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A large number of physicians are facing retirement soon, yet few have a plan in place to transition out. Before selling your practice, take these steps to maximize its value.
Keith Borglum, CHBCA large number of physicians are facing retirement soon, yet few have a plan in place to transition out and maximize the value of their practice.
While many practice owners wonder how much their practice is worth, and some would like to maximize the financial value of the practice in order to sell it for the most money possible at exit. Most practices are built to create current income and lifestyle for the owner, and not to create “equity value” at sale. Equity is created by value above-and-beyond labor. Creating equity value requires specific strategies.
Buyers have multiple professional opportunities. They can take employment somewhere, start a practice, or buy a practice. Taking employment involves no risk to the buyer’s savings or equity position, because they merely work and receive pay. Starting a practice involves investing some cash or taking on the responsibility of a loan. When buying a practice, buyers want to get not only some return on investment (ROI), but also a return of the original capital. If there is no ROI above what employment pays, and no return of the original capital, there is no reason to invest. A prudent buyer would merely take employment and invest elsewhere.
Most physicians are compensated based on productivity (and with quality incentives and bonuses for some). The harder and faster you work, the more you get paid. But it is still only compensation for labor. Working 80 hours a week doesn’t create any more equity than working 40 hours a week. It merely increases labor and proportionate compensation.
To create equity value (and especially fiscal “goodwill” value), you need to create income that is not directly dependent on your personal labor and reimbursement. The technical term for this is dividends.
Dividends in medical practices are most commonly created by leveraging labor or ancillary services. You can leverage labor by employing other physicians, non-physician-providers (NPP), and billable support personnel, and profiting from their labor by paying them less than the cost of their labor plus related overhead.
Instead of working 80 hours per week yourself, if you can employ an NPP at $100,000 per year for 40 of those hours, instead of another physician at $200,000 per year, and get the same work-output from them, you have probably $70,000-plus dividends (after other expenses) from employing the NPP rather than the physician. Employ three NPPs, and you have generated more income without seeing the patients yourself. That’s leverage.
A potential buyer of your practice can see that owning your practice-with or without working in your stead-earns them $210,000 more than merely taking employment elsewhere. That $210,000 creates income and value. How much value is determined by appraisal or sale.
Other common sources of dividends are: in-house lab, imaging, pharmacy, product sales, facility fees, technical-components, and ambulatory surgery centers. Those leveraged components can create millions of dollars of value to a prospective buyer.
Keith Borglum, CHBC is a practice management consultant, appraiser, and broker in Santa Rosa, California. Send your financial questions to email@example.com.