Financial confidence has started bringing buyers and sellers together for practice transitions. Each call or inquiry from a doctor has a unique story, yet they all have similar concerns.
There are various reasons that doctors start planning for retirement and think about selling their practice. Some of these reasons can be positive while others are not. Too often a sale happens when health issues arise or a death occurs. This makes decisions difficult and impulsive, which can lead to costly mistakes.
When is the best time to sell your practice? The answer is different for everyone. If given time to properly plan, making the right choices is easier and less stressful. Planning involves understanding your options as a seller or buyer. As a buyer you have to decide on the size, location and price you are able to afford. As a seller you have to know your practice valuation or selling price in the market. Is this price in agreement with your retirement goals?
Start with reviewing the practice valuation. It is based on financial statements and tax returns typically filed in the past three years. The overhead of the practice, location and demographics all play critical roles in determining the value. Collection/production trends over prior years are scrutinized to determine if a decline or growth of patients has occurred. Some doctors wait to sell because they have no idea if they can afford to. Poor timing can cause the practice to decline in value when the doctor isn’t producing at the optimum level.
Another thing to consider is the size of the practice. Sometimes a practice is too large for one buyer and becomes harder to market. This might require joint ownership, which can make financing challenging. The good news is there are lenders today that specialize in professional practice financing and will typically allow 100 percent if approved. This will provide a cash payout to the selling doctor and an affordable buy-in to the new owner. This is much better than a seller having to hold a note for financing and delaying a retirement investment.
Smaller practices can be attractive for new doctors and can provide immediate patient cash flow. They are also easier to manage regarding the production level and staffing.
Limited space can pose another challenge if the selling doctor stays for three months or longer helping with transition and consulting. Besides space issues, the clinical production may not support two doctors, causing temporary cash flow problems for the buying doctor if not anticipated.
For the seller there are several steps before listing a practice for sale. After having a valuation that is agreed upon, tax planning should be done to determine the tax effects of the sale and net cash flow, followed by a financial plan. In order to avoid mistakes, proper planning is crucial; you don’t want an assumption of net cash flow rather than a reality.
For the buyer there are things that need to be done prior to the purchase. Once a practice is selected, due diligence of patient records should be conducted. After that, the valuation report, practice financials and cash flow/business projection should be reviewed. This business projection really helps give an understanding of how the practice will operate and what cash flow is available to the owner after they pay the debt service. This will also serve as a guide for the expectation of revenue and expenses.
Having a team of professionals evaluate tax options and financial planning will provide a thorough understanding that is necessary before the sale. Many sellers feel comfortable and ready to move forward after this process or they realize working a few years and reducing debt by increasing revenue will benefit them longer in retirement years. It’s never too early to start planning. Be sure to consult your CPA to get the guidance you need. I95
Weyrich, Cronin & Sorra