Considerations for Selling a Practice
Aug 30, 2013 | Taska Parker, CPA
In the wake of concerns over the uncertainty of Obamacare, the requirement for medical practices to convert to electronic health record systems by 2015 and the cuts in reimbursement coverage, a number of physicians have evaluated their situation and determined that it is better to sell or merge their practice.
Once the decision is made the question becomes, “Now what?” How do you go about selling your practice?
Years ago when hospitals were buying practices to gain access to more patients, physicians were in the driver seat. Currently, with the Stark and Anti-Kickback laws in place, there is less negotiating maneuverability. With the anti-kickback laws, along with an increase in doctors interested in selling their practices, physicians are at even less of an advantage.
Still, there are things you can do to improve your position, especially if selling to another doctor or group practice. Keeping in mind that “failing to plan is planning to fail,” first make sure your practice is sale ready.
Rather than rushing into the sale, taking some time to prepare by following the steps below will help smooth out the sale process.
A lean, clean practice
First, running a lean and clean practice simply helps the sale process proceed smoothly. Whether selling to a hospital, another physician or practice group, it is critical that you assure your books are always clean and clearly reflect the practice’s current financial status.
One example: Remove all expenses or debts that are personal in nature. Buyers quickly become leery of a business when they see a number of personal expenses such as country club dues or personal loans to or from the business.
Additionally, a practice should make every effort to decrease accounts receivable (AR) days and ensure their managed contracts are current. Even a seemingly highly sought after practice such as cardiology or neurology can find they are receiving a lower than expected sale price offer if they are not collecting copays or decreasing AR days, and their books consequently show a low percentage of billing revenue.
It is also advised that you remove nonessential items from the balance sheet. Items such as obsolete inventory, bad debts and idle or non-operating assets are prime examples of clutter that can unsettle a potential buyer. Since many valuations for physician’s practices are asset based, it may be tempting to leave idle assets on the books or not perform an inventory and not remove assets you no longer own. However, typically purchasers will perform their own due diligence valuations, quickly becoming unnerved if discovering a large number of assets on the books that cannot be located.
Most purchasers prefer, or even require, financials prepared by a CPA. As such, working with your current CPA to have clean financials prepared on a regular basis will go a long way towards expediting a successful sale process.
Low risk = high value
Second, lower risk equals higher value and is more attractive to the buyer in the sale process. Reviewing insurance policies on a regular basis ensures the proper policy type and coverage, can lower risk, and provides reassurance to a potential buyer. Further, a physician’s practice earnings appear more secure when all leases, licenses and contracts (especially employment contracts) are kept current.
Along with the review of employment contracts, evaluate whether you have the proper staff for the practice size. As a result of the complexities caused by billing, many physicians’ practices underutilize their employees. There is always an increase in risk and increase in expenses involved when firing or laying off people. Faced with this possibility a buyer may quickly become concerned. Being prepared to adequately describe each employee’s responsibility within the practice provides strong reassurance to a buyer.
When to sell
Lastly, determine the best time to sell. For example, if your desire is to avoid selling to a hospital, but prefer selling to a larger medical group or to a new physician, then plan to be with the practice for a few years after the sale. In some cases when bringing in a new doctor they may prefer a period of 12 to 18 months, allowing patients time to transition. In these cases it is also wise to have an agreement in place regarding your involvement and how you will transition out of the practice in conjunction with the sale. Establishing a written agreement early on reduces headaches and expenses when you are ready to retire.
Whether you are considering retirement, concerned about decreasing reimbursement rates or simply the fear of the unknown, the sale process often seems like a daunting task. However, advanced planning and due diligence with your practice pays dividends in the long run.
Taska Parker, CPA, is Senior Tax Manager at Biegler & Associates. To contact Taska for more information about Biegler & Associates services please email her at firstname.lastname@example.org or call (804) 855-1200.
Biegler & Associates, is a proud member of the National CPA Health Care Advisors Association (HCAA). HCAA is a nationwide network of CPA firms devoted to serving the health care industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information, contact HCAA at info@HCAA.com.