Thinking about selling your healthcare practice? Here are six factors to consider

Consolidation in the healthcare industry is long-running trend that seems unlikely to slow down. In particular, value-based care compensation models, in which healthcare providers are paid based on patient healthcare outcomes, often require sophisticated back-office operations for complex tracking of patients, procedures and payments.

The trend toward value-based care is likely to continue for the near future. Medicare Advantage plans are increasingly moving toward this model, and payers with other patient bases are now beginning to try it as well. Payers are also experimenting with expanding value-based care from primary care to other specialties, such as gastroenterology and nephrology, among others. Many in the industry are operating under the assumption that value-based care could become the norm within a decade.

For many physicians, these factors, as well as others, have increased the appeal of selling their business and having someone else deal with the business back-end so they can focus on providing quality patient care.

1. Buyers are particularly interested in smaller practices with solid patient bases

As part of their roll-up strategy, many buyers are looking to acquire smaller practices with solid patient bases in densely populated areas, or practices in markets where the acquirer already owns or has affiliations with many locations. Active buyers include private equity firms, contracting entities, management services organizations (MSOs) and other strategic acquirers.

In some cases, buyers may feel they can optimize per-member-per-month profit levels at the practice by integrating it into their existing back-office systems and/or injecting new knowledge into operations and workflows. In other cases, acquirers – especially contracting entities, are seeking to increase their market share ahead of competitors. MSOs, which often have right of first refusal within their agreements with affiliate practices, may be increasingly likely to exercise their right to acquire a practice so a competing group cannot.

Competition among buyers has, in some cases, led to higher valuations.

2. Consistent numbers can help you obtain the best offer possible

If you’re considering a sale, it’s helpful to understand your financial position from the viewpoint of a buyer. Sophisticated buyers may want to look at revenue and profitability trends for the past year, and three years of historical financials (preferably using the accrual-based method of accounting). Potential buyers may also seek to analyze key performance indicators such as per-clinician productivity and care quality.

Understanding the picture these numbers present before entering negotiations can help you ascertain what the practice’s fair market value may be and prepare you to address any areas of concern with potential buyers. In some cases, you may use these analyses to negotiate a more favorable purchase price or lessen the amount of time spent in negotiations.

However, many smaller practices do not keep the types of financial records that enable a buyer to understand this information quickly and accurately. If you’re considering selling your practice, you may benefit from working with a transaction advisory services professional who understands the healthcare space and its unique accounting issues. A sell-side advisor can help you assess your records and prepare financial and other reports that are consistent for purposes of creating transparency within a potential merger or acquisition. Being prepared and understanding your accrual-basis financial performance (including any potential pro-forma adjustments) increases value when preparing for or negotiating a transaction.

Even if you ultimately decide not to sell your healthcare practice, having a clearer understanding of the financial health and key performance indicators of your business can help you identify areas for performance improvement, such as cost savings initiatives or additional revenue opportunities.

3. Some economic factors are putting downward pressure on deal values

Inflation has increased the costs of everything from labor to supplies; buyers have taken note and, in some cases, are making offers with lower multiples to account for these increased expenses. Many buyers are particularly concerned with future wage inflation – how much they’ll need to increase compensation to keep needed staff.

Sellers that enter into potential deals with their own projections for future expenses and revenues –which take into account reasonable inflation-related cost increases – may be better-prepared to understand their practice’s fair market value, and better-positioned to mitigate buyer concerns. Similarly, if you’ve already given large raises to retain staff, or negotiated long-term deals to keep rent and other expenses down, it is useful to properly document that for potential buyers.

Another economic factor – rising interest rates – has not yet affected the volume or velocity of healthcare deals, but higher financing costs may put downward pressure on deal multiples going forward as well.

4. Understand how a potential deal will be financed

Given the current interest-rate environment, it’s particularly important to understand how a potential buyer plans to finance its acquisition. An organization that plans to pay with cash on-hand, or one that already has financing lined up, may be in a better position to close the deal, and to do so more quickly. Potential buyers that approach you to make a deal and plan to find the financing sources later may take longer to close the deal, or be unable to close at all.

Taking time away from seeing patients and/or running a practice to talk with investors can mean a decrease in income. It’s useful to understand how serious and prepared a potential buyer is so you can decide how much time and effort to put into negotiations.

5. Know what you want from a sale to negotiate payout structure and post-sale expectations

Most buyers want to maintain a practice’s patient volume and quality of care after acquisition, and this can be one of their biggest challenges. To mitigate the risk of volume and quality dropping after purchase, they may set key performance indicators (KPIs) and other benchmarks for clinicians to meet. Buyers may also want a post-deal entity structure that allows clinicians to share in the practice’s profits, as a way of encouraging managerial support and operating expense controls.

If you understand why you’re selling and what outcome you want from the sale, you have a better chance of negotiating post-deal compensation and work expectations that you will be satisfied with.

Consider whether you (and your partners, if that applies) are looking to sell so you can concentrate on patient care and not worry about the back-end, or if you’re ready to cut back your working hours or even fully retire. Often, different partners may be looking for different outcomes, so this is a discussion that’s crucial to hold before considering any potential partnership or sale of the practice.

Additionally, it is important for the seller to do their own due diligence on the buyer to assess fit. After all, physicians usually spend years building their practice and reputation. It can be helpful to speak with other practices acquired by the buyer to understand what a partnership may look like to confirm you can get what you want from a sale.

6. Pre-sale preparation can lead to a more successful and satisfying sale

If you are considering selling your healthcare business, consider reaching out to a qualified transaction advisory or tax professional with healthcare experience. Sell-side due diligence, a better understanding of your financial picture, anticipating different deal structures for tax efficiencies, and other preparation can help you mitigate risk and therefore maximize the value of selling your practice.

Read the full article on HealthCare Business News.