When considering selling your medical practice, take some time to prepare. You want the sale of your medical practice to be appealing to the buyer(s). Follow these suggestions to maximize the selling price of your practice.
Practice values are typically comprised of three categories:
1. Tangible assets: Real estate, office equipment, and furniture
2. Accounts receivable: All revenue owed to the practice at the time of the sale
3. Goodwill: Practice reputation, trained staff, established patient base, revenue potential
Here are some things to consider to maximize the value of your practice.
Patient Retention is Key
Be willing to stay on for 6-24 months after closing to minimize attrition (loss of patient base). This will work to your advantage if you are working toward an earn-out. Remember, the higher the risk on the acquisition, the lower the value. Minimize risk by sticking around during the transition and helping the patient feel comfortable with the changes while providing continuity of care.
Know Your Timing
The best time to sell is when your practice is doing its best; not when it’s underperforming and you’re tired of trying to keep it afloat. Recognize the difference between actual value and potential value. Just because your practice may have the potential to tap into new markets and increase revenue doesn’t mean the buyer is going to pay you the associated value.
Financials are important
If you’re not already, then familiarize yourself with the financials of your practice. Normalize your financial reports. If you’re a full-time physician who has been paying yourself $50k/year; realize when the buyer reviews payroll expenses, they will adjust that cost in their analysis to reflect a compensation of fair market value, which will lower your net income.
Understand the True Value
Many valuations are based on a multiple of EBITDA (Earnings Before Interests, Taxes, Depreciation, and Amortization). That means for every dollar you spend at the practice, it will cost you the equivalent of that dollar times the multiple used to help determine the purchase price. Every time you spend a dollar, ask yourself if your return on that dollar will produce enough of a benefit by the time you’re ready to sell. If not, try to go without if possible
It’s necessary to minimize costs. Consider reducing payroll expenses. Start with eliminating or, at least, decreasing overtime earned by employees. Decrease material costs. Think about carrying fewer supplies on hand and then order more frequently. It’s likely that the potential buyer will review several years of performance to determine value, but the trailing twelve months (TTM) will be the most important. Think “lean” and think “efficient.” Make sure you’ve done everything you can to make the last twelve months as profitable as possible. Just as important as minimizing costs, is maximizing revenues. Be sure your providers are documenting everything that they do. Then, make sure you appropriately bill for everything documented. You don’t want to miss out on reimbursement for services provided.
Understand your current contracts and whether they are assignable or not. This is of utmost importance and may impact the value of your practice. Don’t forget about the leases on buildings you currently occupy. The buyer cannot operate the business without the proper right to occupy the space. Transactions can be delayed by landlord negotiations. To mitigate the likelihood that a lease assignment may impact the timing of your transaction, you should begin discussing the transition with your landlord as early in the process as possible.
Expect Change After the Sale
Expect some things to change after the sale is complete. Recognize you’re no longer in charge and be ok with this. Change is almost always difficult, but just because it’s difficult, does not mean that it is a bad thing. Understand the new owner is going to do everything possible to increase revenue and profitability. This usually means doing some things differently. But remember, these changes often lead to better opportunities for you and the staff.
Selling your practice takes some time to prepare if you want to maximize its value. Don’t wait until you’re ready to sell to begin the preparations. If you have additional questions about selling your practice, feel free to reach out to me through this form. I’m happy to walk you through a preliminary valuation of your practice and answer any questions you may have.
Darren Coe is the Vice President of Business Development – Mergers and Acquisitions for Nova Medical Centers.
With more than 16 years of experience in the healthcare industry, Mr. Coe oversees and manages the growth and development related to mergers and acquisitions; including market analysis, due diligence management, valuation analysis, M&A financial forecasts, and negotiations of contract terms and pricing.
Prior to joining Nova Medical in 2014, Mr. Coe served in numerous leadership positions in operations and business development at Work Care Occupational Health, Cogent Health, and WorkingRx. He earned his Bachelor’s degree from Brigham Young University and his MBA from the University of Utah.