Business Advisor: Three Keys to Selling a Physician Practice

Large health systems, physician practice management companies (PPMs) and private equity firms are buying physician practices in waves across the country. This rolling up of practices that own ASCs was big business in the 1990s, and now it’s happening again. Sales of practices have been occurring in an increasing number of specialties, including orthopedics, ophthalmology, GI, urology, OB/GYN and cardiology — all of which perform procedures in same-day surgical settings. Physician owners of surgery centers must position their biggest investment in a way that maximizes the purchase price and ensures a smooth transaction. 

Hire competent advisors
The selling of a practice and surgery center could be the most important transaction of a physician’s life, so they shouldn’t entrust it to their friend who’s a divorce lawyer or a real estate attorney. Physicians make that mistake all the time, trusting a close friend instead of an attorney who specialize in this kind of transaction.

They should also align themselves with experienced advisors, the most important of which is a healthcare investment banker who specializes in physician practice sales. This expert can develop a confidential information memorandum (CIM), which is essentially a small book about the business performance of the practice, including financial data and projections that potential buyers would want to see. The investment banker and an experienced healthcare transaction attorney will use the CIM to shop for the best deal. 

Highlight the positives
It’s crucial to take the necessary steps to cast the practice’s potential in the best possible light because the sales price will be based on financial projections. A good investment banker can forecast future profits, known as pro forma profits, that take into the actualization of positive initiatives, such as new office spaces and young doctors who were recently hired. These targets indicate the future profitability of the practice. Pro forma profits also reflect the elimination of expenses from cost-cutting initiatives and projected future reimbursements. They should show that future profits will be higher than historical ones.

The purchase price of a practice is determined by multiplying “EBITDA” — earnings before interest, taxes, depreciation and amortization — by a purchase price multiple. It’s important to note that while existing ancillary service lines such as an ASC, physical therapy and MRI services currently have existing EBITDA, the professional side of a practice does not because physicians take it out as compensation. The professional practice EBITDA is essentially created by physicians agreeing to taking a reduction in their compensation. A good buyer should be able to replace this compensation reduction over time, but the ability for them to do so must be carefully analyzed by the transaction’s advisors. This is called “income repair,” which is repairing the income back to its original level before it was reduced to create the practice EBITDA.

There are countless issues that could kill a deal.

Get the practice in order
This refers to every aspect of the proposed deal that’s not included in the financial presentation. There are countless issues that could kill a deal. A smart seller does their own due diligence in advance so that they can get out ahead of these issues. Physicians should identify and resolve billing and legal issues before putting their practice on the market. They should also make sure junior doctors are under contract, review reimbursement relationships and understand the managed care contracting status to make sure all contracts are in good standing.

Also, many practices want to be considered a “platform” rather than an “add-on” for a transaction with a PPM or private equity firm in order to get a higher multiple. To be a platform, the practice’s existing infrastructure — executive team, back-office operations and ancillaries — should be able to be used by the new buyer to leverage subsequent add-on acquisitions. Every practice would like to be a platform practice, however, and private equity firms and PPMs know this, so don’t attempt to present yourself as a potential platform practice if your current infrastructure can’t legitimately support it.

Physician practices that jointly own an ASC with a health system or management firm add some complexity to the transaction. In those situations, negotiations will not only be between the physicians and the PPM or private equity firms, but also the existing ASC partner. It’d be a much simpler deal to negotiate if the physicians were independent owners of the ASC.

No matter how many parties are in the deal, however, the three principles discussed above still apply. If you follow them, you’ll maximize your sales price and make sure the transaction goes off with as few hitches as possible. OSM