What physicians need to consider when selling a practice

Jan 08, 2016, 5:00am

When considering selling a practice, physicians must consider the near- and long-term objectives of the practice's owners and of the acquiring organization, as well as how much autonomy the proposed arrangement allows the acquired practice, experts say.

David Wagener, M.B.A., C.P.A.In any partnership decision, dermatologists must strike a balance between economy and autonomy, according to experts during a mini-MBA session at the American Society for Dermatologic Surgery annual meeting (Chicago, 2015). They added that in an environment where physicians have long bought and sold practices among themselves, and private group practices have been uptrending, the entry of private equity (PE) firms merely provides sellers with another option to consider.

READ: Documentation and enxtenders top daily coding challenges

The biggest reason a physician might decide to sell his or her practice outright is that the physician is near retirement, says David Wagener, M.B.A., C.P.A., president of Advanced Dermatology Management (ADM) Inc. and CEO of Skin & Cancer Associates (SCA).  However, with the right offer on the table, many people would accept he suggests.

Seller's remorse

Consider such offers carefully, he advises. "Some physicians are receiving unsolicited overtures from people interested in acquiring their practice. If those people have excellent selling skills and are good at persuading people, sometimes sellers make irrational decisions and have seller's remorse down the road."

READ: Investor-owned dermatology practices: The pros and cons

You must weigh the pluses and potential pitfalls of the proposed deal and understand your own short- and long-term objectives, as well as clearly understand the acquiring firm's objectives and business plan, he said.

Mark S. Nestor, M.D., Ph.D."Group practices have some significant advantages if the group is put together right," says Mark S. Nestor, M.D., Ph.D. He is voluntary associate professor, department of dermatology and cutaneous surgery, University of Miami Miller School of Medicine. Group-practice advantages include economies of scale in purchasing, negotiating and other operations, he says.

"There's so much regulation now that it's incredibly costly for a solo or two-doctor practice to satisfy Medicare's Clinical Laboratory Improvement Amendments, Occupational Safety and Health Administration regulations, and employee and other regulations. It's much more efficient to do it within a well-organized bigger practice," he says. Referrals are much more straightforward in a large practice, he adds.

GET INFORMED: Equity firms pressure to sell: What’s best for you

Because many companies are buying medical practices, Dr. Nestor adds, various "flavors" of practice-management companies have sprung up. Some provide only billing services; others do far more. ADM, which is owned by the physicians it serves, manages his private group practice. Within this arrangement, "Billing and collections can be done in a very professional manner, including, since everything is dermatology, understanding coding - as well as all the exceptions - perfectly." The management company's experience and expertise also helps with audits, quality assurance, human resources, accounting and finance, he says.

While many PE firms have entered the physician-practice fray, Mr. Wagener says, ADM and SCA have grown privately and slowly, practice by practice, over many years. "We didn't need any third-party capital or expertise to build a thriving dermatology practice that now embodies 52 dermatologists in 32 locations."

The "pros" of selling one's practice to a large organization are fairly pragmatic, he says: cashing out, aligning with professionals and making a good business better.

ALSO READ: Practice setting should allow dermtologists to balance life and lifestyle

"The cons are more psychological. Doctors must realize they're giving up control," he adds. If one's practice is purchased by a top-down organization, Dr. Nestor says, "You lose autonomy in terms of how you want to practice."

PE firms currently acquiring practices don't plan to hold them long-term, Mr. Wagener notes, and they typically want the practice's original owner or owners to stay and attend to their investment.

NEXT: Doing the math

 

Doing the math

If it's a sole proprietorship that's run like an efficient business, which Mr. Wagener says is rare among physician practices, negotiations can be fairly straightforward because there is only one decision-maker. If a physician who owns a practice employing several other physicians makes $1 million annually from the practice, he explains, the PE firm might offer him $400,000 yearly to stay on. "So the physician, in effect, reduces his income by $600,000 annually, creating free cash flow or profit. That profitability is the basis for the price paid for the medical practice by the acquiring company. Where it gets sticky is if you have a practice of five or six physician-owners all making $600,000 yearly," he explains.

RECOMMENDED: Establish brand identity to unleash your practice’s potential

Each physician must agree to reduce their annual income by, say, $200,000 to free up perhaps $1 million in annual profit, Mr. Wagener says. "Now you have different people of different ages, with different points of view, who must come together to make a democratic decision. And each person will receive a smaller amount of money than the single owner in the previous example, so the dollars are less persuasive." 

Ultimately, he says, a PE firm's objective is "to buy a business, pay multiplier X for it, help build that practice up and sell it for a higher multiple of a higher profit,” he says. They buy it for $5 million, offer the doctor $4 million with the remaining amount as 20% in stock in this new entity, and tell the doctor that they’ll build it up, sell it and the extra million in stock could become worth another $5 million, he explains. This model has worked in dentistry and many healthcare specialties, such as emergency medicine, anesthesiology and radiology, he says.

But what happens if a practice fails to grow or meet new owners' targets? Mr. Wagener asks, "There are plenty of examples of for-profit operators purchasing physician practices, and the whole venture failing." In many cases he has seen, however, "The physicians have wound up buying their practices back for pennies on the dollar. There can be significant disruption along the way, but things could be worse."

READ: What you’re missing without a mission statement

On the other hand, Dr. Nestor says, "There are group practices that don't take away your autonomy - you function as a profit center, and you practice exactly the way you want to and earn accordingly, while reaping the benefits of superior management, compliance programs and support systems. That's the way our group practice is set up."

For any multi-physician practice, Mr. Wagener says, the number-one challenge is keeping associates happy: "paying them enough that they feel satisfied, but not so much that they're cannibalizing your income. It's a balance," and the complexity grows with the number of doctors.

"Every day," he says, "more places are employing physicians. Nowadays if you go into emergency medicine, you're not opening a private practice, you're going to join an ER doctor group. Dermatology has never been that way, but it's heading there. One of the primary options dermatologists will have in the future will be to take a job with one of many larger dermatology practices."

 

Disclosures: Dr. Nestor is a partner in SCA Dermatology, a 52-dermatologist group practice that is managed by Advanced Dermatology Management Inc., and he owns Strathspey Crown L.L.C. stock. David Wagener is a shareholder in Advanced Dermatology Management.