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What to consider if your private practice is an acquisition target

Article

Physicians need to conduct a careful analysis of multiple factors before considering an acquisition by a health system or other buyer.

Michael Joyce, CFA, CFP® - Agili

Michael Joyce, CFA, CFP®
Agili

Physicians in the United States are now just as likely to work as an employee of a health system or for another employer as they are to be in a private practice. This marked shift was noted in the American Medical Association’s (AMA’s) 2020 Physician Practice Benchmark Survey, which was released in October 2022. This was the first time that the AMA reported that less than half of the physicians in its membership worked for private practices (those wholly owned by physicians). Back in 2012, 60% of the physicians participating in the AMA survey worked for private practices but by 2020, that number was down to 49.1%.

If this trend continues, and more private practices become acquisition targets of hospitals and health systems, partners in private practices would do well to carefully consider the following features of a potential acquiring hospital or health system: a) financial viability of the acquirer, b) productivity expectations after the acquisition, and c) benefits package offered. Additionally, an acquisition target would want to employ counsel to oversee legal analysis of the deal and agreements.

Let’s take a deeper look at these considerations and why they matter.

Financial viability of the acquirer

When selling a private practice, or almost anything, it is always more preferable to bank on what’s known now and get paid as quickly as possible. Being paid in one lump sum (or where the vast majority of the consideration is paid up front) is a far safer bet than being paid over a number of years – when the future of the acquiring entity’s management and finances can’t be guaranteed.

If this ideal scenario is not an option, it is imperative that partners in a private practice do their due diligence to fully comprehend the financial viability of the purchaser. Of course, getting input from a trusted financial advisor is recommended for this analysis. If the buyer is paying over time, or if there’s some type of escrow or earn-out, it’s important to know if the hospital system can make future payments. Before agreeing to a purchase, a private practice must know, for example, how much debt the hospital or health system has.

Productivity expectations after acquisition

Partners in a private practice targeted for acquisition should also have a full understanding of what’s going to be expected of them from a productivity standpoint after the acquisition and how that will impact compensation. What are the breakpoints for relative value units (RVUs)? If a physician fails to hit the RVU target for the year, what will their compensation look like for the subsequent year? The purchasing hospital or health system may have higher productivity expectations than a private practice and it is important to understand this ahead of time.

Benefits package

Yes, hospitals and health systems often offer 401(k) or 403(b) matching, but it’s possible the earning potential of the plan is not as strong as a private practice’s existing profit-sharing plan or cash balance plan (for partners, in particular). Be sure to go into a deal with eyes wide open.

A common perk for doctors employed by hospitals are nonqualified deferred compensation plans. Doctors should understand that in order to qualify for current deferral of taxable income, the plan funds must have “substantial risk of forfeiture” – which means that the funds are subject to the claims of creditors. This risk can be somewhat mitigated if the deferred compensation plan is set up as a so-called “rabbi trust” (i.e., a trust that supports the nonqualified benefit obligations of, in this case, hospitals or health systems to their employees). So, this makes it all the more important for private practices to understand the purchasing entity’s financial status ahead of a possible purchase.

Legal analysis

And finally, it will be crucial to employ a skilled attorney (or attorneys) to review any agreements (i.e., noncompete, nonsolicitation, nondisclosure agreements) before a purchase. In theory, a physician can be compensated for signing a noncompete. In addition, some states limit the legality of certain provisions of a noncompete agreement. Also, depending upon how the private practice is structured (i.e., LLC, S-Corp), a good tax attorney can make recommendations to mitigate taxes owed. And if the hospital or health system requires that new employees sign an employee agreement, it is best to have an employee attorney review it ahead of a purchase.

Partners in private practices that are current acquisition targets or may become acquisition targets should carefully review these four key considerations early. A clear strategy to address these issues will help to ensure that an acquisition is as beneficial as possible for those partners who have built, expanded, and sustained the practice.

Michael Joyce, CFA, CFP®, is founder and president of Agili in Richmond, Virginia, and Bethlehem, Pennsylvania, responsible for overall invest­ment strategy, management of investment portfo­lios and financial planning services. He can be reached at MJoyce@AgiliPersonalCFO.com.

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