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The difficulties of owning, selling a large, closely held practice
Good management and advance succession planning are key if a surgeon wants to sell this type of practice.
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Some exceptional eye surgeons have the confidence, perseverance and risk tolerance that is needed to start a practice from scratch and build it to a larger-than-average scale. These surgeons have talents that are different from those of their average peers. But these talents often carry with them several vexing difficulties when the time comes to admit partners or divest.
One especially pesky problem that can accompany high levels of ophthalmic entrepreneurism is a desire for control, and little tolerance for sharing, which can lead to the practice’s founder remaining the only owner, even after 10 or 20 years in business. Some of the most financially robust and surgically prolific practices in America follow this pattern. They may have three or five or even more ophthalmologists, but only one owner.
With the right choice in employee/associate providers, this flourishing business model can be lucrative and stable. And of course it can be gratifying to the founder, at least until the time comes either to grow to a larger institutional practice scale or to divest.
Unlike most large practices that scale up through the aggregation of partner-track associates and distribute not only ownership but production and leadership chores, the large, closely held practice is highly dependent on one high-powered leader-producer. It is not unusual to find the sole owner of four- or five-doctor practices still generating more than half of the collections and making all of the management decisions.
Poignantly, just about every larger, closely held practice I have worked for faces a succession planning challenge. This is especially so when the associates waiting in the wings to take over are younger doctors, loath to take on more debt at a time when their personal educational loans are still unpaid, family rearing costs loom and personal earning power has not yet been proven. These difficulties mount in the present reimbursement climate in which many feel the sky may be falling and ophthalmology’s historically high financial viability may be waning.
“Dr. Large”
In the most difficult settings, the founding doctor builds up a practice so large that he finds it impossible to find a buyer, even after several years of searching. The experience described here, abstracted as a composite of several client settings, is typical.
“Dr. Large” has practiced in a suburban northeastern community for more than 25 years. In that time, he has built a robust surgical practice with annual revenue in excess of $2 million, an ambulatory surgery center and a wonderfully dedicated lay staff, all working in a showplace office facility. Dr. Large has employed a number of hoped-for partners through the years, but no one who ever really clicked or had enough self-confidence to sign a partnership agreement. As a result, professional staffing eventually stabilized with an optometrist and a medical ophthalmologist, both non-partners.
In faltering health and with a mildly underfunded retirement portfolio, Dr. Large decides it is time to start succession planning. He hires recruiters and places the usual journal ads. Months pass, then quarters, then years. Many candidates come to examine the practice, but none accept the opportunity because even after steeply discounting the practice’s goodwill value, the tangible equipment and real estate segments of the practice still represent a massive investment, and few candidates see themselves capable of filling Dr. Large’s shoes.
As Dr. Large’s energy level continues to recede, so does his productivity, causing profit margins to soften and making the practice even less attractive to potential buyers.
Dr. Large, now approaching 66 years of age, finally has to fire sale the practice to a local competitor who is just standing by for the inevitable opportunity he knew would eventually fall into his lap if he waited long enough. And Dr. and Mrs. Large end up living out their days a lot less comfortably than they had hoped.
Alternatives
For surgeons like Dr. Large, the pattern is all too familiar. Many such doctors wind up working a few more years than they would prefer and then selling at a steep discount to whoever happens to be left in the auction hall. If you are the owner of a practice like Dr. Large’s, there are several alternatives to painting yourself into this uncomfortable corner.
The first alternative, and the one most under your control, is to use the higher profits typically generated in the large, closely held practice model to set aside sufficient retirement funds to make the proceeds from the eventual sale of your practice moot. Let’s apply this to the example of Dr. Large. If in each of the 25 years of successful practice he had set aside just another $40,000 or $50,000 in extra retirement savings, the resulting supplemental funds would eliminate any need to be paid for his practice by successors. Indeed, under this scenario, Dr. Large could have closed the doors, sold the building and equipment at salvage value, distributed the patients to colleagues in the community for free and done just fine.
Another alternative if you currently own a closely held practice is to think well ahead of your retirement and start adding an associate every few years. In this manner, rather than trying to find someone willing to take on what can be a multimillion dollar note to buy 100% of your practice, you can sell a quarter or less of the practice at a time.
Remember that there is no rule saying that a two-partner practice has to be owned 50-50. If you have a large two-doctor practice, and you, as the only owner, still generate the majority of revenue, it may be most practical — and perfectly fair — to sell to your associate only an amount of the practice that is pro rata to their personal collections, ie, if an associate is only generating 21% of the business, then that is all he or she buys, not a 50% position.
Strategies
To make a transaction more palatable for reticent associates, you can blunt their fears in a number of ways.
- Super-validate the practice’s value by securing a forensic-level valuation opinion.
- Sell only one practice segment at a time — first the core practice, then after that has been paid for the real estate, the ASC and then perhaps the separate equipment leasing corporation or optical.
- Finance in-house (with the seller taking back a note, rather than the buyer using third-party bank financing) and assure little or no downside risk for a number of years in the event the practice falters or does not live up to the buyer’s expectations.
- Index the pace of payments so that they do not exceed the new partner’s ability to pay (eg, “Payments on the practice-purchase note shall be $14,500 per month for 4 years but shall not exceed 10% of the distributable income to the new partner, with any deferred amounts carried at the prevailing interest rate.”)
- If necessary, sell just a scant share at a time, let’s say in palatable 5% increments.
All of these approaches have been used by owners to break through the all-too-common “large, closely held” problem. One of these, or several in combination, may allow you to move to the next level of scale and organization in your own practice or to pursue a desired succession strategy.
For Your Information:
- John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. Mr. Pinto is the country’s most-published author on ophthalmology management topics. He is the author of John Pinto’s Little Green Book of Ophthalmology, Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement, Cashflow: The Practical Art of Earning More From Your Ophthalmology Practice and the new book The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.