The Sale of Physician Practices
Physician practices are one of the most sought after business in South Florida. The recession-resistant nature of the medical industry along with the fact that Florida has the second highest percentage of seniors (age 65-84) in the nation leads to very strong demand for physician practices. Most doctor offices are owned by physicians, but others are owned by large chains, hospitals, or entrepreneurs. In all cases, a physician practice should be sold confidentially and with the assistance of a professional business broker. A confidential sale insulates patients, staff, and competitors from the potential sale so that the practice will run smoothly during the sales process.
Ancillary Services Often Key to Sale
Many physician practices offer ancillary services to their patients, which are often a substantial amount of the revenue and profits earned by the practice. For example, many dermatologists offer spa services (such as laser treatments), neurologists offer sleep centers, internal medicine doctors offer blood and lab work, and orthopedic surgeons offer physical therapy services within their own practice. Often these ancillary services require a very large capital investment in the form of equipment, but the payoff is usually well worth the investment. Ancillary services are often a primary component of the value of a physician practice, and can significantly increase their value when it comes time to sell.
Potential Buyers of Physician Practices
The most common buyer of physician practices is a physician who is either just beginning their career or seeking a career change. Most physicians will qualify for external financing (backed by the Small Business Administration) because of their qualifications and unique expertise in being able to operate a physician practice. Hospitals also purchase physician practices as a way to cement their relationships with practicing physicians and as a way to create profit centers. Private equity groups and non-physician entrepreneurs also purchase physician practices as investment opportunities even though they must employ physicians to operate the practices.
Insurance Considerations
- Insurance contracts and reimbursements are the lifeblood of most physician practices as the main source of cash flow.
- In order to maintain the value of the practice, it is crucial that these insurance contracts are properly transferred to the buyer.
- Otherwise, the buyer will not have the same level of revenue and patient flow as the seller, so the practice will be less valuable.
- Many sales of physician practices are thus structured as a ‘stock purchase deal.’
- This means that the buyer will purchase the shares of the seller’s corporate entity and become its new owner (thus retaining the seller’s tax identification number).
- The downside is that the buyer will also inherit the liability of the seller’s corporate entity.
- Still, it is a risk worth taking for most buyers if it means retaining the valuable insurance contracts.
- Most business transactions are structured as ‘asset purchase deals’ whereby the buyer forms their own corporate entity and buys the assets of the seller’s corporate entity (without retaining any potential liability from the seller).
Determine Adjusted Owner Benefit of Physician Practice
In order to properly value a physician practice, its adjusted owner benefit must be determined. Adjusted owner benefit refers to the actual economic profits derived by a working owner. First, one calculates the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) from the most recent financial statement such as a tax return or profit and loss report. Then one ‘adds-back’ any of the owner’s personal expenses that flow through the financial statement, the owner’s salary, and any irregular or non-recurring expenses that would not be incurred by the buyer of the practice. The adjusted owner benefit should ideally be calculated for the past three years to get a sense of the growth and stability of the practice.
Use Cash-Based Method of Accounting
In most physician practices, payments for services rendered are received (if ever) after the rendering of services. This creates accounts receivable, or money that is owed for services rendered. The financials of a physician practice should reflect the cash-based method of accounting, which recognizes revenue and expenses at the time cash is received or paid out. Buyers will want to see what the financials look like based on the cash actually received (not just billed). At the same time, many sellers of physician practices will retain their accounts receivable in a sale, and collect the money on their own or in conjunction with the buyer after the sale.
Factors Affecting Valuation of Physician Practices
- Once the properly adjusted owner benefit is calculating using the cash-based method of accounting, a valuation multiple of 2-4x the owner benefit is usually assigned.
- The valuation range depends on the quality of the practice, the expected future growth of the practice, the transferability of the practice, and the equipment included in the sale.
- Equipment can greatly affect the valuation of physician practices with ancillary services that may have extremely valuable physical assets in place.
- If the owner of a physician practice is a non-physician or absentee, then the valuation will increase.
- This is because the financials of the practice already reflect salaries and payments to practicing physicians who are operating the practice.
- Conversely, a practice with a working physician-owner (particularly with no other practicing physicians on staff) will receive a lower valuation because the buyer will need to replace them with their own labor or payroll expense.
- Note, however, that the adjusted owner benefit of such practices with a working physician-owner includes their salary.
- Additionally, a physician practice with a strong long-term lease with favorable rent in a growing area will lead to a higher valuation.
- Lastly, most buyers of physician practices will demand that the seller personally sign a non-compete agreement whereby they promise to refrain from practicing medicine within a specified geographic range and time frame.
- The valuation will suffer without an acceptable non-compete agreement in most instances.
The sale of physician practices (particularly those with ancillary services) make excellent acquisition targets for a range of different buyers including other physicians, hospital, private equity groups, and non-physician owned investment groups. Always use a professional broker to confidentially sell a physician practice for the maximum purchase price.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.