Often overlooked factors when selling a practice that can leave money on the table

Introduction

How do partners ensure a highly successful outcome when selling their medical practice? A thoughtful and planned path provides practitioners with a high likelihood of success. A strategic approach includes assembling a trusted team of advisors who can provide partners with a clear understanding how to drive value in a sale process.

While financials are fundamental, there are other key elements which are often overlooked and have significant implication on the outcome. It is essential to have a strong understanding of what drives value through the eyes of the investor , the current competitive landscape, organizational synergies with an acquiror, and key risks and considerations related to your business as well as the overall healthcare landscape.

Preparing for a Transaction

Preparation is key to the sale process. Prior to sending a potential buyer any sensitive information, partners should be well organized and understand the message the information is conveying. Investors – both strategic (hospital systems and other practices) and financial (private equity) – are well-versed in sale processes and can digest a high amount of diligence materials quickly. This can lead to undercovering positive and negative trends that may not be overly apparent to practitioners.

Organization is critical. It goes beyond having legal documents and financials neatly organized. There must be a keen understanding of the trends that these documents show. Strategic organization reduces the potential for findings of key risk factors that was unbeknownst to the partners and enables the partners to highlight, through diligence, the strong underlying value of the practice.

Strategic organization also includes qualitative alignment. Discussions with internal key stakeholders are essential to positioning the business. Additionally, it is important to have internal alignment on the goals of the practice. Whether the objective is maximizing financial consideration for near retirement partners or obtaining the right buyer to drive future growth for partners earlier in their career, it is vital that the messaging is uniform and consistent.

Consulting with a team of specialists can help the partners go through numerous scenarios, think critically about long-term goals and, ultimately, agree upon messaging, approach, and overall goals. Preparation takes time. It is recommended that an advisory team is assembled 6-12 months before formally launching a sale process. A strong attorney is crucial and in addition, the team needs skilled financial advisors, including:

Accountants – An accountant who specializes in healthcare helps organize the financials, ensures accuracy in financial reporting, and aligns the business with essential metrics during due diligence. In addition, they can assist sellers with an analysis of accounting records prior to sale, along with converting financial statements to accrual-based accounting, which will be required by a potential purchaser to ensure the best possible outcome.

Investment Banker – The right investment banker is critical. They are the quarterback of the process who will give partners insight on trends, help properly position the company with investors, and highlight key elements that financials demonstrate. They work with the partners on identifying potential buyers, negotiate key deal terms, maintain data flow, and work with advisors on critical transaction elements.

Trust & Estate Specialists – A trust and estate specialist offers guidance on how to best structure the practice and eventually sell it, with an eye towards income stream protection and wealth preservation for the seller and future generations of the seller’s family. Most strategic sales involve a skilled professional early in the process to explore estate planning and income tax savings opportunities. Once sales negotiations commence, it may be too late to restructure the practice in ways that will facilitate financial flexibility with the most advantageous tax opportunities available.

A Well Positioned Message to Attract Keen Interest

It’s critical to understand that any buyer will have an investment committee who will scrutinize the transaction. A thoughtful message will demonstrate the key investment highlights, so investors understand their “next bite of the apple” and show the partners have the right processes in place to mitigate downside. This helps advisors negotiate and drive a premium price.

What makes the practice’s story most compelling? Demonstrating to potential buyers a captivating acquisition opportunity:

• Explain how the practice has evolved to meet market dynamics
• Convey current success and the path for future growth
• Practice advantages compared to others in their respective market (i.e. geographic and specialty)
• Strong recruiting and retention strategies for practitioners, which leads to recurring patients and a strong referral network

A trusted advisory team’s value is demonstrated by working with the team to craft the strongest narrative possible. The team will prepare a professional and credible presentation for investors.

Understanding Buyer’s Perspective is Essential

Putting yourself in the buyer’s shoes is important and often overlooked. A thoughtful narrative highlights potential synergies between the practice and purchaser. A strong story emphasizes the successful strategies and how that can be potentially applied to the purchaser’s practice (on the strategics). Potential areas to pique the buyer’s interest include:

1. Is the practice in the geographic area that expands the buyer’s reach?
2. Does the practice complement other practices in the purchaser’s portfolio?
3. How can the practice be integrated and can collaborate with complementary practices and companies for a robust growth model?
4. Are there best practices and processes that enhance the offering of the acquiror?

Conversely, risks need to be assessed and conveyed with a thoughtful strategy to alleviate possible concerns. Risks can be market driven (insurance, regulatory, et al), as well as those associated with the practice. The latter aspect includes how key doctors who are not partners will view the sale and can be mitigated through a unified message. For that reason, those physicians should be brought into a potential sale discussion early to understand their future plans and growth objectives. Given the nature of the healthcare industry, there are numerous risks; identifying those that directly impact your practice will show a greater degree of thought and give buyers stronger confidence that the team truly understands the dynamics of the industry.

The Due Diligence Process

Once we have decided to move forward, thorough due diligence commences. The team is in place to work with the practice to ensure proper delivery and messaging of the information. While this process may become exhaustive for the partners, due diligence is critical and generally takes considerable time because all aspects of the medical practice are evaluated before the acquisition. A select list of broad diligence topics is below (all of which have numerous layers of information).

1. Financial
2. Compliance/Regulatory
3. Operational
4. Information Technology
5. Legal

A company may have strong financial performance but if internal practices are found noncompliant, the transaction can be delayed or have a significant impact on value. All parties need to be aware of the key liabilities and risks that a buyer will undertake as a result of the sale. The purchaser will have its own consultants who will analyze all information and generally take a conservative and cautious view on potential risks and liabilities.

Prepare for Next Chapter

The best offer is not always determined solely by the highest sale price. Partners must be mindful of how the new structure will affect them and other key employed practitioners/physicians. There are numerous stories of practice sales negatively impacted by an unalignment of post-sale expectations that lead to early exits by key practitioners dissatisfied with the new owner.

To align interests, investors often structure acquisitions with an element of deferred compensation. It is imperative that the transition is smooth so partners earn the deferred piece of the consideration. To achieve this collaboration, partners must ask probing questions and understand all the dynamics about the path to earning the deferred compensation.

The best outcome is when all the information is transparent and all of the interests are properly aligned and agreed to ahead of time. Advisors should encourage the partners to speak with previously acquired partners and ask the critical questions.

Conclusion

Selling a medical practice can be an emotional and stressful period for partners. Assembling a team of experienced healthcare experts can help create a smooth process that focuses on market conditions and buyer considerations to achieve the best possible outcome for everyone – both short- and long-term.

Deborah Nappi, CPA, MST, a Partner at Sax LLP, serves as Co-Leader of the firm’s Healthcare Practice. She can be reached at dnappi@saxllp.com. Joy Matak, JD, LLM, a Partner at Sax LLP and Leader of the firm’s Trust and Estate Practice. She can be reached at jmatak@saxllp.com. Jerome Fusco is Managing Director at Sax LLP and the leader of the firm’s Investment Banking arm, Sax Capital Advisors. He can be reached at jfusco@saxca.com.