hospital won’t pay for the good will of the practice.”
Kassouf points out that if you sell to another physician with the intention that one doctor leaves the group and one comes in but four others stay, the biggest difficulty is deciding if there will be any inherent good will in the practice. “If a physician leaves due to retirement and another physician comes in, there’s no significant good will being purchased because the doctor turned the business over to someone,” he says.
Waters says the selling physician should have a good attorney and make sure that the sale documents state the transferable liability to the new owners so that if the new owners have problems with the business, they can’t come back and sue the selling physician.
A merger may be a more attractive option for some physicians who are looking for strength in numbers, economies of scale, and the ability to offer ancillary services to patients. With more physicians in a practice, they may have more negotiating leverage with insurers, payers, hospitals and suppliers. The combined groups also can reduce duplicative expenses by using their size as leverage. “The bigger the practice, the easier it is to absorb the fixed income component of the practice,” Kassouf says.
Preparing for a merger is much like preparing for a sale with a few subtle differences. “When you prepare for a merger, you must make sure the infrastructure, logistics, insurance and personnel are all coordinated between the two groups. You should look at who will govern and what the compensation arrangement will be,” Kassouf says. “Things like retirement plans and liability insurance differences must be sorted out before you get too far along in the process.”
Waters encourages multiple meetings of all of the physician owners prior to the merger. “Meet and share ideas through roundtable discussions and see how the merger will affect all involved before you do it,” he says. “You should go forward with as much information as possible.”
As part of the merger process, Kassouf suggests that the physicians’ families get together to evaluate compatibility. “Spouses of the doctors need to meet the other parties, because if a spouse doesn’t concur with the decision, there won’t be a good result,” he says. “You want everybody involved to be on board.”
