July 28, 2017
This is the first article of a multi-part series on the process of health care transitions prepared by Samuel N. Klewans and Michael Skerritt.
Taking the Appropriate Steps Before Selling Your Practice
Messrs. Klewans and Skerritt represent health care providers on the business side of their practice, which means representing health care providers during the entire life cycle of their professional career.
We have put together a series of articles which will periodically appear on our website regarding the process of purchasing or selling a health care practice. There is substantial similarity in this process between physicians, dentists, podiatrists, and veterinarians. But there are, of course, many differences. We cannot, in a series of articles such as this, attempt to cover everything that a practitioner will encounter. We will do our best to highlight areas of concern, areas that you need to take account of, and areas that you need to give thought to.
The process of buying and selling a health care practice takes on a life of its own and becomes a journey. We hope that this introductory article and those that follow will be helpful to you in that journey.
Maximize the Value of Your Health Care Practice
If you are a seller, the process of selling your health care practice should begin two to three years before you decide to sell. Unfortunately, many health care providers determine that they are going to attempt to sell their practice at a certain age, and then a few years before reaching that age they begin to decrease their working hours and thus their income. This is exactly the opposite of what one should do. Rather, one should work as hard as they can during the last two to three years because potential purchasers of your practice are purchasing cash flow. Any purchaser’s attorney or accountant will ask the seller for the last three years of tax returns as well as the profit and loss statement year to date. If those financial records show diminishing collections over the two or three years prior to the anticipated purchase and sale, you are going to get less for your practice.
There are additional steps that you can take to maximize your purchase price if you are a seller. You can paint your office, repair chair and couch fabrics in the reception area (never say waiting room because people do not like to wait), hang new pictures in the reception area, and generally give the office a fresh and clean look. A prospective purchaser does not want to see a tired, worn out office. If your staff wears scrubs, wearing the same color can give the appearance of coordination and efficiency, not only to the prospective purchaser but also to the patient. Straightening magazines throughout the day can also reflect favorably on your practice.
Reduce Practice Indebtedness
Finally, you need to get a handle on the existing indebtedness of the practice. Bear in mind that a purchaser will not want to buy a practice that has debt, so you will need to pay off all debts beforehand, or from the purchase proceeds. In order to determine how much you would expect to receive on the sale of your practice you need to have an accurate assessment of any debt. Indebtedness that exists at the time you anticipate selling can impact the amount you will net from the sales proceeds. Take into consideration that the seller will pay taxes on the sales proceeds and the practice indebtedness will further diminish those proceeds. Thus if you are working, full steam so to speak, for the two or three years prior to sale you may be able to reduce the debt and get an income tax deduction, which means you will realize more net proceeds from the sale of the practice.
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