Considering Selling Your Physician Practice? Get Finances in Order Now

You can minimize the negative impact of COVID-19 on the value of your business.

While the trend of healthcare M&A and industry consolidation is expected to continue post-pandemic, practice owners presently negotiating a sale or those who might consider selling their physician practice in the next 12 to 24 months, may be concerned about how their current financial picture may affect the sales price they are able to negotiate.

Many medical practices have recently experienced reduced revenue or limited cash flow, and consequently, their earnings quality will be affected as a result of the COVID-19 pandemic. The good news for most medical practices is that this dip will be temporary. However, if you are thinking about selling your practice in the future, you should take the appropriate steps now to better understand your financial position so that you will be able to address any areas of concern with potential buyers.

The present time can be an opportunity to improve financial record-keeping and procedures, as well as to analyze key performance indicators (KPIs) that potential buyers are likely to focus on. These efforts can help you ascertain the practice’s fair market value and may increase that value, leading to a more favorable purchase offer.

Moreover, these analyses can benefit your practice even if you later decide not to sell. With a clear understanding of the financial health of your practice, you can identify areas for cost savings or additional revenue opportunities.

Improve financial record-keeping to prepare for healthcare M&A

How does your accounts receivable for the current quarter compare to last quarter and to the same time last year? What is your revenue projection for the next three months, and is it moving up or down? In what direction has net profit been trending for the past year? What is your projected 13-week cash flow?

The answers to these questions are important indicators of the health of your business; however, many medical practices do not keep the types of financial records that would lead to quick or accurate answers to these questions. You should be able to quickly pull a balance sheet; an accurate profit and loss statement (income statement); gross, operating and net margin reports over time; and accounts receivable and payable reports.

Potential buyers are extremely likely to dig through your financial records to obtain insight into your practice’s historical and future performance. It’s in your best interest to identify any trends or issues first, as well as to make sure you know the KPIs of your healthcare practice. The identification of positive trends can help you better illustrate why your practice deserves maximum value from a potential buyer, while the identification of negative trends may provide you time to fix any issues and/or plan on how best to address them.

Clean up your accounting and financial reporting and identify the accurate normalized earnings

Clean, consistent record-keeping may also help to increase the final selling price of your medical practice. Our experience has shown that consistency, transparency, identification of pro forma adjustments and other record-keeping preparations can significantly increase the actual price paid for a business.

There are many ways a medical practice can improve its financial record-keeping – and you should confirm that the more recent historical periods are accurate and consistent from a reporting perspective. A good rule of thumb would be to review the prior two to three years, including the current year-to-date as any potential buyer would like to analyze a long enough period to identify trends and continued strong performance.

The five steps below can improve your financial records, help you to understand the current health of your business and enable you to better plan for a potential sale in the future.

1. Consider switching from cash-basis accounting to accrual-basis accounting. Many smaller medical practices use the cash-basis method of accounting, recognizing revenue when it is collected and expenses when paid. However, this approach could make it difficult for a buyer to review trends in areas such as patient volume, revenue collection and profitability. The challenges of cash-basis accounting are exacerbated in healthcare due to the lag in time between the date of service and the ultimate reimbursement of a claim. Be aware that potential buyers may likely convert your historical data to accrual-based accounting for a more accurate picture of your financial results.
2. Enhance consistency and transparency for historical information and projections. To ascertain whether revenue and profits are increasing, decreasing or remaining consistent, you must be able to compare “apples to apples.” Some common inconsistencies in medical practice accounting include revenue recognition, monthly accruals and year-end adjustments made for tax reporting purposes. While it may not be possible to have total consistency between reporting periods, try to establish as much consistency as possible in historical data, and to establish consistent reporting guidelines going forward. Keep notes on the reasons for inconsistencies in order to quickly explain them to a potential buyer.
3. Evaluate accruals and capitalizations through the lens of GAAP. Check to see if there are significant expenses that are typically required to be accrued per Generally Accepted Accounting Principles (GAAP), such as payroll expenses or maintaining an allowance for bad debt where necessary. Also check whether you have any expenses that can be capitalized under GAAP.
4. Exclude certain discretionary expenses if deemed to be non-recurring expenses. If such expenses are paid through the practice, it can negatively impact reported earnings and the valuation a potential buyer would assign your practice. Prepare an earnings reports with add-back adjustments for these non-recurring expenses, and include detailed evidence, such as invoices or credit card statements, to help a potential buyer validate and accept the adjustments. Maintain notes of these items when they occur so you do not forget to include that as an adjustment for a potential buyer.
5. Carefully calculate pro forma impacts of acquisitions, expansions or performance improvement initiatives. If you recently acquired another practice, opened an additional office, began offering new services, signed a contract to be added to a new insurance network, or invested in a new claims processing system or other performance improvement initiative, as an example, calculate the expected annual impact of that change. Also, consider crafting a brief narrative with supporting evidence and clear logic for the projected impact; it may allow you to negotiate a more favorable sale, or may shorten the negotiating or due diligence period during a sales process.

Other records you may want to assess and improve

In addition to KPIs related to high-level profitability and cash flow, a potential buyer may evaluate other metrics or performance trends important to their investment. Enhance your ability to negotiate a higher valuation or sales price by assessing your records, preparing to quickly and easily provide reports, and striving to make your reporting outputs and performance measurements as accurate, consistent and comparable as possible.

Create and analyze your reports on a monthly, quarterly and annual basis and include KPIs such as:

• Total patient volume
• Monthly patient visits or procedures
• Monthly patient visits per provider or location
• Monthly procedures per provider or location
• Average revenue per procedure or visit
• Revenue by CPT code or service type
• Practice mix of private insurers, governmental insurers and self-pay
• Average number of days to collect outstanding accounts receivable

Lay a strong foundation by understanding your current position

Of course, improving your record-keeping is not the only way to strengthen a medical practice as you prepare for a sale. You may also want to assess billing and coding practices, clinical processes, supply-chain decisions and a variety of other business and operational characteristics. However, before you take any of those actions, you need to know where your practice stands in terms of its financial performance and KPIs. You cannot manage what you cannot measure, and you cannot measure without good data collection, record-keeping and reporting processes.

Beyond arming your practice with actionable information, strengthening record-keeping and reporting will help you to assess the fair market value of your practice, recognize any potential weaknesses prior to a potential buyer doing so, and negotiate a more favorable outcome during a merger or acquisition transaction.