Preparing to Sell a Medical Practice: Three Key Steps
LARRY SOPHIAN, CPA
Whether you are considering selling your medical practice or you have already made a firm decision to do so, three key preparation steps can help ensure a successful outcome. They require significant data gathering and analysis, but the result will be worth it.
1. Benchmark Practice Performance
The first step is to compare your practice’s performance to that of similar practices in the same market. A better-performing practice will command a higher price — if you have data to back it up. Some commonly accepted metrics for demonstrating how well a physician practice is functioning include:
- Individual productivity of the practice’s physicians and mid-level providers, tracked by work RVUs;
- Compensation levels for all physicians;
- Number of active patients;
- Number of patient visits in the most recent year and
- Average cash collections per patient visit.
If there are other measures that are representative of your practice’s performance, include them as well. If the data has been collected for some time, present it as trending analysis for the last three to five years.
Once you have gathered the desired data, acquire these same statistics for competing practices and contrast them with yours. The best source of information is the Medical Group Management Association. The second is your state medical association.
The benchmarking process may reveal some shortcomings, but do not try to hide them. A savvy buyer’s due diligence will uncover them anyway. Most buyers understand that there is room for improvement in every practice, and they may view deficiencies as opportunities for change that will enhance the potential upside of the deal.
If the shortcomings are severe, you may want to hold off on putting your practice on the market. By taking some time to remedy the problems, you will probably enjoy a higher price when you do sell.
2. Review Physician-Owner Payments and Expenses
Identify money paid to the physician-owners of the practice in the form of compensation and expenses. Buyers give a lot of attention to total payments made to physicians who own the practice. Those payments are usually a large percentage of total practice expenses, and doctors will likely expect that their payments will continue at the same levels after the acquisition is completed. But while physician payments are a significant expense, they are also a measure of the practice’s success — more profitable practices can afford to pay their owners better.
There are several categories of payments to physician-owners. Direct compensation may be in the form of salaries, contributions on behalf of the physician-owners to retirement plans or profit distributions. Make sure you calculate the latter on a regular basis.
In addition to the direct compensation categories discussed above, your practice may also be paying discretionary expenses such as travel, food and entertainment, and automobile expenses. There also may be nonrecurring expenses associated with physician-owners, such as legal, consulting and financial fees or equipment purchases.
3. Prepare Strategic and Financial Plans
If you don’t already have them, prepare strategic and financial plans for your practice. A great way to boost the market value of a practice is to demonstrate that the practice is strong and on a path to more growth and success in the future.
Strategic and financial plans are often joined together, and the combined plan should explain how the practice will leverage its strengths and weaknesses to address the opportunities and threats that it faces. The plan should start with an analysis of the practice’s internal and external environment, state a coherent future direction, define strategic objectives for moving in that direction and lay out an action plan for achieving the objectives.
SWOT the Practice
In addition to — or in place of — the practice benchmarking its performance, consider a traditional SWOT (strengths, weaknesses, opportunities, threats) analysis of your practice’s operating environment. It requires identifying the internal practice characteristics that put it at an advantage or disadvantage compared with others, as well as external factors that could be exploited by the practice or pose problems for its success.
Some examples might include the following:
- Ancillary services are offered (strength).
- Staff turnover is high (weakness).
- A new accountable care organization (ACO) seeks the practice’s participation (opportunity).
- The largest payer proposes lower reimbursement rates (threat).
If your practice does not have the training and experience to execute these steps, bring in professional help. Your financial advisor is knowledgeable about your financial history and current condition. He or she can assist not only while you prepare your practice for sale, but also after offers come in.
During negotiations and the due diligence process, buyers will request detailed financial and operating information and ask probing questions about the practice’s past performance and future outlook. To separate true buyers from lookers, ask prospective buyers for a confidentiality or similar agreement to look at the books and records. You will need to respond to these inquiries and negotiate a final deal, all while continuing to practice medicine.
Choose Malpractice Coverage Wisely
All physicians must have malpractice insurance. But all policies are not alike. It is critical that you choose one that fits your practice’s needs. After all, if you do not choose wisely, your practice could find itself in a tenuous financial and legal situation in the event of a lawsuit.
Explore Types of Coverage
Practices must address malpractice coverage by asking: How much protection does it want, for what period and events? Malpractice coverage is stated in terms of limits per claim and the aggregate limit on payments over the life of the policy.
There are several types of coverage to choose from. Most practices will be concerned with claims-made, tail and nose policies. A “claims-made” policy covers incidents that may occur during the policy period and that are reported while the policy is still in force.
When a doctor changes policies, it’s possible that some claims will be uncovered before the new policy kicks in. The gap can be filled by either “tail” coverage, which takes care of claims that arise after leaving the previous carrier, or “nose” coverage, which extends coverage of the new policy to an earlier date. Tail coverage is also typically purchased when a physician retires.
Review the Provisions
There are several policy provisions physicians should review. Most will include a “consent to settle” clause. It requires the carrier to obtain the physician’s written permission before settling a claim against him or her. Without it, the insurer can settle a claim that the physician believes is defensible.
Several states have set up medical review panels and all claims must be heard by the panel before legal action can be taken. This reduces frivolous claims and helps lower premiums.
Another provision is related to the legal costs of defending a claim. Those costs, which can be upwards of $100,000, may be included “inside” or “outside” the policy limits. The latter is better. Otherwise, a $100,000 legal defense bill will be subtracted from a $1 million per occurrence limit, leaving $900,000 to cover court awards and damages.
Also consider claim acknowledgment. An insurance carrier may acknowledge that a claim has been made either by requiring that the insured physician receive a “written demand for damages” from a prospective plaintiff, which means the physician must wait to be sued, or the doctor is allowed to report an adverse outcome as a potential claim, known as “incident reporting.”
Select a Carrier
Malpractice insurance companies take many forms. Some are physician-owned (“captive” insurers); others are traditional commercial entities. Work with a broker or an independent agent to find the insurer that best suits your practice.
The carrier must have sufficient financial resources to satisfy current and future damages claims against its policyholders. A close look at the carrier’s annual report and other financial statements will reveal information about its surplus, net written premiums and loss reserves — key metrics of financial strength. Also look at ratings issued by industry analysts such as A.M. Best Company and Fitch. A rating of “A-” or better is desirable.
Equally important is the carrier’s management philosophy, which is reflected in its underwriting standards, claims management and actuarial policies.
The cost will depend on the carrier as well as the coverage needed and the physician’s history of adverse events. Take advantage of preventive services that carriers offer to practices to help reduce their legal risk and maintain patient safety. For example, they may provide risk management tools through bulletins, publications and educational programs.
Protect Your Practice
Choosing the appropriate malpractice insurance will help protect you and your practice. Your CPA and attorney can help lead you through the process.