Selling your practice? Here's how to prep it

Like home sellers trying to make their houses appear even more attractive and valuable in the real estate downturn, physicians wanting to sell their practices must put in extra effort to attract an increasingly limited pool of buyers. Nevertheless, experts say a seller can use many strategies to get the practice sold at its best price.

"Often practices do sell," said David Greene, president of Medical Practice Brokers in Colorado Springs, Colo., who has handled nine sales of one- to four-doctor practices within the past year. "There are still buyers out there."

Medical practice sales experts recommend that doctors follow a series of steps, ideally beginning the process two or three years before the desired time of sale. These measures include getting financial records in order, making the practice visually appealing, setting realistic price expectations, communicating the interest to sell and planning the transition.

First step: Organize the money

Physicians need to get financial records in a form that makes sense to a buyer as well as to an institution that may finance the deal. Three years of orderly tax returns and profit-and-loss statements are vital, experts said.

"Get your house in order," said Roger Strode, a partner with the Chicago law firm McDermott Will & Emery. "Get a good accountant if you don't already have one."

Besides getting the relevant numbers on paper, an accountant can pinpoint expenses that might make the business seem less attractive in a potential sale.

Any personal expenses that may have been counted as business expenses either for taxes or other reasons that made sense at the time should be taken out of the medical practice's accounting when working toward a sale, said Wendy Ingalls, vice president at Mercer Capital in Memphis, Tenn. For example, these can include golf memberships or a physician's car.

This is also a time to keep the financials strong. Physicians who are edging toward retirement should not downshift too early, which could potentially reduce the value of the practice. A trend of increasing profits, no matter how modest, makes a business more appealing

"Don't retire on the job," Greene said.

Second step: Look good

Any seller has to think about the impressions buyers will have when they first see the premises. Clutter should be cleaned out, expired drugs discarded and broken equipment disposed of. Many experts even recommend doing some landscaping, adding a fresh coat of paint and modernizing the décor.

"Get rid of the black velvet Elvis painting and make it look better to a prospective buyer," Greene said.

But although first impressions count, improving appearances should not cost huge amounts of money. Any investment in a potential sale needs to be balanced by the possible payoff. Technology in particular might not be worth the expense of upgrading, according to experts. Buyers, especially hospitals or health systems, often have their own means of keeping records.

"If you still have a 486 computer running Windows 3.1, it's time to upgrade, but be very careful about putting $150,000 into a new EMR. You may not get your money back on that," Greene said.

Third step: Set a realistic price

Experts say physicians often expect too high of a price. This is most likely a hangover from a mid-1990s bubble when hospitals and physician practice management companies competed hard to lock up practices. Determining a true value now often requires a professional valuator.

"It is very, very situational," said Keith Borglum, a consultant, broker and appraiser with Professional Management and Marketing in Santa Rosa, Calif.

The nature of the buyer is often a key determinant in setting a price. Selling a practice to another doctor, for example, is a matter of figuring out what that person is willing to pay for hard assets and expected accounts receivable.

Robert Neaderthal, MD, an internist in Nashville, Tenn., was in the process of selling his solo practice to another physician when he realized that not all of his equipment was saleable. The new owner bought some of the pieces, but the rest went to charity. "It's got to be a fair exchange," he said.

Selling to a hospital or health system is trickier, because these transactions are governed by self-referral and anti-kickback regulations. Those institutions need to justify the price as fair market value, which is strongly affected by what is included in the sale. Among the considerations will be whether the physician and trained staffers will remain at the practice and the value of any contracts included in the sale.

Setting a cash value for goodwill -- intangible assets such as reputation -- is a matter of intense debate. Hospitals usually are unwilling to pay for goodwill, but physicians and other buyers may be more amenable.

Services such as the Goodwill Registry, run by the Health Care Group in Plymouth Meeting, Pa., offer statistics to help value goodwill. But experts advise using such statistics as starting points rather than hard-and-fast rules.

Two practices bringing in the same amount of money each year might be valuated differently when it comes time to sell. One may be making a greater profit while the other may be poorly managed with significant debt and declining annual revenues.

"It gives the benchmark. The appraisal can be higher or lower depending on the practice," said Daniel M. Bernick, a principal with the Health Care Group.

Fourth step: Get the word out

Communicating that your practice is for sale needs to be handled delicately so as not to generate fear among the staff or prompt patients to leave too soon.

Physicians can mitigate unnecessary worry by initially getting the word out among a select network, experts said.

Borglum suggested that sellers begin by looking for a local buyer. "It's a big leap of effort to bring someone in from out of the area who is willing to relocate," he said. "Is there somebody in another group or somebody in your call group who would be interested? Maybe there is somebody in your community who has a son or daughter in medical school who is coming back who might be interested? Any way to try to find a local buyer is best."

Local hospitals and health systems can be contacted directly. Getting more than one entity interested is important to get the best deal.

"You always want two parties interested in your practice. Those practices that are in marketplaces where there is only one health system interested -- that is a tough negotiation," said David Christeson, MD. He was a partner with Welborn Clinic in Evansville, Ind., which was bought by Deaconess Clinic, also in Evansville. He is now Deaconess's chief physician administrative officer.

If the physician is staying with the practice, this process is also an opportunity to get to know the hospital or health system leadership.

Fifth step: Plan the transition

Before the contracts are signed, decisions need to be made about how the transition of ownership and patients will be handled. A practice where the doctor is staying after the sale tends to be more valuable, and the changeover becomes less of an issue for patients.

But the process can be trickier when a physician is leaving. "You cannot just walk out the door," Dr. Neaderthal said, adding that he stayed on for a year to introduce his patients to the new physician-owner.

Furthermore, the emotional ramifications of transitioning from owner to employee, or owner to retiree, can be just as challenging for the physician as it is for their patients. Letting go may not be easy.

About a year ago, Dr. Neaderthal called people who used to be his regular patients to find out how they were doing.

"It was difficult both before and after I notified my patients," he said. "I missed certain features of practice. I missed seeing people. I didn't miss the business of practicing after 30 years, but I certainly missed the patients."