The first key step to purchasing a medical practice: will the purchase be an asset or a stock purchase. The other two? Read on...
If you’re contemplating buying or selling a medical practice, there are many considerations—especially on the purchasing side of the ledger. But one of the important myths to eliminate from the equation is the purchase of a medical practice as a form of investment—at least not in the traditional sense.
As Alan Hill, CPA, director of medical services for the Ohio-based accounting firm of Rea & Associates, explains, it’s not like buying a stock that’s going to appreciate.
“I think eventually you’re going to sell [the medical practice] for more than you paid for it, because you’re going to be in it for a long time,” Hill explains. “But bottom line, you’re going to get out of it what you put into it. It’s really an investment in yourself.”
Okay, so what do you need to consider when buying a medical practice?
Three prime considerations
Matt Zifrony is a director with the Ft. Lauderdale, Florida-based law firm of Tripp Scott. He says there are three key steps to purchasing a medical practice. The first is a complete review of the revenues and expenses of the existing practice, including tax returns and market trends. That step, he says, is often done without the assistance of an attorney.
“It’s like buying any other small business. You’re going to do your own due diligence to decide whether or not it’s a good deal,” Zifrony explains. “And if it is a good deal, how much is it worth? Assuming you then want to proceed, that’s where the attorneys get involved.”
The next step is to decide whether the purchase is going to be an asset purchase or a stock purchase—and there are pros and cons to each approach. If you purchase the assets, then you’re not buying the liabilities of the practice—the potential malpractice claims—because you’re not liable for anything that happened before you bought the practice.
In comparison, if you structure the sale as a stock purchase, the upside is that there’s no need to obtain licenses because the company is essentially staying the same. However, the buyer does inherit the liability issues.
Lastly, there are regulatory issues to consider.
“If the buyer is an individual or a company that consists entirely of doctors, there’s more flexibility in complying with regulatory requirements,” says Zifrony, explaining that many states will not allow an entity that is not entirely owned by doctors to own a medical practice. “Regulatory compliance can then be much trickier,” and could dictate whether the sale is structured as an asset purchase or stock purchase.
Hill says that in today’s economy, more often than not it’s the larger hospitals or large medical groups that are buying up physician practices. Where individual physicians are concerned, they tend to be purchasing a share of a practice where they’re coming in as a partner, or possibly taking over a practice from a retiring physician. In either of the latter two situations, there are key considerations of the practice you’re buying into.
“Where are the referrals for that practice coming from?” Hill asks, rhetorically. “Especially from the specialist side, you need to make sure that you have set up that referral base. On the primary care side, you usually want to work with the physician you’re buying the practice from for a period of time. It’s not a turnkey, here’s your check and you walk away kind of thing. You want to make sure the physician stays in the practice for a while and helps you perpetuate the practice.”
If you’re selling a practice, Hill suggests cleaning up receivables and making sure that records are in good order so that you can make a good presentation as to the value of the practice. It’s also a good idea to have an accountant do an evaluation of the practice to determine its true value. And, as with most real estate transactions, location is of prime importance.
“If you’re in or near a large metropolitan area and you’re looking to some day get bought out, there’s a good possibility you can sell to a hospital,” Hill says. “Most of what we’re seeing is that the larger hospitals in the Cleveland area are still buying practices. So, if you want to be an entrepreneur, then one day just drop the practice and not have to worry about bringing in an associate, a hospital could be a good buyer for you.”
And Hill, who says he has always been a proponent of physicians owning their own practice, is glad to see that there’s still a good portion of physician entrepreneurs who want to be independent and make their own decisions. “[The medical practice] is still a good investment when you think of investing in yourself.”