What goes around comes around. In a trend mirroring that which occurred in the 1990s, physician practices are selling out to hospitals and private equity firms in increasing numbers. Driving this trend is the need to lower costs, achieve operating efficiencies and, ultimately, gain negotiating leverage in an increasingly competitive healthcare marketplace. For those ready to sell their practice, there are several important factors to consider, including the goals of the shareholders and their individual perspectives on value. Before we take a look at what is needed for the sale and what happens after the fact, let’s first take a look at the numbers related to physician practice acquisitions overall.
Current landscape
The February 2019 Updated Physician Practice Acquisition Study by the Physicians Advocacy Institute shows significant and consistent growth in hospital acquisitions of physician practices.
- Between July 2012 and January 2018, the number of physician practices employed by hospitals grew by 44,400 practices; a 124% increase over five and one-half years.
- From July 2016 through January 2018, an additional 8,000 physician practices were acquired by hospitals.
Private equity firms have taken an interest in medical practice acquisitions, as well. A January 2019 study published in the Annals of Internal Medicine. found that acquisitions of physician practices by private equity firms have increased dramatically during the past few years. According to the study, private equity firms acquired 102 medical practices in 2017. Specialties viewed especially attractive include dermatology, dental, and ophthalmology. Consolidation among gastroenterology, urologists, and allergists is also on the rise.
As a sign of the increasing vertical integration between payers and providers, insurers are also getting into the game. According to this June 2018 Modern Healthcare article, Centene, Humana, and, most recently, Anthem has joined UnitedHealth Group in acquiring medical practices.
Pre-sale planning
The sale of a medical practice, as with any business, can be a lengthy and time-consuming process. Before entering into discussions with a potential buyer, sellers need to consider a number of issues:
- What are the goals of the selling shareholders?
- Is the business ready to withstand the rigors of a detailed buyer due diligence without disrupting day-to-day operations?
- What are the potential risks that may adversely affect valuation, price, or deal terms?
- What is the strategic rationale for different buyer/investor groups?
- What are the tax implications of a sale; and,
- How much are the selling shareholders likely to realize after taxes?
There is significant work involved in preparing a practice for sale in order to maximize practice value. Potential buyers will undertake an intensive due diligence review of the business, during which management will be asked to disclose detailed financial and operating data. To help facilitate this process, financial statements should be up-to-date, accurately reflect the business’ operations, and be readily accessible. Likewise, corporate records, including all licenses and permits, should be readily accessible and current. Any outstanding and unresolved legal or regulatory issues should be fully disclosed and addressed. All material agreements to which the seller is a party should also be available. From the standpoint of valuation, independent physicians should look for ways to increase cash flow in order to maximize their practice value. These may include developing ancillary revenue streams, employing physician assistants, and reducing overhead expenses.
What happens after the sale?
Much of what happens after the sale is determined by what happens before the sale closes. It is critically important to define post-deal terms before closing the transaction. The starting point for outlining the important points of your deal is the Letter of Intent (LOI). The LOI serves to memorialize the basic terms of the transaction, which up to that point have been the subject of oral negotiations between the buyer and seller. It usually is executed after the buyer has completed its basic business due diligence, but before it undertakes its major accounting and legal due diligence.
The LOI will set forth the proposed structure of the transaction, the price and how it will be paid, the terms of notes or stock to be conveyed as part of the purchase, and other important, but general features of the transaction. The LOI also sets forth the conditions for closing the transaction including, among others, the need for regulatory approvals and the completion of due diligence. The final terms will be contained in a definitive purchase agreement, but the LOI serves as the outline for the deal on which the parties have agreed to go forward.
After the sale closes, the buyer and seller will begin the process of integrating the practice into the buyer’s operations. Depending on the buyer, integration may entail staffing and personnel adjustments, as well as operational changes related to billing and collections, vendors, medical equipment, and facilities.
Notwithstanding the ensuing changes, in a recent report on physician practice acquisitions by Jackson Healthcare, the majority of physicians interviewed reported being satisfied with their current work environment.
The best advisor for the transaction
A common mistake made by independent physician groups is not to retain professional advisors when selling their practice. Hospitals and private equity firms have access to buy-side experts, such as deal attorneys and investment bankers, who have significant experience in mergers and acquisitions. You want to make sure your transaction team is on equal footing with the buyer. When looking for the best advisor for your transaction, consider the following:
- Experience advising independent medical practices on the sale process;
- Understands how practices are valued and priced;
- Understand the various regulatory issues affecting physician practices;
- Understands the tax consequences of different deal structures;
- Assists in preparing due diligence materials for potential buyers; and,
- Remains on board after the transaction for any support needed.
There is significant work involved in preparing a practice for sale, structuring the transaction, and attaining the most favorable terms for the seller. The market is organized to favor an experienced buyer over a one-time seller, and the need for professional financial advice is arguably greater for smaller companies that lack the internal resources and time to consummate a transaction. Don’t let the sale of your physician practice go against what the doctor ordered.