Cashing out: Expert advice on selling your practice

If you’re thinking about selling your practice, it’s best to take a long view. Ideally, you would negotiate the sale of your practice at a point when you still have time to work for the new owners.

This point could be at 2 or more years before you actually retire, according to healthcare attorney Steve Shaber and business transactional lawyer Dave Krosner.

Strategies from top negotiators

Shaber and Krosner are partners at Poyner Spruill LLP, where they specialize in negotiating the sale of medical practices. In an interview with MDLinx, they offered advice on maximizing the benefits of selling your practice.

MDLinx: Should physicians sell their practice—and if so, when?

Shaber: People who think that they might want to sell need to examine the question and make up their minds. If they think they do want to sell, they probably should sell while they are still working.

Krosner: [Being] on the verge of retirement borders on too late. You are unlikely to realize significant value for your practice if you were the one producing for the practice and you leave. A sales transaction can make great sense for someone later in their career. Without a sale transaction, when a physician-partner retires from a small medical practice, typically the practice will pay the retired partner a share of his or her pre-retirement accounts receivable as those are collected.

In addition, if the partner is a part-owner of the practice’s building, the partner will often be bought out of that building at what approximates fair market value. Other than that, absent a sale transaction, a retiring partner generally does not receive any other material payments. Alternatively, a practice sale to a third-party—particularly in a situation where the doctors are going to continue to work for a period of time after the sale—can produce proceeds to the selling doctors that they otherwise would not receive if they simply retired.

Practice valuation

MDLinx: How do you value a practice?

Krosner: Fair-market value is whatever a willing buyer will pay a willing seller after both have a command of all the facts. You can certainly look at the revenue, profitability, and other material facts of a practice and make some educated guesses as to the practice’s potential value, but it’s ultimately worth what a buyer is willing to pay. Some buyers, such as a hospital, will view the practice’s value differently than other buyers, such as a larger practice that is trying to consolidate a number of practices across a region, or a private-equity backed management services company that manages the back-office operations of practices.

If the selling physician simply wants to sell and go off into the sunset, any buyer is going to say, "You generated the revenue and profits, but now I (or another buyer physician) will be the one generating those revenue and profits, so I can’t really pay you based on a multiple of your prior profits.” A buyer isn’t likely to pay a material amount just to get access to your patient list—whereas a sale earlier on, when you still have time to practice and produce profits for the buyer, may result in a much higher purchase price.

MDLinx: If you aren’t being paid for the patients, what are you selling?

Shaber: First, you are selling the hard assets. They might include the office building, which could be a high six- or seven-figure value. There may be some medical equipment that’s fairly significant. There could be office furniture, filing cabinets, and the pictures on the wall that still amount to something. The rest of it is “goodwill,” which are the intangible assets.

A particularly valuable piece of goodwill would be the selling physician’s ongoing services to their patient base—provided that the selling physician will hang around for a significant period of time—because there’s value to that continuity. Related to that is the value of the staff. If the buying physician, hospital, or private equity firm is going to get the key staff so they can continue to operate that practice at that location—even if the selling doctor leaves quickly or instantly—there are still elements of continuity that are worth something.

The question of patient records

MDLinx: Do you sell patient records?

Shaber: The practice owns the paper or electronic patient files, and the practice can sell them or not, depending on the wishes of the buyer and seller. You can be pretty sure the buyer won’t want the old files of former, non-recurring patients. The question becomes how much they are worth. That can become an issue under state and federal laws that forbid paying for referrals or paying kickbacks. You can’t guarantee that the patients will stay, and if the buyer pays an inflated price for the records, that looks like a disguised payment for the patients.

MDLinx: What is the process of selling a practice?

Krosner: As lawyers, our job is to advocate for our clients and get the best deal possible for [them], document it, make sure it’s regulatorily compliant, doesn’t violate any laws, and make sure the doctor is as protected as possible under the contracts. There is a principal acquisition agreement that has representations/warranties by the sellers and indemnification obligations to the buyer if those are wrong, and for other negotiated items. The seller’s lawyer seeks to limit that indemnification exposure as much as possible.

We often say our job is to help the seller achieve the most valuable transaction possible, with the greatest likelihood of the seller keeping that purchase price in his or her pocket. We also help clients understand and achieve the transaction and identify other professionals to assist.

MDLinx: Which professionals participate in the sale of a practice?

Krosner: I like to have a team. You definitely need an M&A [mergers and acquisitions] lawyer, and often a healthcare regulatory lawyer, involved. Ideally, you would also have your accountant involved to help supplement the lawyer in terms of structure and tax results to the doctor. Sometimes you’ll have a broker—especially if it’s a larger transaction—to help identify and attract potential buyers and obtain the best purchase price possible. Brokers are engaged by the seller or the buyer. Small practices are unlikely to hire a broker.

The bottom line

MDLinx: Could you give a range on how much a physician can expect to make from selling a practice?

Krosner: It really depends. It depends on the profitability, revenue, and the nature of the buyer. In my experience, hospitals are less willing to pay as much of a premium as other buyers such as private equity-backed groups. A one-person, primary care physician is going to sell for way less than a 100-physician multispecialty, multi-geography practice. If the doctor is simply retiring, then they will get a lower-end offer.