Selling your medical practice in a buyer's market

Key Points

There's a new wave of practice sales, but, as many physician sellers are discovering, the rules of the game have changed.

Gone are the days when hospitals eager to control primary care gatekeepers were willing to offer big bucks to PCPs to acquire their practices. Now, hospitals and larger groups drive a harder bargain, offering little or nothing for goodwill and thinking twice before dangling a mega-income guarantee before a prospective physician seller and employee.

Today's buyers may not be spendthrifts, but many are eager to acquire primary care and even specialty practices-and not just as a hedge against health plans. Hospitals and larger groups are buying practices and employing physicians in order to achieve competitive advantage in their marketplace, says Marc D. Halley, president and CEO of The Halley Consulting Group, in Westerville, OH, and author of The Primary Care-Market Share Connection (Health Administration Press, 2007).

A good deal for the buyer doesn't necessarily mean a good deal for the seller, of course. But physicians who can't count on high sale prices can often find other ways to benefit. In a tough market, though, getting a good deal calls for careful planning-and knowing what you're looking for.

Sprucing up

Just as you'd paint the walls and clear up the clutter in a home you were about to put on the market, there are things you can do to make your practice more attractive to potential buyers. Unless your office suite is jam-packed or shabby and your equipment is on the verge of being outdated, however, the preparatory measures are likely to focus more on performance than cosmetics.

If your practice is underperforming and you're not in a rush to sell, take the time to turn things around. The key to doing that, says Halley, is to develop and follow a strategic plan-with the help of consultants, as needed. Depending on circumstances, this plan might include steps to boost physician productivity, gross collection ratios, cash flow, or the percentage of net revenue from ancillary testing and procedures. If necessary, it might also include steps to make certain internal processes more efficient, like pushing accounts receivable below a 40-day benchmark. Positive movement in these and related areas, says Halley, will enhance your bargaining position.

While a well-performing practice can forgo much, if not all, of the improvement process, a preparatory step no practice should forgo is the valuation. Here, too, you'll have more bargaining power if you have a good idea before you begin negotiating with potential buyers how much your practice is worth.

Appraising your practice

If you sell to a hospital, you'll almost certainly need to have an independent appraiser-or agree to one hired by the hospital itself-in order to identify the fair market value of your practice, something required by the federal Stark rules. But whether you sell to a big healthcare system, a large group, or an individual physician, this is a key step.

Besides going through your financial statements, tax returns, and related items, the appraiser will assign a dollar value both to tangible assets, like equipment, furniture, and office space, and intangible assets. Your biggest intangible asset, goodwill-the competitive advantage your practice enjoys in its marketplace-is especially difficult to assign a dollar value to. For one thing, patients are prone to switch providers as their health plans change. For another, goodwill varies widely by specialty and location.

Despite this, there are tools to assist individual sellers and appraisers in assessing goodwill. One is The Health Care Group's "Goodwill Registry," a database, organized by specialty and location, of what buyers have paid for this intangible asset over the previous 12 months. (For more information, go to http://thehealthcaregroup.com/products.aspx.)

An alternative, or perhaps supplemental, method for gauging goodwill is something called "excess earnings," and can only be done after you've identified a buyer. "If the buyer can work for Kaiser Permanente and make $250,000 a year, it's going to be pretty hard for the seller of a practice making that same amount to get anything more than a nominal amount for goodwill," says Brent Thomas, a partner in Capital Performance Advisors, a CPA firm in Walnut Creek, CA. "But if the most that buyer can earn in his specialty as an employee is $250,000, and you're selling a practice making twice that amount, then you probably have goodwill to sell."