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Practice Management

The Surgeon's Guide to Selling a Practice

By Bhagwan Satiani, MD, MBA, FACS, FACHE(R), and Jessica L. Bailey-Wheaton, Esq.

Bhagwan Satiani, MD, MBA, FACS, Professor of Surgery Emeritus and Academy Professor, The Ohio State University College of Medicine, Columbus, OH; and Jessica L. Bailey-Wheaton, Esq., Senior Vice President and General Counsel, Health Capital Consultants, St. Louis, MO; present tips and considerations for selling a surgical practice.

While the life cycle of a surgical practice may vary, many surgeons at some point will consider selling all or part of their practice. The average age of retirement in the United States is 64 years old. Some specialty surgeons retire much earlier; the average provider ages in the following medical specialties are otolaryngology (54); plastics, neurosurgery, ophthalmology, and orthopedic surgery (55); and thoracic surgery (56).1

Other than retirement, there are several reasons for selling a practice, including the owner(s) wishes to grow, concerns about financial solvency, or burn out. Many surgeons may be attracted to the advantages of joining larger networks and health systems. Physicians can be part of an accountable care organization and population health panel, get favorable reimbursement from payers, not have to deal with the business of healthcare, and access capital for information technology and electronic health records. Beyond work preferences, physicians may also decide to sell for financial security (a more common reason these days due to the COVID-19 pandemic) and lifestyle considerations. The seller must consider and search for the type of buyers that may be interested in purchasing all or part of the practice (see Table 1).

Table 1. Types of Potential Buyers

  • Hospital or health system
  • Same specialty small practice or group
  • Large single- or multiple-specialty group expanding or entering the geographic location
  • Existing physician buyer

Our focus in this guide is on a surgeon selling to another practicing entity only, since the partnership agreement should cover any dealings between the physician shareholders. Selling a practice to a hospital or health system may be similar in terms of the valuation process, but many other considerations arise, including restrictive covenants (for example, non-compete agreements), so this situation is also not discussed here.

Because of the time and energy spent building the practice, there is an emotional component to a sale. Selling a practice is a significant milestone in the clinician’s (seller’s) life—both emotionally and financially. Some questions will need to be answered. Is your family supportive of selling? Is this a good time to sell? Will you be happier working for someone else and giving up your autonomy? Are you sure about what you will do with your time? What happens if the operating and controlling arrangements do not work out? How will you deal with the downsides of employment? The Medscape 2022 survey listed what employed physicians liked least about their jobs, which included: less autonomy (48%), more workplace rules (34%), less income potential (33%), and mandatory performance targets (24%).2

The Team

Like selling a house, selling a practice could take 12 months or longer and the process should start as soon as a firm decision is made. Once that decision is made, the owners will want to ensure that business documentation and licenses are up to date, compile documents, and resolve outstanding obligations. If sellers are seeking a specific value, they may want to proactively obtain a valuation (discussed later in this guide) of the practice and see what aspects may be improved upon to increase value.

Put together a team as soon as possible to bring in the necessary expertise for the efficient execution of the many facets of selling the practice at the best price possible. There are typically several professional advisors involved in these transactions who will help guide the buyer. For example:

  • Legal counsel will draft the contracts and ensure the deal does not violate healthcare laws.
  • Compliance must have a seat at the table from the start to help with due diligence so that you know exactly what you’re buying—the good, the bad, and the ugly.

Brokers can help you with many details of the negotiation and transaction, such as price negotiations and documentation of the deal. If a valuation is required, a valuation professional can help determine a reasonable value for your practice and provide a fair market value (FMV) report, if needed, to satisfy fraud and abuse law requirements. Financial planners/accountants can help you structure the transaction to be most advantageous to you regarding taxes, as well as future compensation, in line with your financial goals. Although there is no fixed time, most purchases will take at least 6 months. While some small practices may still record financial information using cash accounting, most have switched to accrual-based accounting. Since most physicians do not know enough about balance sheets, or income and cash flow statements, an accountant is a valuable member of the team. While a broker may have their own interests sometimes, they provide valuable information and assistance. It is important for the rest of the team to have a relevant healthcare background.

Types of Transactions

Generally, there are two types of practice transactions: asset and equity (see Table 2).

Table 2. Types of Practice Transactions

Equity

Asset

“Assets” of the Practice Are Sold

  • Seller can identify/acquire specific assets and liabilities to assume
  • Typically, favorable tax treatment for buyer (step up/goodwill amortization)

Equity (Stock/Membership Unit) Sale

  • Equity ownership changes hands
  • Same bank accounts, payor agreements, HR policies, etc.
  • Liabilities (known and unknown)

Asset transactions typically involve the sale of the entirety of the business; the seller can identify which specific assets and liabilities they want the buyer to assume. On the other hand, equity transactions, which are also known as stock or membership unit sales, typically occur when a physician is selling a piece of the practice, a certain percent of interest, or a certain number of shares in the business (although you can sell all of the equity of a business). When you sell the equity, the buyer can just assume the practice’s bank accounts, payor agreements, and HR policies, but that means the buyer also assumes the practice’s known and unknown liabilities.

The practice transaction life cycle is shown in Figure 1.

Figure 1. Practice Transaction Life Cycle. Used with permission from Health Capital Consultants

The Sale

As noted earlier, preparation for selling part of the practice should start at least a year prior to employment or retirement. If succession to partners within a group is being considered, it is important that the process is started 5–10 years ahead of time.

The seller must be clear about the goals for selling (as well as post-sale goals, particularly if the seller will then be an employee). Even more important, if there is more than 1 seller (a group practice or partners), their goals have to be aligned. This becomes a difficult task as the reasons for selling may vary. Younger and older partners may have different priorities and outlooks. Other complicating factors may include all partners not being equal shareholders, one physician having veto power, or only some physicians being owners of the building or ambulatory surgery center/office-based lab (OBL), while others are not.

Depending on the goals of selling, the seller has several options in terms of the sale. If the legal structure is a limited liability corporation (LLC) or a professional corporation (PC), the buyer receives membership interests or stock, respectively. If the seller or one of the owners wishes to merge with an existing practice and close their previous practice, the new practice then continues with assets and liabilities of both practices. In the rare situation where the seller wishes to keep certain parts of the existing practice, the buyer simply acquires assets and leaves liabilities with the seller.3 Depending on the transaction type, almost everything (such as equipment or other hard assets, or goodwill) would go to the buyer.

Negotiations

The buyer may also have concerns and the seller must be prepared to address these prior to any negotiations (Table 3).

Table 3. Potential Buyers’ Concerns

  • Location
  • Patient insurance mix
  • Revenue mix
  • Patient demographic details
  • Referral base
  • Employee and managerial snapshot
  • Valuation
  • Regulatory
  • Seller post-closing plans

For instance, the buyer may want to purchase the practice but on the condition that you, the seller, stay for a prescribed period (possibly a year or 2) to integrate the existing patients into the practice. If the seller is willing, the buyer can employ the seller on a W2 basis or pursuant to a transitional services agreement.

As the seller, you may believe it prudent to have the prospective buyer sign a nondisclosure agreement in order to keep the discussions private and also to prevent them from negotiating simultaneously with others while the sale is being discussed. Once the seller’s goals are clear, it is important to have the practice appraised to determine the FMV.

If the sale is to another group or a merger, many issues will have to be resolved including governance, scheduling of patients, call coverage, patient volumes, compensation, bonuses and incentives, benefits, and expense allocations.

Valuation

According to the IRS, a practical way to frame FMV is the price at which a practice would change hands between a willing buyer and seller when neither has any compulsion and both sides have reasonable knowledge of the facts. Per healthcare fraud and abuse laws, most exceptions (which make an otherwise illegal financial relationship permissible) require the price paid to be FMV. A practice valuation is utilized for a variety of reasons including mergers, acquisitions, and buying or selling the practice. The value of intangibles such as goodwill depends on the existing laws and practices in the area. There are no clear guidelines for estimating goodwill. So, the willing buyer and seller will have to negotiate goodwill, each putting forward their estimate of the reputation of the practice, payer mix, the net collection rate, and the practice location. A dialogue must also be held about how to deal with accounts receivables or other capital assets or liabilities such as bank loans. This can be factored into the valuation process. An appraiser will collect numerous data points before submitting a report.

A few additional notes on valuations are:

  • The cost of appraisal depends on the complexity of the deal being considered and the regulatory exposure, including whether the report is being wrapped up into a legal opinion on the deal.
  • Most reports are not formal but simply allow the seller to get an idea of the worth of their practice. These are called desktop pricing analyses and will, at a minimum, determine if the revenue stream is strong and confirmed by data and if there is predictability for a future income stream.
  • Commonly utilized valuation approaches, methods, and techniques include:
    • The Income Approach, which typically utilizes a discounted cash flow (DCF) method
    • The Asset or Cost-Based Approach, based on assets minus liabilities
    • The Market Approach, which is similar to real estate transactions using comparable sales in the area, but because there may not be enough practice sales in the area, the other two methods may be more practical.
  • The DCF method accounts for the existing surgical practice as a “going concern” that is expected to generate cash flows in the future, which is followed by estimating future revenues and expenses and then discounting it back to calculate present value of the projected profits.
  • Investment value may be defined as the specific value of an investment to a particular investor (or class of investors) based on individual investment requirements.5 The investment value is distinguished from FMV, which is impersonal and detached.

Price

The price is certainly open to negotiation and may rely on comps (comparable sales), although in most cases there will not be many similar surgical practices sold in that location. The price may also be decided based on the FMV opinion if one is obtained. The payment terms will also be negotiated.

A common method of valuing the practice is using multiples (or x-times earnings before interest, taxes, depreciation, amortization, or EBITDA) to arrive at the expected earnings in the future (see Figure 2). The multiple is open to negotiations as the parties will arrive at the number depending on the local market, rate of growth, referral patterns accelerating, the scope of the practice, local economy, and population growth. If the seller is retiring or moving outside the geographical area, the purchase price can be paid in cash or over an agreed-upon schedule. If not, the buyer may propose some cash, stock in the company, or earn-outs (i.e., compensation in the future if the practice achieves some financial targets, commonly a percentage of gross sales or earnings).

Figure 2. Purchase Price Methodology: Private Equity or Other Physician

When the purchaser is a hospital, the pricing methodology will differ because under fraud and abuse laws, the hospital cannot pay based on the volume or value of referrals, which paying a percentage of practice revenue can implicate. Therefore, the various portions of the practice are valued and attributed to the buyer or seller (Figure 3).

Figure 3. Practice Purchase Price Methodology: Physician/Hospital

The entire transaction must meet accounting, financial, and legal standards while benefitting the buyer and seller from a tax standpoint. A lot may also depend on the state where the transaction takes place because of state and local taxes.

Miscellaneous Items

Another item to consider may be potential tail medical malpractice expenses. This may involve purchasing a tail policy or paying for converting claims made to an occurrence policy.

What happens if the seller owns the real estate where the practice is located? The buyer may elect to include the market value of the real estate in the transaction, or an “arm’s length” lease may be worked out. Similar negotiations are held for any ancillary services or an ambulatory surgery center/OBL if the seller wishes to sell these as well. Those are often sold under a separate transactional agreement.

After the deal closes, the practice will have to notify patients, the liabilities carrier, and state and federal agencies as to the change in ownership. Whenever a practice undergoes a transaction wherein a majority of the business changes hands, there will nearly always be some notice, consent, application, or other process to engage in with respect to each permit,  including each license, certificate of need, certification, provider number, or filing with any governmental body necessary for the conduct of, or relating to the operation of, the practice. Whether the seller or the purchaser is responsible for such notices may be a negotiation point.

Documents

A (non-exhaustive) list of documents buyers will need to access:

  • Articles of Incorporation or Organization
  • Bylaws or Operating Agreement
  • Shareholders' Agreement
  • Minutes and Resolutions by Consent
  • ACO, IPA, and Similar Agreements
  • Leases: Realty and Equipment
  • Management Agreements
  • Payor Contracts
  • Employment Agreements
  • Corporate Compliance Plan
  • Loan Documents
  • Supplier and Service Contacts
  • Financial Statements
  • Tax Returns
  • Insurance Policies
  • Intellectual Property Licenses

Due Diligence

Due Diligence means taking reasonable steps such as an accurate appraisal of the business and facts to satisfy a buyer before the purchase (see Table 4).

Table 4. Due Diligence

Type of Due Diligence

Details

Corporate

  • Provide an organizational chart, governing and constitutional documents of the corporation/organization, and minutes of any board, shareholder, and managerial meetings
  • List all related party transactions including the practice’s policies with respect to related party transactions
  • Compile the CVs for all board members, managers, and vital employees
  • Compile all information about the capital structure of the practice that is not included on the Statement of Shareholder Equity
  • Compile a list of all the practice’s permits, licenses, and authorizations
  • Disclose if the practice is currently restricted from doing business under any regulatory or legal provision and collect any communications with a regulatory agency, litigation, and investigation matters

Compliance

  • Practice’s compliance policies and program, oversight, operational structure, evaluations, and any related documentation
  • Document review of policy and procedure differences to determine integration changes
  • Billing and coding reviews, denials, payor contracts, and audits
  • Training documentation
  • HIPAA compliance, inspection, and survey findings

Tax

  • Copies of all federal, state, and local tax returns and any audits for the past 5 years including the resolution of any findings
  • Copies of any tax sharing, tax allocation or related inter-company agreements
  • Summary of all deferred tax assets, valuation allowances, and deferred tax liabilities
  • Summary of any tax assets (carried forward trading or capital losses, excess management expenses), including details of how they are reflected in the statutory accounts
  • Summary of any sale and leaseback transactions
  • Details regarding the tax base cost of major assets where their base cost is other than original cost

Financial

  • Copies of audited and unaudited financial statements and each subsidiary and affiliates
  • Detailed descriptions of any off-balance sheet/statement of financial position items, liabilities, or obligations of any nature
  • Schedule and description of any contingent liabilities not disclosed or referred to in the financial statements
  • Detailed schedule of the components of all prepaid expenses and deposits
  • Summary of all material changes to accounting policies adopted
  • Copies of all budgets, operating plans, and financial projections
  • Summary of any cash management controls and practices
  • Summary of investment policies
  • Report reflecting all aged accounts receivable trial balances
  • Summary of the Practice’s inventory costing system and other procedures and policies related to inventory
  • All vendor contracts

Human Resources

  • List of current employees and/or independent contractors
  • Obtain employee rules-of-conduct handbooks and safety policies
  • Determine which employees should stay with the practice
  • Review past employee disputes and future problems
  • Review employee and/or independent contractor agreements
  • Provider credentialing files
  • Review employee health insurance and retirement plans
  • Obtain a list of employee grievances and complaints
  • Evaluate policies about labor unions and check for pending labor disputes or lawsuits
  • Review workplace accidents and/or worker's compensation claims in the past 5 years
  • Obtain documents and/or videos of new hire orientation and training sessions
  • Review policies about sick days, paid holidays, paid vacations, and overtime pay
  • Review policies about bonuses, incentives, commissions, and deferred compensation
  • Evaluate emergency training and recovery plans

Information Technology and Intellectual Property

  • Details of any current and planned IT initiatives/key projects
  • Summary of all key IT resources, the practice's policies and procedures regarding the purchase and maintenance of software and hardware
  • Summary of all material software and hardware utilized by the practice including the physical location thereof
  • Diagram of the practice’s technical architecture including servers, storage devices, operating systems, and databases 
  • Description of the networking systems utilized by the practice
  • Summary of any specific hardware configurations utilized
  • Summary of any external IT contractors/consultants, vendor support or other support services and summary of services provided by all external IT contractors/consultants to which the practice is entitled
  • Summary of annual costs associated with maintenance of IT hardware for the past 3 years
  • Copies of all material contracts related to software and/or IT services obtained by the practice
  • Description of the capacity for growth in the practice's current IT environment
  • Summary of how technology is acquired by the practice
  • Description of the key security protocols adopted by the practice
  • Description of the practice's policies and procedures related to backups and/or disaster recovery 
  • Description of the practice's data privacy policies and procedures
  • Summary of all personal and/or sensitive information held and/or processed by the practice
  • Summary of all monitoring measures/tests conducted

Conclusions

It is important at the start to be clear about the strategy and goals, and to define the ideal type of buyer for the selling surgeon’s long-term success and happiness. Be prepared to provide all the necessary documentation and permits. The practice is easier to sell if it is profitable, so it is best to consider selling while it is. You are only as good as your team, so be sure to recruit legal counsel; compliance, broker, and valuation professionals; and/or a financial planner or accountant at the outset so that nothing is missed.

Valuable information (post-closing items, drafting of agreements, and regulatory agreements) is available in The Surgeons Guide to Buying a Practice.

Read Surgeons Guide to Buying a Practice

About the Authors

Bhagwan Satiani MD, MBA, FACHE(R), FACS, is Professor Emeritus of surgery at The Ohio State University in Columbus.

Jessica L. Bailey-Wheaton, Esq., is Senior Vice President & General Counsel at Health Capital Consultants in St. Louis, MO.