Wednesday, September 4, 2013

Appraising a Practice: The Art of the Deal for Buyers and Sellers

Selling a medical practice
Most physicians and their managers will likely face buying and selling their medical practice (or shares in it) at least once in their careers. Healthcare financial advisor David Marcinko offers straightforward advice for anyone wondering what a medical practice is worth.  Arriving at a satisfactory price presents a daunting challenge to everyone involved - buyers and sellers alike must understand that an appraisal will produce only a price range - a starting point for final discussions. All the math and science, due diligence, and top-level appraisers’ fees will only create an environment for good old-fashioned negotiations. In the end, the only accurate valuation is the amount written on the buyer’s check.

Unless you’re a seasoned veteran of buying and selling medical practices, you will do well to find expert help—preferably from a specialist in physician practice appraisal. That’s because assets to be valued fall into two major categories: tangible and intangible. Nearly any competent appraiser can reliably value the tangible assets, such as real estate, leaseholds, and equipment and furnishings; but the intangibles, such as goodwill, contracts, restrictive covenants, and staff, present a somewhat unique challenge.

Before proceeding with the appraisal, Marcinko advises sellers to:
  • Choose a competent appraiser with a thorough understanding of the physician practice in today’s managed care environment.
  • Have your CPA produce three to five years’ worth of complete financial statements—balance sheet, cash flow, income statement, and operations statement.
  • Eliminate extraordinary expenses or revenue.
  • Calculate depreciation - especially if your specialty relies on a good deal of expensive technical instrumentation and equipment.
If you’re the buyer in the transaction, avoid these common errors:
  • Believing the seller’s representations without testing and verifying all data;
  • Failing to actually visit the practice you plan to buy;
  • Using up all available cash to make the purchase - meaning you are virtually bankrupt on Day One of your new business;
  • Making too many changes immediately, thus alienating (and potentially losing) patients, referrers, and staff;
  • Assuming managed care payors will automatically transfer old contracts to you;
  • Not understanding the value of an already assembled and available workforce; and ailing to “pull the trigger”- purchasers sometimes over-analyze the opportunity to the point of experiencing paralysis by analysis. If you can’t make a decision in a reasonable amount of time, practice ownership may not be for you.
As your negotiations zero in on an agreeable price, you may find some other issues require special consideration and creative terms. The author offers the following suggestions that have worked for other deal-makers:
  • Early on, secure a letter of intent with a good faith deposit placed in an escrow account until the sale is brought to a close.
  • When buying an existing practice, try negotiating for a commitment from the departing physician to assist in introducing you to the existing patients.
  • Include a formal statement confirming that the practice is not presently involved in any litigation.
  • Negotiate for some kind of death or disability insurance if there is any seller financing involved in the deal.
Finally, the author reminds sellers not to get stuck on a high price that your appraiser has clearly demonstrated. It does no good if no one will pay it! And buyers must remain flexible and open to special circumstances that may lead them to pay above “fair-market” price for a practice. “Price” is a slippery term. Here are several definitions to keep in mind:
  • Asking Price: often arbitrary, difficult to substantiate, and often cut by as much as half during negotiations
  • Realistic Price: one that both buyer and seller believe to be fair
  • riendly Price: the (often discounted) price for associates, partners, and other colleagues
  • Creative Price: one taking into consideration special circumstances such as seller providing down payment or financing or other “creative” deal-makers
  • Emotional Price: usually inflated by a motivated buyer or deflated by a motivated seller • Fair-market Value: a somewhat “scientific” price used by most appraisers, taking into account the immediate and general environment
  • Business Enterprise Value: a combination of all assets and the working capital of a continuing business
  • Owner’s Equity: an accounting term that includes all the owner’s assets (tangible and intangible) less all the liabilities (both booked and contingent)
In the end, of course, the axiom remains: Caveat emptor!
If you enjoy reading the blog entries in "Solving Problems in the Medical Practice" you may want to check out all the great products at Greenbranch Publishing.

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