Selling Your Practice

Physicians in the later stages of their careers who have maintained their independence and resisted selling their practice often have a renewed interest in selling as they near retirement. This interest may be motivated by a desire to realize some value for their practice but it also is often driven by the desire to assure some level of continuity of care for their patients as well. Selling can be a good option and in many cases may be the only option. Recruiting a younger physician to buy into and take over your practice may have been an option in earlier generations, but the current generation of younger physicians has less interest in the business side of medicine and tends to be more averse to financial risks. Often the options come down to either selling or closing the practice.

THE UNIVERSE OF POTENTIAL PURCHASERS

The universe of potential purchasers generally consists of existing associates or partners, younger physicians seeking to start or build a practice, existing single and multispecialty group practices, and hospitals/health systems. Let’s take a closer look at each.

Existing Associates or Partners

If you are fortunate enough to have a newly recruited associate or existing partner, the buy-out terms typically were established on the front end, when that physician formally signed on or became a partner. Problem solved, right? Unfortunately no, this situation can present issues, too.

Upon your retirement, the remaining physician or physicians may face several economic issues that can affect you as well.

If the remaining physician or physicians have full practices, when you retire, regardless of the buy-out terms, they will lack the capacity to continue to serve all your patients. Recruiting a replacement for you needs to be planned well in advance because recruiting is difficult in many parts of the country and many young physicians prefer straight employment over becoming an associate on a partnership track. They have extensive debt and want to be certain of a regular paycheck and avoid uncertainty and penalties associated with paying down their medical school and training loans.

While you already have existing agreements regarding retirement and the sale of your ownership interest in the practice upon retirement, in many cases, these agreements were written years ago and may not accurately reflect the ability and intention of the remaining physicians. Two issues often arise in this situation: payment of the buyout and increased practice overhead.

Buyout payments usually involve the value for the furniture and equipment and the value of the accounts receivable. Sometimes buyouts include additional payments for intangible or goodwill value as well. The payment of these obligations, depending on how the payments are structured, can present a severe financial stress on the remaining physicians and may exceed what the remaining physicians can or are willing to absorb.

Increased practice overhead results because most overhead costs in a medical practice are fixed. Rent, for example, doesn’t go down when one physician retires unless the remaining physicians are able to move into smaller space or renegotiate the lease, which is often difficult or impossible. Staffing, sans perhaps a medical assistant or nurse, probably won’t decrease much either.

These two factors leave the remaining physicians with increased per-physician overhead layered with the payment of buyout obligations.

In the past, these factors could be overcome by recruiting a replacement physician, but in the current environment, the starting salary expectations and willingness and ability of the younger physicians to assume financial risk will likely make recruiting difficult if not impossible.

Ultimately, the financial resources of the group may not mesh with the existing agreements and many times these issues lead the practice to seek assistance from a local hospital. This assistance typically comes in two forms: an outright sale or recruiting support coupled with an income guarantee to a newly recruited physician.

Many hospitals will offer recruiting support and income guarantees to private practices as an alternative to purchasing the practice. Typically, under an income guarantee arrangement, the hospital will provide and pay for recruiting a new physician and guarantee the income of that physician for a period of one to two years. The income guarantee usually covers a predetermined monthly collection amount plus the incremental overhead the practice incurs as a result of the new physician — actually writing a check to the practice monthly to cover any shortfalls.

The income guarantee usually is structured as a loan that is forgiven over a period of years, typically two to three years, after the guarantee expires.

All of this may sound attractive, but it does present some issues that are often troublesome to younger physicians. Legally, the loan obligation is an obligation of the young physician, basically requiring him or her to stay in the practice until the loan is forgiven. Many young physicians prefer to avoid a commitment of four or five years and that commitment is often coupled with becoming a partner in the group after the guarantee period (typically two years) is over. As noted above, since younger physicians are mostly eschewing private practice for hospital employment, an income guarantee that puts them in a private practice may simply not be sellable.

On the positive side, assuming the right candidate can be found, the practice can maintain its independence while reaping the benefits the hospital guarantee provides. Hospitals have a better chance of recruiting a physician because they have deeper pockets — they can afford to pay the recruiting fees and offer market salaries, signing bonuses, student loan repayment, moving expense reimbursement, and other benefits that independent groups find difficult to afford without the income guarantee.

Younger Physicians Seeking to Start or Build a Practice

Younger physicians starting and building a private practice are generally in short supply. Many are laden with medical school debt and in recent years have been more interested in working for hospitals and health systems. They tend to be uninterested in the business side of medicine and are risk-averse.

A few years ago, I worked with a well-respected primary care physician who was in his mid-60s and contemplating retirement. He was negotiating with a young physician down the street who was just getting started about selling his practice and wasn’t making much progress so he brought my company in to try to move things along.

“He’s 64 years old,” the younger physician told me, “why should I pay him for his practice when I can run a newspaper ad in about six months and pick up most of it for free?”

This response illustrates a key point: the closer you get to retirement, the less value your practice will have. The younger physician wasn’t wrong. The reality is that when you retire, your patients will find another physician one way or another.

So plan ahead, start shopping early, and try to keep your plans close to the vest if you want to try to maintain your value.

Absent a viable succession plan in your private practice — existing partners or newly recruited associates interested in buying in to the practice and buying you out — selling to a hospital may be your only real viable option.

Existing Single and Multispecialty Groups

Existing single or multispecialty groups are other options for selling your practice. While these groups don’t exist in every community, those that do have often grown through merger or acquisition with established practices.

These groups usually have some of the same advantages as hospitals. They often have the financial resources, size, and stability to attract and recruit young physicians. While younger physicians may eschew small private practices, there is a level of attraction that comes with joining a large single or multispecialty group: working with like-minded peers and colleagues in an independent setting that has the financial resources necessary to compete in the marketplace with larger hospitals and health systems.

The bad news is that such groups generally attract other physicians through increased income rather than through payment of large purchase prices. As you look toward retirement, increased income is likely not your main focus — you want to realize some value for your practice.

Most larger group practices have a great deal of flexibility in their acquisition model and can move much more quickly than a hospital. Where synergies can be demonstrated and a transaction benefits both parties, in the right situation they can be a viable option worth considering.

Hospitals and Health Systems

All things considered, hospitals generally represent the best option in the universe of potential purchasers for a retiring physician. While you may not want to be employed by a hospital, to maximize the value from your practice, it may be necessary and even a good way to wind down your career.

This is where timing can have an impact on your value. Rather than just announcing your pending retirement, develop an outline of a transition plan and present it to potential hospital suitors two or three years in advance. A successful transition plan needs to allow plenty of time for execution.

A typical transition plan involves the following:

1. Sale of your practice to the hospital.

2. Joint recruitment by you and the hospital of a physician. You and the hospital work together to jointly recruit a physician to replace you upon retirement. This step can be in process or even take place before the sale.

3. You continue in practice as a hospital employee while the new physician is recruited and for a period of time afterward during which you gradually reduce your work level and consciously and deliberately transition your patients to the new physician.

If you are fortunate enough to practice in a community where there are two or more hospitals in heated competition, it may be possible to push the envelope on the sales price by creating competition for your practice. However, hospitals are highly regulated with respect to what they can pay for a practice.

Excerpted from The Three Stages of a Physician’s Career: Navigating from Training to Beyond Retirement edited by Neil H. Baum, MD; Joel M. Blau, CFP®; Peter S. Moskowitz, MD; And Ronald J. Paprocki, CFP®, JD.