The current state of the healthcare industry has created an extremely dynamic and sometimes unpredictable marketplace for private practices across the U.S. If you’re considering buying into this volatile market you’ll need to be rigorous in assessing the true and transferable value of any practice you’re analyzing for potential purchase.
You’ll likely seek out trusted professional help to ensure that your purchase agreement is written to protect your interests and investment at every stage in the transition of the practice.
In this CareeerPhysician article we lay out the basic framework for how the practice purchase process typically plays out, with some advice to assist you at each of the main stages of the transaction. We also offer a sampling of typical war stories – both good and bad – from those brave physicians who have taken this step before.
When considering a major business move like buying a healthcare practice, you should first do your homework regarding your targeted marketplace and patient profile and the sale price of similar practices in the region, both in your own and in other specialties. From this initial research you can then begin to determine how much you can afford and are willing to pay for a practice, and begin to investigate financing, assuming the transaction will be financed.
Finding a Practice
Once you’ve identified your market and desired price point range, you’ll need to create a very clear and specific profile for the type of practice you want to own and grow. All practices are not created equal and using your targeted patient profile as a guide, you should identify and consider only those practices with the type of business model and patient profile you’ve defined as commercially viable.
Ask for Help
At this point in the process, if you haven’t already, you’re likely to consider hiring professional help for two key elements of your practice purchase process:
- a business broker or buyer’s-agent with expertise in finding well-suited healthcare practices for sale within your desired market, price range and practice/patient profile, and
- an attorney to assist and advise you on the actual purchase agreement documents.
Although it is certainly possible to find and buy a practice without such professional help, it is definitely worth considering. It could save you valuable time in identifying a practice for purchase that is well-suited to your needs and profile. In addition, upfront legal advice often proves a very wise investment by saving money down the road should something unforeseen happen with your transaction.
Going It Alone
Should you decide to navigate your practice search and purchase process with little or no professional help, here’s a quick recap of the key steps in the typical purchase process:
- identify desired location and practice profile
- advertise in trade or other business publications
- approach the practice directly
- request and review financials
- due diligence:
- disclosures and representations
- request and review permits and licenses (are they transferable)
- obtain list of all assets
- obtain list of all liabilities
- prepare and submit an offer
- secure financing, including possibility of owner-financing
- prepare purchase transaction agreements (non-compete employment agreements)
- medical physician transition planning (written and detailed)
- closing the purchase transaction
- taking occupancy
What’s In a Name
If the practice you’re considering buying is operating under a corporate name, there may be some significant value in buying the corporation outright, not just its assets. Depending on the patient profile, in some cases the corporate practice name may have accrued significant brand equity over the years and would be a considerable asset in driving continued patient business.
On the other hand, if you’re purchasing a practice that has been operated under the name of the individual physician or physicians in the practice, then it’s rarely advisable to purchase or retain the use of the practice’s name.
Pricing and Terms
Once you have thoroughly researched your targeted marketplace and have a solid fix on what similar practices have been sold for, you will be better prepared to set – and defend – your asking price.
But remember, in a healthcare practice purchase transaction the terms are as important as the purchase price itself. In most cases, you will likely be financing some or much of the total purchase price, so the single most important aspect of the purchase will be the ongoing cash-flow generated by the practice.
Another important possibility to consider when putting together your offer sheet and eventual purchase agreement is potential seller financing. In such cases, the seller may ask for a higher sales price, but their financing terms may create stronger cash-flow for the practice. As an example, in return for a higher selling price you can negotiate longer repayment period, a no-payment grace period and a lower interest rate, or no interest rate.
War Stories and Testimonials
For a personalized flavor of the many ways a practice purchase agreement can unfold, we offer a sampling of real-world tales from collected sources.
“I recently purchased my practice in Southern California and enjoyed a purchase experience that was efficient and a great success. I used a buyer’s agent and was pretty impressed with her patience, expertise and ability to keep the transaction moving when it seemed doomed to never close at numerous points in the negotiation.”
“I tried to manage the purchase transaction process alone, but finally got some help from an attorney to draft the purchase agreement. I then wisely as it turns out took the attorneys advice and hired a buyer’s consultant to help map out the transition planning which ended up being a lot more complex than I ever would have imagined.”
“Some friendly advice for physicians considering finding, purchasing and transitioning a practice without any outside professional help — spend a little now and save a lot later. A lot of legal grief, money and time! Having bought and sold multiple practices throughout my career, the first of which I flew solo, I can tell you the investment in outside help is well worth it. I’d recommend a buyers broker to help find your ideal match; an attorney to draw up the offer and eventual sales agreements, and an accountant specializing in small business tax issues to minimize you taxable liabilities. I even worked with a transition consultant and found that to be a great aid in letting me concentrate on getting integrated into the practice and the patient base during a time when there was still a lot to sort out and manage from a purely business point of view.”
“My husband and I had always planned to retire to the Phoenix area and I was desperate to find a practice there that met my requirements for patients, cash-flow, etc. After mediocre results with two buyer agencies I came upon one that understood exactly what I was looking for, helped me find it and walked me through the transaction to closing and transition.”
Here are a few final tips to keep in mind as you consider seizing the exciting business opportunity of purchasing a healthcare practice:
- Find out whether the practice has other existing partners with whom your agreement should also be written and agreed. Ask to review any and all partnership agreements.
- Look for purchase opportunities with practices and partners that you can get along with during a possibly protracted process. After all, if you’re inclined to get along well it likely indicates that the practice you’ve selected is a good fit for your temperament, business needs and professional personality.
- If you’re in a transaction negotiation and the seller has legal or other agency representation, remember that they don’t work for you – no matter how nice, accommodating or helpful they may seem. Their job is to get the best deal for their client. If you’re concerned, seek your own professional advice as well.
- When reviewing the identified assets that will transfer to you in the sale, look beyond the standard items like files, equipment, phones, furniture, computers to other important but less visible assets like web-site URLs, practice telephone numbers, e-mail addresses, advertising and marketing copyright and signage.
- Consider adding a clause to your purchase agreement that includes a formula to adjust (downward) the eventual purchase price if agreed minimum cash-flow for the practice isn’t met.
About the Author:
Wesley D. Millican, MBA, CEO and Physician Talent Officer of CareerPhysician Advisors, LP, and CareerPhysician, LLC, provides comprehensive talent solutions for academic children’s hospitals, colleges of medicine and academic medical centers across the nation. He possesses a longstanding passion for career development of all young physicians and serves as a go to career resource for training program directors and their residents and fellows. In continuing his commitment to the “future of medicine”, Mr. Millican speaks nationally at residency and fellowship programs. His Launch Your Career® Series is a proven resource for today’s residents and fellows and has served as a go to resource for program directors over the last 15 years.