Polish Your Nest Egg: Sell Your Practice

Physician's Money Digest, January15 2004, Volume 11, Issue 1

When it's time to retire and sell their practice, most physicians want to believe that their life's work will bring in a fair return on their investment. Unfortunately, this isn't always the case. "Physicians usually have no idea what their practice is worth," explains Michael Solomon, MD, a Millburn, NJ–based internist. "Most are disappointed when they find out. It can be very devastating and demoralizing. What should be an exciting and fulfilling time in their life becomes a time of frustration and anxiety."

Physician's Money Digest

As a sideline business, Dr. Solomon helps physicians evaluate the worth of their practice when it's time to sell. Here's what he told about determining market value.

Why did you start part-time consulting on the side?

My father was a stockbroker. The management of money was something that was always discussed in my family —if not always put into practice. So I have a background in financial matters. In 1981, when I went to buy my own practice, I found that there were no medical consultants in the field. It was very frustrating. There was no real knowledge base to draw from. And, of course, it's taboo in medicine to discuss money, so my medical colleagues weren't much help. At the time you could only go to lawyers or accountants. Accountants do have a sort of "book value" formula, but it's not very accurate for real-world medicine.

What are the key areas to look at when evaluating a practice for sale?

There are several factors to consider: • Good will—Medical practices are unique among all other businesses. They're not like Dunkin' Donuts, where the value of the business is immediately transferable. Instead, the value of the business is in the "good will" of the practice, which makes it much harder to sell. But there are certain things a physician can do to make the transfer of good will (or the retainment of patients) easier and bring more value to the practice. I recommend that a physician send out a detailed letter of transition to their patients. Ideally, a physician should bring in the buyer as an associate and agree to stay on for 6 months. In this way, a physician is transferring the practice rather than selling it.

• Payer mix—The payer mix is another factor that should be considered when evaluating a practice. Physicians need to recognize that HMO patients are not "worth" as much as private patients in terms of retainment. A patient who has to select their physician from a predetermined list is not as loyal as a patient who doesn't have to select their physician from a list. Yet today, the average payer mix is more than 60% HMO. Also, there is no guarantee that the new physician will be credentialed by the HMO. It's more complex for specialists, whose "value" is determined by what or who makes the referral.

Yellow Pages

There are only four sources of patient referrals: another patient, another doctor, the health insurance network, and self-referral via the or advertisements. The good news is that a doctor has a degree of control over the last three patient referral sources, which relate directly to the value of the practice. When it comes to HMO referrals, physicians often feel that they're not being paid enough, but they don't look into the actual financial data. For example, if a physician determined that their bill for each HMO patient was $5 less than the average fee, than they're actually losing money on these visits. Too often, a physician would rather keep a full schedule than cut patients for costefficiency purposes. In the end, they're working harder for less money.

• Office assets—I ask all physicians for a detailed inventory of their office assets. This includes physical equipment, such as lights, tables, medical equipment, and consumable supplies. I also find out how much it would cost to replace each item. Finding out the replacement cost takes a lot of work and time; naturally, the office staff is usually reluctant. Each item is appraised differently. For example, a $10 box of syringes is worth $10. However, electronics, such as a computer, are depreciated. In some cases the depreciated value is not the actual worth. When buyers tell me that an office desk is so old it's not worth anything, I point out that if the old desk didn't exist the buyer would have to purchase a desk at today's prices.

At what age do you find most physicians want to retire?

I've found that most doctors retire way too late, when the bloom is off the rose. They usually want to stop practicing and retire at around age 70.

How many years before retirement should physicians start thinking about selling their practice?

There are a variety of things a physician must do about a year or so before they sell their practice. As mentioned earlier, they should create a detailed inventory of assets. In addition, they should work on accounts receivable and update their patient list, making sure it's accurate. They should also determine how much money they're making and from what sources. And of course, they must get firm control of their overhead.

What other hurdles do physicians face when selling their practice?

When I ask to see corporate tax returns for the past 3 years, most physicians take a deep breath. They have a lofty idea of what their business is worth, but they don't want to part with such personal information. In some cases, primary care physicians are embarrassed that they make so little. However, these physicians think that their practices are worth more than they're really worth. Unlike other businesses, doctors don't do yearly inventories of their assets. As a result, they usually don't have the information they need to determine what their business is worth. I had one physician who nearly cried.

Should physicians be aware of any possible pitfalls?

First, make sure you find a buyer, or an associate, who has the assets to afford the purchase. You don't want the buyer to default on a loan because they're still in debt from medical school expenses. Also, both the buyer and the seller should sign a covenant not to compete. The buyer then knows that the seller won't take the money and purchase property across the street, opening a brand new practice. Equally, the seller can be assured that the buyer (especially if they're an associate with access to records) won't take the patient list and move across the street. As unlikely as this scenario sounds, this sort of thing does happen. It can get very nasty. Additionally, sellers should warranty that their patient list is accurate, their practice earnings are accurate, and that they actually own the equipment. Building ownership should also be made clear.

How do you determine actual price of a medical practice?

At a minimum, the price should be the practice's net income for the last year. That's a good starting point.

How long does it usually take to sell a business?

The buyers are out there. It usually only takes about 3 to 6 months. Don't advertise until you're armed with a detailed analysis of the business and its worth. It works to your benefit to know the financial details of your practice. Be aware, during negotiations buyers will try to shoot holes in the price.

How do business partners change the dynamic of a sale?

If you're in a partnership, you'll go through the same process when you sell. The appraisal should be done the same way, even if a partner is only buying out your half.

Can you offer Physician's Money Digest readers any additional advice?

Physicians need to be honest with themselves. They need to look at their practice with a critical eye. If they do, they can get a reasonable return on their investment. There are no shortcuts. Doctors must be willing to do the work. It's a life phase. As with anything worth accomplishing in life, you have to put effort into it.