Navigating ownership transitions: A guide for private medical practices

Anthony Venette: ©Dejoy & Co.

Nearly half of surveyed physicians in their 50s recently said they plan to retire by their early 60s. The medical field can expect a significant shortage of primary care doctors in the years ahead, which means it will be challenging to ensure continuity in leadership, operations and patient care. But the right kind of ownership transition plan can mitigate these challenges and ensure physician (and patient) retention and the best patient care.

Getting started on the path to transition planning

Transitioning ownership is complex, involving financial structures, risk assessment, and legal/HR collaboration.

The first step is to identify key stakeholders and to clarify long-term objectives. Stakeholders include owners, family members, employees, investors, and external advisors. Understanding their perspectives and motivations is crucial for aligning the transition plan with your practice’s goals.

That’s why it’s imperative for you and your advisors to conduct a thorough assessment of your business and ownership structure, including your financial, legal, compliance, billing, and operational frameworks so you can fairly evaluate your practice’s financial health and market position.

You and your advisor also want to set clear goals and realistic transition timelines, including succession objectives, financial targets, and operational milestones. Break down the plan into actionable steps for accountability.

Transition options

Here are two viable options for private medical practices to consider:

1. Transfer to NextGen. Transitioning to younger physicians can provide continuity of leadership and financially reward NextGen for stewarding patient care.

2. Sell to a third party. Strategic buyers, private equity, or insurance companies can provide liquidity and expansion opportunities. However, retiring physicians must consider the impact of selling to outsiders on the practice’s culture, operations, and patient care.

For doctors hoping to retire quickly, I’ve found that private equity is generally not a good fit since private equity deals typically require physicians to commit to remaining employed for three to five years following closing. Selling to a local physician or hospital is often a better option, though even these buyers also generally expect retiring physicians to stay on after closing.

Valuation and tax implications

No matter which transition option you choose, you must pay close attention to the business valuation and tax implications of the transaction. The highest offer is not necessarily the best offer. It’s more important to look at the deal terms and what your “walkaway” proceeds will be after taxes, transaction costs, and advisory fees.

A comprehensive valuation of your practice is essential for determining fair market value. An independent business valuation professional will provide an objective assessment of your practice and help you avoid common valuation mistakes.

Valuation is a highly subjective field and requires three key attributes:

1. Sound methodology and logic.
2. Data, data, and more data.
3. Ability to utilize multiple methodologies.

Each of the attributes above involves accounting, financial, economic, and legal considerations. While some doctors are fluent in these areas, very few can translate that knowledge into an accurate appraisal of their practice. Common mistakes include conflating enterprise value and equity value, or using an overly simple methodology that doesn’t accurately reflect the practice’s worth. Another common misstep is using outdated or irrelevant market multiples (often from a previous transaction in which they were tangentially involved). Further, most practice owners are unaware of how certain factors affect the value of partial equity interests (i.e. less than 100%).

Without having a qualified appraiser to guide your team, your practice and its owners could be exposed to the following risks:

1. Receiving more (or less) than fair market value.
2. Understating or overstating taxable income for the entity or its owners.
3. Creating cash flow issues for the entity or its owners.

An independent valuation professional should be able to analyze your practice, make comparisons to industry benchmarks, incorporate economic or industry factors and provide multiple valuation methods rooted in real-time market data.

Real world example

Dr. Smith, a senior partner in a thriving private practice, plans to retire within two years. The practice includes three other physicians, one of whom, Dr. Jones, has shown strong leadership skills and an interest in taking over the practice.

To facilitate a smooth transition, the practice developed a detailed transition plan with the help of a professional advisor. The plan was focused on equity transfer as follows:

Equity transfer with a 5-year note: The cornerstone of the transition plan is the structured transfer of equity ownership of the practice to Dr. Jones within one to two years, via a traditional five-year promissory note. This arrangement enables Dr. Jones to assume ownership and management responsibilities gradually while providing financial security to Dr. Smith during his retirement since the note works as both a cash management tool and as an income tax planning tool for him.

Accelerated transfer schedule: To expedite the transition process, the equity transfer is scheduled over a shorter timeframe, ensuring a swift and efficient transfer of control and management responsibilities.

As part of the equity transfer, Dr. Smith agrees to provide Dr. Jones with mentorship and training that’s designed to transfer critical operational knowledge and strategic insights to her. This allows for a smooth transition of the practice.

A comprehensive financial plan is developed to facilitate the equity transfer and ensure financial stability for both Dr. Smith and Dr. Jones. This plan includes provisions for Dr. Smith's retirement benefits, compensation arrangements during the transition period, and the financial implications of the promissory note agreement.

Patient communication: The plan includes a strategy to inform patients about leadership changes, reassuring them that their high level of care will continue under Dr. Jones

Conclusion
Proactive transition planning that considers all stakeholders, especially patients, can help medical practices navigate ownership changes successfully while maintaining the highest standards of care.

Anthony Venette, CPA/ABV is a Senior Manager, Business Valuation & Advisory, DeJoy & Co., CPAs & Advisors in Rochester, New York. He provides business valuation and advisory services to corporate and individual clients of DeJoy.