Having worked in the dynamic field of medicine and having run your own practice are significant achievements. However, there comes a time when you retire, and selling your medical practice to a strategic buyer is one option for funding your retirement. The idea of letting go of your practice might be scary, but it is also practical. The biggest challenge is making up your mind to exit; once that is done, the real work begins.
What Does a Strategic Buyer Want?
The task at hand is to position your medical practice as a valuable opportunity to a strategic buyer. This buyer can be a specialized medical practitioner, a healthcare network, or a private equity firm. For a buyer, your medical practice could be a source of additional income, a way to expand your business, or a new specialty line. While your medical practice may be your priceless possession, for the buyer, it has a price.
There are several methods to value a medical practice. The technique that’s best for you depends on what’s most attractive about your practice. For instance, in a pediatric practice, long-term patients are its prized possession, as they keep bringing in recurring revenue and referring friends and family. For specialty practices such as cardiology and gynecology, the physicians and their equipment are valuable. Identify your niche that adds value.
Preparing Medical Practice for Sale
Before you begin spreading the word to attract potential buyers, gather all critical documentation related to your practice. This includes legal, financial, and operational documents such as your tax returns for the past 3-5 years, profit and loss statements, balance sheets, accounts receivable reports, lease agreements, vendor agreements, inventory lists and more. Moreover, you also need to have all updated patient records and data ready, as well as all necessary licenses and permits.
Just like you wash your car and check for any repairs before selling the vehicle, your business also needs due diligence, hygiene checks, and audits. The above documents not only facilitate the smooth sale of your practice but also help review and rectify any inefficiencies or gaps before selling it. A spotless reputation and well-organized business are likely to get a higher price in the market.
Factors That Affect the Valuation of Your Medical Practice
Now that you have all the papers in hand and have corrected any slipups in your practice, it’s time to actually put a price on your business. There are three primary methods of valuing any business:
- Income-based: This method calculates how much your practice actually earns to set a price for it. It checks whether your profitability is good, whether your revenue flow is stable, and whether you have a strong network of insurers that expedite patients’ insurance claims.
- Asset-based: This method takes into consideration the value of any tangible equipment, as well as how vast and loyal your patient base is. After all, for a medical practitioner, patients are your most significant assets. High attrition rates in patient numbers can impact your valuation. Consider reaching out to such patients to understand their reasons for leaving. By addressing constructive feedback and strengthening your patient base, you can significantly increase your valuation.
- Market-based: Location is essential for any business, and the same holds true for medical practices as well. Setting up your practice in an affluent neighbourhood or one well connected to public transport, offices, and schools can lead to higher valuations. Also important is the kind of patients you cater to. Specialized practices, such as pediatricians in areas near schools or elderly care clinics near retirement homes, also add to your value.
Apart from these three main valuation criteria, other factors can influence valuation, such as –
Reimbursement Rates: Smooth, efficient billing processes with a high insurance reimbursement rate help keep your cash flow and revenue flowing, attracting higher valuations.
Collections & Accounts Receivable: Being punctual with your accounts receivables, ensuring any outstanding dues are collected within the stipulated time, and maintaining strong cash flow indicates a disciplined approach to accounting and overall operational accuracy – something that strategic buyers value highly. If you happen to spot any gaps in your books of accounts and delays in accounts receivable, it’s a good time to tighten the reins and regain control of your medical practice’s finances.
Technology Integration: Using the latest medical technology and equipment, including artificial intelligence (AI)-driven diagnostics, robotic surgery tools, and telemedicine systems, increases your valuation immensely, especially in specialized practices. Using technology and specialized software to keep patient records up to date for accounting, billing, or workflow improvements also garners higher valuations.
Compliance and Quality Metrics: Medical practices adhere to strict compliance rules, particularly regarding patient safety and operations. Ensuring all your permits and licenses are up to date and government-compliant is essential for getting a reasonable price. Any pending legal issues or malpractice complaints can severely affect your valuation. Also, offering specialized or ancillary services, such as physiotherapy or diagnostic tests, is a big plus.
Physician Productivity and Practice Branding: You might have the best and latest medical equipment in the best possible locality, but medical care ultimately depends on how good and skilled the physician is. The expertise, attitude, and reliability of your team of physicians are your most significant valuation factor. Do patients trust you and other physicians employed by you? What are the referral rates? How intense is patient satisfaction? And how well-connected and respected are you in your own medical fraternity? All these factors play a significant role in solidifying your image as a highly valued medical practitioner. Encouraging your team to expand their contact networks and upskill themselves can help increase valuation.
Growth Opportunities: Another factor that decides your valuation is the scope for growth in your practice. Buyers are usually looking to buy medical practices that can be expanded by adding new treatments or branched out to various locations in the long term. Highlighting such opportunities in your existing practice can be a game-changer for valuation.
Nuances in Selling a Medical Practice
Selling even a small solo medical practice can take 6-12 months, including valuation, identifying qualified buyers, negotiations around sale price and terms, transition planning, and finalizing complex purchase agreements.
This is where all your efforts to enhance the value of your practice will fructify, provided the sale goes through smoothly. At this step, patience and efficient execution are essential. Any shortcuts or rushing in closing the deal could put you at a disadvantage in the negotiation. If the financial documentation is not proper or the sale agreement is not carefully structured, you might lose significant value, face a hefty tax bill, and incur regulatory and compliance risks.
Selling your medical practice is a high-stakes process. Having a team of financial, legal, business, and tax consultants can help you navigate this complex process efficiently and get you the best available offer.
While the business consultant can help you improve business valuation, the accountant can prepare the financial statements and other documents, and the financial consultant can scout for strategic buyers and play a valuable part in negotiations. The legal expert can review the licenses and agreements, and the tax advisor can structure the deal to reduce tax obligations.
Contact MW&CO in Woodstock to Help You with the Valuation of Your Medical Practice
At MW&CO, our team of accountants, business consultants, and tax advisors can provide due diligence, prepare financial statements, and develop strategies to improve business valuation. To learn more about how MW&CO can provide you with the best accounting, consulting, and tax expertise, contact us online or by telephone at 519-539-6109 or toll-free at 1-877-539-6109.