Getting a good selling price for your podiatry practice is a complex endeavor and can be particularly challenging in these unstable economic times. This author reviews seven elements that can help physicians attain maximum value for the practice and also offers insights on the valuation process.
Preparing your practice for a sale can be a very emotional and challenging exercise. I have spoken to many physicians around the country who are always asking me how much their practices are worth. That is like asking someone over the phone, “How much would you pay me for my house?”
There are a lot of factors that go into selling your practice. Accordingly, I would like to offer very realistic and practical advice on how to prepare your practice so you can maximize the sales price. The better shape your practice is in, the higher the price you will be able to receive upon a sale. I have been buying practices for the past 20 years and I have made my share of mistakes. However, you cannot succeed unless you make and learn from your mistakes. My knowledge in the trenches will hopefully provide very real life information to prevent you from making serious mistakes as you prepare for the sale of the podiatry practice.
Remember that a podiatry practice is purely an asset. I constantly hear the following: “I have put 30 years into this practice and I can’t just give it away.” Although you might feel this way, when you are selling the practice, you are giving someone else the opportunity to recognize the profits and revenue after paying you for the practice.
Selling a practice is no different than selling any other type of business and you need to view it this way or you might never survive the process that leads to the end result: getting the best value possible for the practice. Always be objective and realize that the best time to sell any asset is when you do not have to sell it. This works the same in reverse. The best time to buy any asset is when you do not have to buy it. A physician practice is just another asset that gives the investor a return on his or her investment and the price ultimately comes down to what the buyer is willing to pay, regardless of how much you think it is worth.
There are seven essential factors to understand when planning for the sale of your practice. These essential elements will provide a good base of knowledge to understand the valuation process.
1. Plan Practice Sales At Least Two To Three Years In Advance
One of the biggest problems that I have seen in the marketplace is that physicians do not plan far enough in advance to sell their practice. As a result, they take a steep discount or are even forced to sell it at a “fire sale” price if it sells at all. When I meet with physicians who are within three to five years from retirement age, I always ask them: “What are your plans for retirement?” The most common answer I get is, “I am never going to retire and will work until I cannot work anymore.”
This approach is music to a buyer’s ear since it is impossible to work forever and you will be setting yourself up for a fire sale. Is that response realistic? You need to be grounded in reality. It is impossible to work forever.
Retirement is a very sad time for many physicians not only because they have to stop doing something they have loved to do for the past 30 years, but also because many physicians did not properly plan for retirement and cannot afford to retire. There is a fundamental economic principle that “expenses rise to your level of income” and I have found this to be no truer than in the physician world. Most physicians have created a lifestyle in which they spend everything they make, cannot afford to retire and do not even want to think about the reality of not working. Unfortunately, this is not 100 percent the fault of physicians since physicians are not trained on money management and wealth creation was never part of our training.
As entrepreneur Doug Curling, one of my mentors, always says: “Being a doctor is what you do, (it is) not who you are.” Unfortunately, many of our egos drive our self-esteem and giving that up can lead to major depression for many of our colleagues.
2. Clean Up Your Practice’s Financial Statements
It is very common for physicians who are in solo or small group practices to run personal expenses through the practice to reduce personal income taxes. Although this might be saving money in taxes, it actually decreases the value of the practice since practices, just like other businesses, are valued on profitability. Therefore, one should avoid this accounting method if he or she wants to maximize the practice’s value.
In addition, in the current banking climate, banks are often unwilling to add back personal expenses when validating the value of your practice. Try to change your practice accounting at least two to three years prior to putting it on the market. This will not only allow you to maximize your sale value but will limit your liability exposure to the Internal Revenue Service (IRS).
If you want more information of what is allowable in terms of business versus personal expense write-offs, you can go to the IRS Tax Manual, Section 179 (property).
3. Keep Important Documents Organized
When putting a practice up for sale, it is common for appraisers, buyers and other consultants to request the same documents. The more organized these documents are, the more perceived value and confidence the buyer will have when evaluating your practice. You will also save some money in legal and accounting fees if you are very organized.
Some of the most common documents to include in the presentation portfolio include: three years of financial statements and tax returns; a detailed payer mix by revenue for the past three years; updated accounts payable and receivable reports; articles of incorporation; company bylaws; and a copy of the corporate minutes book if you have one. In addition, I would include any liabilities with current or past employees, worker’s comp claims and pending litigations.
Finally, you should prepare a separate book including all managed care contracts because a buyer will want to make sure those contracts are transferable. If a buyer decides to purchase your practice and finds out that he or she cannot get on managed plans you are currently on, this could be a very negative factor and lower the value of the practice.
Some other documents needed in the preparation process will be copies of all leases and contracts for real estate, equipment, and physician and non-physician employment contracts. Most likely, any buyer will want you to pay off all debts at closing.
4. Provide Info On Billing And CPT Code Analysis
I would provide a separate report showing how you bill by Current Procedural Terminology (CPT) code in the form of some type of charge/paid tracking analysis report. This serves a couple of purposes and is very important in being transparent in your transaction. A buyer will want to make sure that the practice’s revenue is accruing in an ethical and legal manner, and will want to see if you are under-coding, over-coding or incorrectly coding.
When my colleagues and I evaluate practices, it is not uncommon to see physicians who bill the same way they billed 20 years ago and have not changed due to pure ignorance. This complicates the entire process. This can work either to the buyer’s or seller’s advantage. Either way, this will be assessed prior to a final offer or commitment.
5. Do Not Negotiate Sales On Your Own
A consultant is going to be your best investment since you need to detach yourself from the sale. This will take the emotional part out of the equation. Many physicians have spent 30 plus years building a practice and treat it like their own child. How do you put a value on your child?
To value your practice objectively, hire an outside firm that specializes in medical practice sales and preferably podiatry sales. The more specialized the consultant, the more realistic the practice valuation will be as it pertains to podiatry. The average appraisal will range from $7,000 to $12,000 depending on the complexity of the practice.
When my colleagues and I purchase practices, we will perform our own valuations since we have in-house investment bankers. However, we still tell the sellers to find an outside person to value their practice if they disagree with our valuation. Again, we do this because if we purchase a practice, we want to make sure both parties feel good after the transaction.
I personally will meet with all prospects and review all the due diligence, but I never negotiate the price. This is because you have to be completely unemotional and it is hard even for the buyer to be non-emotional in the negotiations. As a seller, separate yourself from the negotiations but make sure to let the consultant know your expectations. If the consultant is experienced, he or she will tell you if your expectations are unrealistic with current market conditions. Remember, you can have the greatest appraisal in the world but if your expectations are too high, you will never get your price.
Think of this like selling a house. Hire a broker who negotiates for you. In a seller’s market, you get a high price. In a buyer’s market, you will get a lower price. Unfortunately, the prices of podiatry practices have been decreasing in value. In lieu of this trend, there are things you can do to increase your practice’s value. I will address this shortly.
6. Engage A Lawyer And Accountant Early In The Process
It is very important to get an accountant or lawyer involved early on in the process since there could be tax ramifications that can hurt or help you, depending on the way the sale is structured. Position the sale in such a way that there are minimal tax liabilities post-sale. Please note that the buyer wants the same benefits so it is critically important to understand your post-sale obligations, if any, to the IRS. I have witnessed so many physicians who have sold their practices not knowing the tax liabilities post-sale only to find out that they owe the government a huge sum of money in the future when they sell the practice. If you have a good accountant and attorney, this will help you come to a reasonable resolution.
Early on in my career, I made mistakes only to find out later that I would owe the IRS a nice sum of money. When you retire, you cannot afford to make any mistakes.
It is imperative that you hire accountants and lawyers who are leaders in the field of healthcare transactions. This is one area where you do not want to pinch pennies.
Finally, maintain control of the sale by having the attorney prepare the offering documents and all the legal documents rather than letting the buyer write the offer. If you need a reference for an attorney, consult my contact information at the end of this article.
7. Take The Training Wheels Off The Practice
Ensuring your practice can get by without you is not an easy task. To the extent that you can get your practice to the point where you can just replace yourself and it can continue running as a smoothly oiled machine, you will get a lot of points for this from a buyer’s perspective.
Too often, the success of a practice is the direct result of the physician owner being involved in every aspect of the business. This is often a problem for other physicians who want to buy your practice and do not have the proper skill set to run a practice. This means making sure that all the managerial functions of the business are not dependent on the selling physician and you have adequate personnel who can make the transition seamless to the purchasing physician. It is an advantage to have seasoned staff that can run the practice with or without you, and all you need to do is have a plan to transition the new physician seamlessly into the practice.
I have also personally witnessed situations when one of the non-managing partners or associates buys the practice only to have the practice decline dramatically when the selling managing partner retires and leaves the practice. This is one of the most devastating events that could happen to a practice.
How To Increase The Practice’s Valuation
Now that you know what is necessary in preparing your practice for sale, it is time to understand how practices are valued and what you can do to increase you valuation. Regardless of which methodology you use in valuing your practice, it all comes down to what the buyer will pay and what the seller will accept.
There are three general approaches used to valuing a practice. These approaches include the cost approach, income approach and market approach. Usually, blends of all three can help determine a final number. If you ask 1,000 experts to place a value on your practice, you will probably get 1,000 different answers. It is very important to understand this one very valuable comment: “Value is determined. Price is negotiated. Don’t ever confuse value with price.”
The cost approach. This is based on the value of assets in the practice. The first method in the cost approach is the book value of the practice, which is the aggregate value of all assets minus liabilities that equals the equity of the practice.
The net asset value method is more commonly used. This involves adjusting the value of tangible assets and liabilities to their fair market value. This method reports greater value of assets than net book value on the balance sheets and accounts for intangibles. What do we mean by tangible assets versus intangible assets? Tangible assets relate to property, such as equipment, cash, accounts receivable, land and office buildings. Intangible assets are non-monetary in nature. Examples of intangible assets would be the doctor’s skill, reputation and management qualities.
(For examples of this valuation, see “A Basic Primer For Using The Book Value Method” and “A Guide To The Adjusted Book Value Method” at right).
The income approach. This approach employs one of two common methods: the discounted cash flow or the single period capitalization of income method. The bottom line is that with these approaches, the practice’s worth is directly related to the present value of all future cash flows or earnings that the practice should produce.
This can get quite complicated but ask yourself what you would pay today for all projected future cash flows from the practice for the next five years. Take into account some type of discount rate to account for risk, such as reimbursement changes, location risks, competition risks, contract risks, etc. For example, let us say that a practice will generate $400,000 in profit over the next five years. What would you be willing to accept today to forgo all future profits (i.e. sell the practice)? The higher the risk and the smaller the practice, the higher the discount rate. A 30 to 50 percent discount rate is not uncommon and that could put a value range of $200,000 to $280,000 for that practice.
The market approach. This method uses comparable practice sales to determine the value of your practice. This is often the hardest one to perform since most practice sale knowledge is not public. I have found that in the podiatry world, practices are selling for 30 to 50 percent of the previous 12 months’ gross collections.
It is vital to have a good education on how to prepare your practice for a sale as well as a grasp of the three main valuation methods used in valuing physician practices. I have even more detailed information about practice valuations and will share this information in another article in the near future.
Dr. Helfman is the CEO and founder of Village Podiatry Centers in Atlanta. For more information, contact the author at email@example.com or visit the Physicians Business Academy at www.physiciansbusinessacademy.com .
For further reading, see “How To Obtain Premium Value For Your Practice” in the September 2006 issue of Podiatry Today, “Seven Reasons To Appraise Your Practice” in the August 2004 issue or “Essentials To Planning For A Successful Retirement” in the March 2004 issue.