The market for buying and/or selling medical practices is extremely active right now. But that doesnâ€™t mean every deal is a good one.
The market for buying and/or selling medical practices is extremely active right now. But that doesn’t mean every deal is a good one, and formulas for successful sales or purchases are not “one size fits all.” It’s critical to avoid key mistakes when engaging in this process.
John Fanburg, managing director and chair of the health law practice at Brach Eichler, one of New Jersey’s largest full service law firms, says there are five different approaches or options physicians can take when entering the medical practice marketplace.
“The overriding approach is you need to be part of a larger group, especially if you’re a practice with fewer than five doctors,” Fanburg explains. “With the cost associated with providing services today, you need to have a larger base to share that type of expense.”
But that’s not the only road you can take.
Option one, Fanburg says, is to simply grow your practice, expanding it organically by hiring more people or merging with similarly sized groups. Option two is to join or affiliate with one of the larger multi-specialty groups in your area, or affiliate with a different type of group (option three).
“Option four which seems to be very popular is selling to a hospital,” Fanburg says. “I believe that last option is probably not in the best interests of the physician group from a long-term strategic approach.”
Fanburg explains that typically hospital contracts that medical practices may enter into are not long-term agreements. They generally last for three or four years, and that can become problematic given the administrative turnover that occurs at the leadership level.
“The strategic plan of the people who brought you in may not be there two or three years from now,” Fanburg says. “So what may seem like a very good deal today may not be such a good deal in several years.”
Fanburg says he’s seen hospitals struggle to manage physician practices. Hospital leadership may be good at running hospitals and outpatient centers, but they struggle when it comes to running a medical practice efficiently and effectively.
Fanburg says that emotions are always in play when it comes to buying or selling a medical practice. It’s normal, understandable and appropriate. His role, therefore, is to help set realistic expectations so that emotions don’t take over the strategy that has been put in motion.
“I think typically physicians as they go through this process, and it is a process, will get to the point where they understand that what is the big picture here,” he says. “What are we trying to accomplish? What is the path to achieving that goal? It requires counseling, and being very transparent in terms of what goal we’re trying to achieve.”
And that goal can vary. For example, Fanburg explains that the hospital transaction environment is much different from the physician-to-physician selling environment. Hospitals are much more heavily regulated, and must acquire a fair-market assessment as to what the medical practice is worth.
In the physician-to-physician environment, however, there are fewer constraints.
“If you’re the seller, you want to sell your practice for the highest multiple you can get,” Fanburg says. “If you’re the buyer you want to convince the physician that you are not necessarily buying the practice per se, but joining a bigger group which will enable them to earn more money, have more job security, and have more job satisfaction by being with the group.”
Preparation is Key
Fanburg says that if you’re considering selling your medical practice, it’s essential you prepare for the negotiation. That means talking to your financial advisor and doing a reality check.
“It’s 2016,” he explains. “If someone asked me what he could get for his practice, my first question would be, let me see your 2015 numbers. Are they higher or lower than 2014? And how do they compare with 2013? That’s the starting point. And if for some reason 2015 was bad, you need to come up with a reasonable and honest explanation of why 2016 will be back at 2014 levels.”
He also encourages physicians selling their practice to impose a restrictive covenant—a clause in a deed or lease that limits what the owner of the land or lease can do with the property. And, hope for the best but plan for the worst.
“If the relationship doesn’t work out with the hospital, what are you going to do?” he asks, rhetorically. “Are you going to set up practice again? There’s a huge investment associated with that. How are you going to get your assets or your medical records back? So focusing on what if the deal doesn’t work is critical in this very active consolidation market.”