Review of Ophthalmology

Keys Steps to Prepare Your Practice for Sale

It's not quite the same as selling a house, but there are some valuable lessons from the process.

Michelle Stephenson, Contributing Editor
3/21/2011

If you’re thinking about retiring or relocating and want to sell your practice, experts say you should start planning at least 18 months in advance. The first steps are evaluating your financial situation and improving your practice’s curb appeal.

“You have to have your financial house in order, because lenders are going to look back at least three years on financials and buyers who look at a practice want to see at least three full years of financials,” says Brad Ruden, MBA, owner of MedPro Consulting and Marketing Services in Scottsdale. “So, you have to make sure that your financials are in order for at least three straight years, or any buyer is going to have a hard time using your financials to get a loan.”


Get Your Finances in Order 

The first step is to maximize your profits. Amy Galloway, a director at Tripp Scott, PA, a Ft. Lauderdale law firm, says one way to do this is to negotiate better reimbursement rates. “I sometimes refer my docs to a couple of consultants I use who will actually re-negotiate their managed care contracts so that they get more favorable rates, or I may try to bring in another payer so that the practice has a really good payer mix for managed care contracts,” she says. “These are things that really just improve the practice’s bottom line.”

According to Mr. Ruden, it is important to record all income. “In some practices, accounting procedures may be lax, and some cash may not make it on the books. The practice will be devalued if all the income isn’t recorded properly,” he explains.

Another way to maximize profits is to hold off on discretionary expenses. “You don’t want the practice falling apart, so you have to replace the things that need replacing, but buyers look at profits. Maximize profits, and control overhead as much as possible,” he adds.

Daniel Bernick, JD, MBA, agrees. “It probably doesn’t make a lot of sense to invest in EMR right before you are going to sell because the buyer may have his or her own desires in that regard and may not want to pay for it,” says Mr. Bernick, who is vice-president of the Health Care Group, located in Plymouth Meeting, Pa.

Possibly the most important way to maximize profits is to keep the practice running at full steam. If you are retiring, it may be tempting to stop doing surgery or to cut back on your hours; however, this could have a negative effect on the purchase price of your practice. “Nobody likes to see a declining revenue stream,” says Mr. Bernick. “Every buyer wants to look at a potential purchase and see either steady revenue or increasing revenue. If you see decline, then you may be discouraged from buying. Even though you know these trends can be reversed, it still causes alarm and alarm does not translate well into a buying decision.”


Work on Curb Appeal 
 
As in selling your house, first impressions matter, so be sure that all areas of your practice look fresh and updated. “A great practice that gives a bad first impression is a tough sell, so you have to make sure that the building you are in looks nice, that the practice space itself looks nice and isn’t overly outdated, and that the staff is dressed professionally and appropriately,” Mr. Ruden says. “It’s the same as buying a house. If a house is painted and looks good when you walk through it, you will be more apt to make an offer on it than if you see a lot of changes you will need to make.”

Mr. Bernick points out that even though a buyer knows that the paint has just been put on, it still has a psychological impact. “Buying something is an emotional decision, and, as such, you can be influenced by the appearance of things,” he says. “If the carpeting is worn, if the paint needs to be spruced up, or if the waiting room furniture looks old, it might be time to think about making some changes and investing some money, not a huge amount, in curb appeal and making the practice look nice.”


Seek Professional Help 
 
Still, despite the similarities, selling a practice is much more complicated than selling a house. “You will need professional help,” Mr. Bernick explains. “How many times have you sold a medical practice? The first time you do anything, you’re going to make a lot of mistakes. It’s not like buying or selling a house where there are lots of sales, the transactions are public, and you can see published prices. Practices are not like that. They are much fewer in number. In a given market, there may be no practices for sale. Consultants have perspective that you don’t have. I’ve never met a seller who didn’t think his practice was above average. The consultant may need to help the seller be realistic.”

First, you need an appraiser who is experienced at valuations, specifically of eye-care practices. “You are selling the tangible and intangible assets and the profit stream generated by the patient base,” Mr. Ruden says. “General business appraisers use databases where they can just run some multiples or do some market comps. Medicine is much more difficult, because it is the one industry that has third-party payers. In other businesses, it is the business, the customer and a cash transaction. A lot of general business appraisers don’t understand the nuances of third-party payers.”

Additionally, anyone can own and run a bowling alley or a restaurant. This is not the case with an ophthalmology practice.
“Ophthalmology does not interest the average business person to try to own and make money off of it,” he adds. “That limits the pool of potential buyers. In one sense, the high qualifications for owning a practice drive the value of a practice down because there are fewer buyers out there.”

Mr. Ruden notes that it is important for the appraiser to have substantial experience in eye-care practices and to be a member of one of the professional appraisal organizations: the Institute of Business Appraisers, the American Society of Appraisers, or the National Association of Certified Valuation Analysts.

According to Derek Preece, MBA, from the BSM Consulting Group in Orem, Utah, the intangibles of a practice are often called “goodwill,” which includes any value in the practice that can be transferred to a new owner and that is not included in the tangible assets. Patient flow, a well-known phone number, staff in place who are experienced in running the practice, and a known website are some of the elements of the intangible asset value of a practice. He notes that, over the past 10 years, the goodwill of a practice has been valued on average a little less than 30 percent of a practice’s annual collections. For example, if a practice generates $500,000 in revenue per year, the goodwill figure might approach $150,000 for that practice. “However, in a market where the practice being sold is the only ophthalmology practice, that average goodwill figure might not be high enough,” Mr. Preece says. “If you are the only ophthalmology practice, and patients have to drive 50 miles to get to the next ophthalmologist, clearly, more patients will stay with you than if you are in a market where there are 50 ophthalmologists within a five-mile radius, and where the average goodwill percentage might be too high.”

Mr. Bernick notes that one of the things done in a valuation is to normalize a practice’s income stream. For example, many “overhead” items for tax purposes are really physician compensation items. “Your W2 may not be representative of your true profits, and you want to make the profits look as high as possible to your buyer, so you need to explain if your auto is being run through the business or if you go to Hawaii every year for CME,” he says. “So, if you haven’t reduced the discretionary spending in your practice, you will need to add all of these items back in. For example, you may own the real estate, and you may be charging yourself a very high rent because there are certain tax advantages to doing that. If you’re paying excess rent to yourself, that makes the overhead look high.”

You also will need a specialist to sell your practice. “Business brokers sell businesses,” Mr. Ruden says. “The problem is that business brokers don’t understand medicine and how to market and find buyers. Someone who is experienced in selling ophthalmology practices will have a contact database full of people who are interested in purchasing a practice.” He cites two types of sales: asset sales and stock sales. The vast majority of sales are asset sales. This means that the buyer is not buying your corporation. He or she is starting his own corporation and is buying all of your assets and pulling them into the new corporation.

“To the outside world, everything looks the same—same practice name, location, and staff,” says Mr. Ruden. “But, in the legal world, it is actually a new business the day the purchase occurs because it is a new corporation. In a stock sale, someone buys the stock of your existing practice, so you have sold your corporation and all the things that go with it. The great majority of attorneys and accountants do not recommend a stock sale for liability reasons. In 20 years in this business, I have only seen two stock sales, and they were done at greatly reduced prices.”

Mr. Bernick adds that an attorney can help you with documentation and can help you decide what type of sale it is and other details, such as how much money will be paid up front, how much can be paid over time, and whether there is an employment arrangement for the seller. Some sellers may not be ready to completely retire and may want to continue working in the practice for a while. This can benefit the buyer, because patients will continue to come to the practice to see the selling doctor and can get to know the buying doctor.

“You want it so the buyer doesn’t have to invest a lot of energy and thought into how to make it work, because you’re telling him or her how it’s going to work and how he or she is going to do well. That’s the way to make a sale,” Mr. Bernick says.


Find a Buyer 

According to Mr. Preece, if your practice is in a desirable area, you may not need a broker. “If I had a practice in San Diego, I would probably advertise it on the Internet and in publications to see if I got any interested parties,” he says. “You can also approach other practices in your same market about buying your practice. That’s the first approach I recommend, especially to smaller solo practices. With the uncertainty about the Affordable Care Act and the concern that reimbursements may be decreasing in the future, practices see some safety in becoming larger because they can spread some expenses over more doctors and it becomes less of a burden for each doctor. Those practices are easier to sell to because they know you, they know your practice, they know the market, and they know the potential.”

There is also the buy-in/buy-out alternative. This requires bringing on an associate who will buy into your practice and then buy you out. “This generally takes longer than selling a practice, but you can potentially get a better purchase price by doing it that way than you can by trying to put it on the block and sell it all at once,” says Mr. Preece. “It’s a lot more work, and there are a lot of contingencies, so this may not be for everyone.”

Mr. Ruden advises to be ready to openly and honestly discuss why you are selling. You must also decide if and when to notify the staff. He says that it is always better if the staff is aware because they can help sell the practice and meet with potential new owners.

“Plus, the staff being aware means a buyer can tour the practice while it is in operation and meet the staff,” he says. “This creates a higher comfort level with the transaction, which can result in a full price being offered. If the staff is kept unaware of a possible sale, then a buyer can only visit during non-operating hours (unless a good cover story can be made to explain their visit to the staff and patients). Not being able to meet the staff or see the practice during business hours can lead to a lower offer being made.”

Once you decide to sell, it is  important to start preparing immediately. “Everything takes longer than you think it’s going to take,” according to Mr. Bernick.


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