Preparing to Sell

Think of preparing to sell a practice like preparing to sell a house. People know that to maximize value, houses have to be desirable. While there are some aspects of a house that can’t be easily improved, (such as location and lot size), there are a number of preparations that a seller can take to improve the value of their house, such as cleaning out the clutter, painting rooms neutral colors and staging furniture and decorations. The idea is to show buyers not what the house is for the current owner, but what the house can be for buyers.

Providers should approach preparing a practice sale in the same manner, with the caveat that the best improvements are not always visual. Visual improvements may be necessary, but the best improvements are those relate to practice efficiency. Repainting the exam rooms of an inefficient practice is going to do little to raise the practice value. Here are some suggestions to where providers may find improved efficiencies to improve the chances of selling their practice.

Staffing

Staffing is often one of the biggest expenses for a practice, so it makes sense that it is one of the target areas for increasing efficiency. In small practices, staffing may be approached with a “if it’s not broke why fix it” attitude, because staffing can be a challenge. When finding good staff is difficult, there is a tendency to only address significant problems and let optimizing staff efficiency slide. Providers preparing to sell should remember that staffing efficiency is going to be addressed sooner or later–but the provider won’t benefit from the buyer improving staffing efficiency.

A good place to start with optimizing staffing efficiency by looking at the roles and responsibilities of each position to see where improvements can be made. An “R&R chart” lists each actor or position and the actions performed in the office. A good starting point is to have each staff member log each unique action they take during the course of business, (checking in patients, processing referrals, rooming patients, etc.), to use on the R&R chart. Putting all of this information in one chart can identify where improvements might be made. If every medical assistant, for example, is processing referrals throughout the day, it may be more efficient to set aside time to have one medical assistant process all referrals at the end of the day. Read more on Roles and Responsibilities Charts here.

Improving staffing efficiency also means making sure that staff is appropriately compensated. If some positions are paid significantly more than market rate, that needs to be addressed. This doesn’t necessarily mean that staff should be replaced or have their compensation reduced. Another option is to ask employees who are being paid above market value to accept more responsibility to justify that compensation. Staff who are undercompensated also need to be addressed. If a provider’s significant other is contributing their time for little or no compensation, buyers are going to take that into consideration when projecting expenses. Paying undercompensated staff market rate provides a better reflection of the practice’s performance.

Revenue Streams

Small practices may not attribute revenue to different sources, but identifying revenue streams–and the associated costs–is an important step in maximizing practice efficiency. Providers should consider both how revenue is collected and why revenue is collected. The front desk, for example, collects copays for office visits. Payments from insurance companies share the “why,” but are a different “how.” Desk copayments may then be a revenue stream to track separately from insurance payments and payments on account by patients. Each of these revenue streams can have problems, which means that each revenue stream needs to be addressed to maximize efficiency. Different “why” payments represent the more traditional view towards revenue streams. The practice makes money by 1) Seeing patients for insurance care, 2) Selling supplements and, 3) Provider speaking engagements. Providers are often cognizant that each of these activities generates distinct revenue.

Once each meaningful revenue stream is identified, the provider needs to factor in to additional measurements: expenses and the opportunity cost. A provider may generate substantial revenue from speaking engagements, but they won’t know how efficient these speaking engagements are until they deduct any expenses from the revenue received and factor in the revenue that they could have generated if they weren’t speaking (the “opportunity cost”). A provider than generates $5,000 a month in speaking fees may be spending $1,000 a month on marketing their speaker services. They may also be missing $3,000 in monthly revenue by spending several clinic days to prepare and give talks.

Knowing these numbers helps providers negotiate with buyers. Buyers probably won’t want to recognize the $5,000 in monthly revenue for speaking fees, but an informed provider would point out that eliminating the speaker service would save $1,000 in expenses and that $3,000 in clinic revenue would be realized if the provider were in clinic, which means that eliminating the speaker service would lower practice net revenue by only $1,000 instead of $5,000. As practice valuations can be calculated using “multipliers” (such as “two-times” or “three-times” annual revenue), these seemingly small differences can have a significant impact on valuation.

Expenses

Expenses are another seemingly small factor that can have a big impact on valuation. Providers who are considering selling need to conduct a thorough review of vendor contracts for 1) Contracted rates, 2) Term and Termination provisions, and 3) Assignability. Having favorable rates will improve the practice’s financial performance and projections, but the most favorable rates may come with a longer term. As buyers may have preferred vendors that they plan to utilize at the practice to improve efficiency and/or decrease expenses, entering into a longer term for a favorable rate may actually hurt the practice’s valuation. Providers who are considering selling should balance favorable rates versus terms and avoid any vendor agreements with multi-year commitments.

Conclusion

When considering what else might improve the practice valuation, providers should realize that everything will impact valuation. It will help to have fresh paint, updated equipment and a working coffee pot in the break room. Some improvements won’t be worth the time, energy or investment, however, so the provider must prioritize which improvements will yield the biggest returns. Staffing, revenue streams and expenses are a good place to start, but having a consultant or colleagues walk through your office with a critical eye might be helpful to address any glaring issues that might detract from the value a buyer would pay for the practice.