Three key steps to take when considering a practice sale or merger
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Mergers and acquisitions have come to private practice medicine during the last 5 years — and in a big way. It would be difficult to find a physician of any specialty in any U.S. location who is not aware of this trend.
Physicians reading this article are likely to personally know other physicians who have recently considered a practice sale or merger, or even consummated a transaction. Perhaps you are in this position yourself.
In our practice, we have seen this trend for more than a dozen years, as private equity firms began to consolidate practices in specific specialties. It began in pain management, then moved into ophthalmology, dermatology and dentistry, and continued with orthopedics and plastics/cosmetics — and now has reached nearly every specialty.
By advising physicians as their personal wealth managers, we have seen many merger and acquisition (M&A) transactions come to fruition. From this experience, and through interacting with many professionals in the field — including health care M&A attorneys, investment bankers, practice consultants and certified public accountants — we have observed three key steps for success when it comes to practice M&A deals.
Financially prepare the practice
Preparing the practice financially not only means having the books and records organized and in order but can be more broadly defined as maximizing the value of the practice to a potential acquirer. This objective can be achieved by creating processes and procedures for everything in the practice that is not clinical — from an initial patient intake and checkout to post-appointment follow-up and marketing.
Not only do such systems add value to an acquirer (as they know that this practice is regimented and can thrive through systems rather than by any one person running the show), they also add significant value to the practice even if you ultimately decide not to sell. By implementing processes and procedures throughout the practice, it will run more efficiently on a day-to-day basis, be able to thrive even through employee turnover, and will likely be more profitable — even if a sale never occurs.
Preparing the practice financially also includes maximizing EBITDA, or earnings before interest, taxes, depreciation and amortization. Nonrecurring expenses, owner-related expenses and excess owner compensation are often added back in the equation. This calculation allows the potential buyer to determine what the practice’s profit would be if the buyer owned the practice and had to pay reasonable compensation to physician employees to run it. Once again, getting a good handle on your practice’s EBITDA today and looking for ways to improve it may prove very valuable, whether one sells the practice or not.
Find the right advisory team
This may be the most important factor because the right advisory team will provide the expertise to make sure the other elements are in place; they will help to properly prepare the practice, maximize EBITDA and secure the right type of transaction.
The team should start with the personal financial advisor(s) of the practice partners. They can advise the doctors on the ramifications of a transaction on their personal finances and life goals. If a potential deal doesn’t fit with the physician’s personal life and financial goals, why even consider it? The team will always include a certified public accountant (CPA), often from the practice’s CPA firm, and will sometimes involve a special transaction CPA with experience in these types of deals.
An M&A attorney, preferably with experience in medical practice transactions, is essential. He or she will be the person ultimately responsible for representing the practice to make sure that the agreements reflect the best possible arrangement for the practice and its owners.
Finally, the team ideally includes an investment banker who represents the practice. An investment banker, especially one with experience in medical transactions, can often add many multiples of their fee in value to the sale.
One investment banker with experience in the space makes clear that their knowledge of the industry (what deals have transpired at what values) and competitive process (bringing in other potential buyers to create bidding activity) typically put the medical practice in a much better position than if the banker had never been involved. In fact, many bankers work primarily on a success fee, which ensures that they do well only if the practice does well.
Determine the right type of transaction
When it comes to M&As, one size does not fit all. One practice owner might want to sell 100% of his or her shares and consider the transaction to be an exit from their current practice. Another practice owner may be exploring the sale of a majority ownership or minority stake, while others may consider a combination of equity (ownership) and debt. The choice depends on whether the owners plan to relinquish control of the practice, want to add a financial partner to help them grow but stay in control, or hope to achieve some other objective.
Larger practices, especially those with great systems and EBITDA, may consider becoming a platform practice — one that brings on an investment partner and acquires a host of smaller practices in a geographic region.
For smaller practices, the most realistic option is to be acquired/merged into a larger practice. Many of these arrangements are extremely lucrative for the seller. When the sale of a practice occurs, things may change dramatically, including practice operations, physician compensation and employee management. So that everyone feels positive on the other side of the transaction, each participant should understand his or her personal goals and motivations for the deal from the outset.
Conclusion
As M&As continue throughout all medical specialties, many physicians will eventually consider becoming part of the trend. We hope the steps in this article help you prepare if a merger or sale becomes a real possibility for you and your practice.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
David B. Mandell, JD, MBA, is an attorney and partner in the wealth management firm OJM Group www.ojmgroup.com, where Jason M. O’Dell is the managing partner and financial consultant. They can be reached at 877-656-4362 or mandell@ojmgroup.com.
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