Selling a Practice

The sale of a practice is typically the sale of the legal entity of the practice. A solo provider who owns 100% of ABC Practice, Ltd. would sell their practice by selling their interest in ABC Practice, Ltd., which would allow the new owner of the entity to appoint officers, take control of bank accounts, etc. The sale agreement would in all likelihood include the fictitious firm names, trademarks, service marks, etc. for the practice entity, so if ABC Practice, Ltd did business as Great Health Medical, the new owners would gain control of the rights to Great Health Medical.

Providers looking to sell a practice need to be able to answer one key question: Why does my practice have value–without me? The answer is a big step to determining what value the practice might have in a sale. Here are some tangibles and intangibles that can factor into the value of a practice:

Assets

Perhaps the easiest part of practice valuation is calculating the value of tangible assets. How much money does the practice have in the bank? What is the value of any furniture, exam tables, equipment and supplies owned by the practice? There are different approaches to valuing tangible assets, but different valuation approaches can provide a range of value for the assets. It may cost X to replace the exam tables, but the exam tables would sell for Y. Parties can agree on an value that takes into account both of these numbers.

Practice location and competition

A practice that is located in a desirable area with significant barriers to entry and little competition is going to have more value than a practice in a market where new practices can easily establish. A practice that has captured a significant share of the market is also more desirable than a practice that lacks market share. If the practice is in an open market without significant market share, the practice location is probably not going to add much value to a practice sale.

Practice facilities and cost

While practice location addresses the practice’s competitive position in a market, practice facilities refer to the specific practice site and cost. If a practice has one of the largest medical offices in the market, this could add value. If, however, the large medical office has a long-term lease that is significantly higher than the market rate, the practice facilities may detract from the practice value. This is complicated by the fact that established independent practice owners may have an ownership interest in their practice site. Are providers looking to sell the site with the practice or continue a lease? And is that lease favorable or unfavorable for the practice? If providers have an ownership interest in their practice site, they may have more flexibility in getting value for their practice by negotiating lease factors such as term and rate in conjunction with the sale of the practice.

Contracted Services

Just like a favorable or unfavorable practice lease is going to impact the value of the practice, so will the terms of existing contracts. If the practice has entered into a number of unfavorable long-term contracts that the new owner will inherit, those liabilities will hurt the value of the practice. Practice buyers want to see reasonable contracts that are a good value and yet still offer flexibility. This is especially true of any non-owner provider agreements. If the practice has several employed providers, buyers will want the ability to keep the providers to support revenue and to jettison the providers if they aren’t a good fit. Owners who are willing to continue working at the practice gain flexibility in the value they can get for their practice. For example, an owner might accept a higher rate of compensation for three years in return for selling their practice.

Revenue

The king of all value is, of course, revenue. Practices that are losing money are more likely to close than be acquired in most circumstances. Buyers buy practices as an investment. They want to be able to project the return on that investment. Most buyers assume that they can increase revenue through operational improvements and heightened efficiencies, but they will want a healthy revenue stream that projects a profit after the cost of acquisition, (although this may take time). Providers who are not continuing to work at a practice need to look at how their compensation affects the buyer’s view of revenue. The practice will have to replace the provider to maintain the revenue they produced, so the owner’s compensation has to be considered. If a replacement provider would be available for a salary of $200,000, for example, and the owner’s compensation was $600,000, the buyer could factor that difference into the valuation of the practice.

Conclusion

Selling a practice can be a complicated process that could require a business broker, certified public accountant and attorney. Providers have to consider these costs against the potential profit from a sale, the amount of time that these advisers could save and the potential pitfalls of going it alone. Buyers will almost certainly have expertise in acquiring a practice and will push for terms favorable to them, such as unwind provisions, which can require the seller to repay the buyer if certain conditions are not met.

Providers should also make sure that any sale has contingency provisions for the buyer’s ongoing obligations and liabilities, as well as unforeseen circumstances. If a provider agrees to sell their practice entity for a nominal sum and as part of the sale enters into a related lucrative three-year employment agreement, what happens if the practice entity then fires the former owner provider after year one? What happens if the new entity decides to sell in year two? What happens if the new entity goes out of business in year three?

The basis of a practice sale is the transfer of the practice entity for cash consideration. This exchange can be as simple as selling a house, where the buyer conducts their due diligence and purchases the entity ”as is.” The nature of medical practice complicates this transaction, however, as a myriad if issues have to be addressed. Both buyer and seller need to beware and proceed with caution.