Getting More Value for Your Practice D A N I E L M. B E R N I C K, E S QUI R E, M B A T H E H E A LT H C A R E GROUP P LY M OUT H M E E T I N G, PA W W W. H E A LT H C A R E G R O U P. C O M
Who We Are Business and legal advisers to physicians Publishers of the Goodwill Registry, used in valuation of medical and dental practices Handle and advise practice buy-ins, buyouts, sales, and mergers
Introduction What s Happening Now Valuation of Your Practice How to Get More Value Basic Sale Structure and Process
What s Happening Now Lot of uncertainty in the air Accountable Care Organizations (ACOs) Budget pressure/reimbursements EHR costs Baby boom doctors reaching retirement Upward pressure on associate MD/DO salaries
Gimme Shelter Many doctors have moved to hospital employment Possibly an upfront payment, plus Two- to five-year employment contract Especially primary-care, cardiology, other internal medicine subspecialties Some specialties still mostly independent Dermatology, ophthalmology
Other Options Practice leasing to hospital Sale to competitive group, or to newly trained doctor Group up, merge, get big and negotiate with payers Stay independent: organic growth with associate MDs or DOs, NPs, PAs
To Keep Options Open, For future sale For future buy-in Maintain Value To preserve your income and your survival Staying profitable and viable is basically the same thing as maintaining value If you are profitable and stable, you have options
Thoughts on Valuation Sales to hospitals Hospitals got burned in the 1990s by paying too much Don t expect too much in terms of upfront payment Of equal or greater importance is the compensation you will be paid, post-sale And other contract terms: termination, noncompetes, etc.
More on Hospital Sales The hospital may treat your practice as provider based This will enable the hospital to dramatically increase your charges to patients Your patients may not be happy with this Ask for details
Sales vs. Buy-ins Theoretically, there is a single value for your practice i.e., fair market value Regardless of the type of transaction (sale versus buy-in) Or identity of buyer (hospital or doctor)
Reality Check It is harder to get a big sales price in an outright sale situation, compared with buyin Buy-ins offer greater value to an associate physician More time to shift patients, grow practice Possible payment with pre-tax dollars
Identity of Buyer Matters Too Hospitals can deliver money to doctor via compensation package, rather than upfront purchase price Doctor or group practice buyers can t do that they are likely to pay more upfront, less on the backend compensation
What s for Sale? The Big Three Hard Assets Equipment, leasehold improvements, supplies, software Accounts Receivable Goodwill Includes going concern value, charts, phone number, staff, seller s endorsement of buyer
Hard Asset Valuation Room-by-room appraisal of equipment? Not available for all items Book Value? Nearly always too low Assets expensed under Section 179 These have an immediate book value of zero
Modified Book Value Approach Eliminate assets no longer in use Eliminate personal assets Recalculate depreciation 8- to 12-year life (overall) Straight-line depreciation Floor value: 20 percent of original cost Generally reasonable for most items
Supplies/Inventory Vaccines, drugs, other medical supplies Can be valued by physical inventory at closing Or just estimated based on annual expense and number of months or weeks of supply typically kept on hand
Accounts Receivable Typically not sold in an outright sale But they are part of buy-ins Valuation: face value times collection ratio Or what is actually collected (valuation after the fact)
Goodwill Goodwill: What is it? Any kind of intangible value Likelihood of patient returning to the practice Practice name, location, phone number Reputation in marketplace Value as a going concern: workforce in place, all systems ready to operate a medical practice
Goodwill Valuation Methods Income Approach Market Approach Asset Approach
Comparable Sales Method Same idea as pricing a house Benchmark value, based on neighborhood comparables Adjust for individual features Good: high profit, nice location, lifestyle, modern facilities, moderate competition, good payer mix Bad: low earnings, undesirable location, closed panels
Comparables Data Base HCG Goodwill Registry Specialty-by-specialty compilation of sales and buy-ins over past 10 years Goodwill calculated as percentage of annual gross receipts
Sample Goodwill Calculations Annual Revenues Goodwill Sales Price Goodwill Factor Solo #1 Solo #2 Solo #3 Average Median $600,000 $800,000 $900,000 $100,000 $200,000 $200,000 16.7% 25.0% 22.2% 21.3% 22.2%
From HCG Goodwill Registry (2014) Specialty Average Median Number of data points Family Practice 22.32% 19.54% 175 Internal Medicine 20.98% 17.90% 124 OB/GYN 22.4% 17.8% 60
Remember. THESE ARE (LONG-RUN) AVERAGES. YOUR VALUE MAY BE HIGHER OR LOWER!
FP Distribution of Values
IM Distribution of Values
OB/GYN Distribution of Values
And now.. Seven key ways to keep your practice valuable
Step #1: Keep Working! Would-be buyers are discouraged by declining revenue trend If you cut back your hours, your accessibility to patients and referrers will go down This could hurt business too
Step #2: Maintain Curb Appeal Your physical plant carpeting, paint, waiting room furniture Your website Your financial reporting
Step #3: Maintain Relationships With referrers To keep your volume up With hospital administration Future buy-out and employment With training programs New trained doctors for you to employ or to buy your practice
Step #4: Use Noncompete Clauses In your associate MD/DO and NP or PA agreements You can t sell your practice if your associate can run off with patients Also include a non-solicitation clause Associate may not take patient list
Step #5: Avoid Big Investments..if your time to sale is SHORT (one to three years) E.g., new EHR, new practice management system, new office Big expenses reduce the profits that you want to show buyer New EHR or practice management system will hurt productivity or cash flow
Step #6: Consider New Services Ancillaries can boost your bottom line Feasibility depends on upfront cost, whether you will use them, and willingness of payers to pay for them Not a short-term strategy more for the next four to six years
Step #7: Long-term Strategies You are in the game at least for the next four years Transition to EHR Consider a new office Add an MD Buy a competitor Merge with a competitor
Sealing the Deal: Nuts and Bolts
The Process Valuation seller establishes an asking price Search for buyer Buyer found letter of intent or term sheet Legal documents prepared asset purchase agreement, employment agreement Closing
The LOI Spells out basic deal terms Stock or assets, price to be paid, financing, post-sale employment Most provisions are not binding But some may be. Involve your attorney e.g. standstill or no-shop clause Term sheet is a stripped down LOI; no legal language
Structure of Sale Sellers want stock sales (all capital gain) Buyers want asset sales Better tax treatment for buyer Avoids liabilities Buyer can cherry-pick assets E.g. no purchase of accounts receivable or outdated equipment
Asset Sale Tax Allocation Total purchase price must be allocated among specific assets acquired: e.g. Equipment vs. goodwill Big tax planning opportunity; involve your accountant Parties must agree on allocation
Tax Allocation Example Item Seller wants: Buyer Wants: Goodwill $180,000 (cap. gain) $120,000 (slow write off) Equipment $20,000 (ord. income) $75,000 (fast write off) Inventory $5,000 (ord. income) $10,000 (immed. deduct) Total $205,000 $205,000
Payment Terms 100 percent bank financing is preferable, or Significant money upfront (50 percent +) Buyer has skin in the game
Security Personal guarantee of promissory note From buyer personally From buyer s spouse Collateral: all assets acquired PLUS buyer s future accounts receivable Attorney s fees, if seller must sue buyer
Post-sale Employment Compensation formula What protection against reimbursement cuts? Rising overhead? Term of contract how long is your compensation formula protected against change? Noncompete what if you want to exit?
Real Estate If you own your building, you can offer it to buyer But don t insist on it being part of the sale You can lease it to buyer, or sell to someone else Seller should avoid rights of first refusal or options to buy the real estate
Getting More Value for Your Practice Daniel M. Bernick, Esquire, MBA The Health Care Group Plymouth Meeting, PA www.healthcaregroup.com