Over the course of my career I have been humbled to oversee a number of physician practice transactions. The valuation and ultimate sell of a physician practice can become complex because the healthcare industry is ripe with regulation concerning the appropriate terms and valuations used in these transactions. Most notably, the Stark and Anti-kickback laws that govern healthcare transactions prohibit transaction value being based on physician referrals, ensure transactions are based on fair-market value, and are commercially reasonable.
The Stark and Anti-kickback laws help reduce the potential for physician conflict of interest in the practice of medicine which is a great thing, but it also makes capturing value at the point of sale a little more difficult than traditional industries. In layman’s terms it is very hard for physicians to “luck” into high valuations even with a successful practice. For example, let’s compare two business owners interested in selling their business, Owner A is a physician with a large and loyal referring patient base and Owner B is a financial adviser with a comparable customer base. Furthermore, from a net cash flow perspective the two businesses are equal. More likely than not Owner B, the financial adviser, would be able to obtain a higher valuation for the sale of his/her business because a certain amount of value would be derived from their customer list, whereas Owner A, the physician would not be able to derive value in the transaction from the referring patient base because of the industry regulations noted above.
Though the regulations make the valuation more complex for physicians it is still possible for physicians to maximize value in the sale of their practice. In my experience the most successful sales of physician practices all had these five key things in common:
Successful physicians had planned their exit/sale strategy years in advance
The most successful physician practice sales were owned by physicians that had planned their sale for at least three years in advance and followed that plan as best they could. Valuations and buyer due diligence analysis will look back at least three years, if not longer. Usually, potential buyers like to see upward trends in collections, productivity, income, etc. Physicians know their lives and ambitions better than anyone else, so it is best to sell your practice at the peak of your life’s work, rather than a rushed transaction at retirement age. More than once I worked with physicians towards the end of their careers, and inside of the period being analyzed for the valuation there were dips in productivity for when the physician took vacations or extra time off and the practice was no longer at peak performance it had once been at years ago. Some of this might be able to be adjusted for in a quality of earnings analysis, however, it is always good advice to sell at your peak and not at a valley. Therefore, plan your sale based on the peak of your practice.
2. Successful physicians understood their reimbursement and payer mix
Though the economics of physician practices are changing with the rise of concierge and tele-medicine subscription applications, traditional practices earn the majority of their revenues through reimbursement from private health insurance companies (BCBS, Aetna, Cigna, etc.) and public health insurers (Medicare, Medicaid, VA, etc.). The more successful sales had physicians that stayed on top of the changing reimbursement rates, were good at negotiating these rates with the payers, and had a strong, diversified payer mix. These physicians could speak to and understood where the majority of their collections were coming from and managed their practice accordingly.
3. Successful physicians stayed on top of billing, coding, and made their full revenue cycle as efficient as possible
Going hand in hand with point two above the most successful transactions involved practices with physicians that had competent billing and coding departments with only a small percentage of returned and disputed claims. The most successful physicians stayed on top of their accounts receivable and made sure that claims were paid in as timely a manner as possible. Generally, claims should be outstanding no more than six months (depending on specialty), three months isn’t bad, and anything within a couple months is excellent. There were times I experienced working with physicians who did not understand their revenue cycle and despite having packed patient schedules there were errors in billing and coding that cause high amounts of denied claims and lost collections.
4. Successful physicians managed and leveraged employees and payroll costs well
The most successful physician practices ran relatively lean with a loyal and skilled employee base. These practices had just the right amount of employees (including regular, mid-level, and provider) to remain efficient but did not balloon payroll expense. Many times I experienced working with physicians who carried more employees than necessary often because the physicians did not want to separate from lower performing employees. Furthermore, it is especially important for physician owners to do a good amount of due diligence before signing employment agreements with a mid-level or another provider. Many times these employment agreements are for lengths of time and for a considerable salary. Making a mistake and hiring a mid-level or provider that is unable to meet the desired level of productivity can greatly hurt value.
5. Successful physicians hire healthcare advisory experts
The most successful physicians hired outside healthcare specific advisory experts to assist them in their sale. These experts are able to partner with the physician to plan the sale, identify prospective buyers, secure a fair-market valuation, perform sell-side due diligence, negotiate important deal points such as go-forward compensation, and more. These advisers are able to enhance value and take some stress away from the sale process.
Owning a business is hard enough. Being a physician and a business owner is even more complex, but through careful planning, understanding the economics of the industry, managing your practice well, and hiring the right experts it is well within reach to successfully sell your physician practice.