Retiring Soon? Maximize the Value for Your Practice

Copyright 2022

There was once a time when a retiring doctor could easily sell a thriving practice to a hospital or practice management company. These days, many practice management firms are out of business and hospitals are more likely to be selling than buying.

Appraisals of medical practices are usually based on three primary factors:

Accounts receivable. Outstanding billings might go to the seller so you'll eventually collect the money coming in from the treatment you've provided.

Equipment. Office furnishings and medical equipment are often appraised modestly.

Goodwill. This is generally the key to setting a favorable price. Frequently, goodwill is valued as a percentage of your recent collections.

For example, you might receive 30% of collections, so a practice with $300,000 in annual collections could sell for $90,000, plus the value of its equipment.

The Terms

When it comes to setting terms of a sale, here are three factors to keep in mind:

Aim for an all-cash deal. The buyer probably can finance the purchase with a bank loan.

If possible, don't agree to take a percentage of future revenues, with payments stretching over a period of years. You'll bear more risk and might run into legal problems.

Be ready to stay on — perhaps for six months — to introduce your successor to patients.

So if you're heading for retirement and planning to put your practice up for sale, the choices may be limited to the following candidates:

A doctor with a few years of experience. Some physicians joined a group practice, expecting to become a partner. But partnership prices are generally steep — proportional to potential income — and these doctors may decide they can do better on their own.

Physicians emerging from residency. Some doctors want to start out with their own practices — if the terms are right.

If you want to appeal to either of these potential buyers described above, you should hire a junior doctor and start planning to sell your practice two or three years in advance. Protect your interests with an employment contract, which should include:

1. A statement making it clear that the younger physician is expected to buy the practice.

2. A schedule for the takeover.

3. A formula for setting a purchase price, based on collections.

4. A clause giving either party the right to back out, if things don't work out.

An independent appraisal of your practice can help you get a fair price for the business and give potential buyers an idea of what they will pay. And remember, operating trends can make a difference:

  • If your practice can show a recent increase in collections, you may get a larger percentage of those collections when you sell.
  • On the other hand, if income has been dropping, you might get a smaller appraised value for your practice's goodwill.

The bottom line: It pays to increase collections before selling your practice. Work extra hours and see more patients. If you cut back just before you retire, as many physicians do, your sales price is likely to drop. The lower your net income and the fewer active patient charts you have to turn over, the less attractive your practice will be to potential buyers.

What's more, if you go into pre-retirement mode, your revenues will drop but your expenses won't fall as much.

One final tip: Don't forget aesthetics. A bit of sprucing up may enhance your practice's appeal. Splash on some new paint and lay new carpeting. Take home everything from the office that you don't actually use. The result is a clean, spacious look that buyers can picture themselves in.