In the coming year, a full 31% of CFOs plan to acquire physician practices. Due to the gained synergies and increased efficiencies of medical business mergers and acquisitions (as well as the financial effects of COVID-19), experts expect this trend to take off. 44% of healthcare CFOs believe that the pandemic will spur an increase in partnerships. If you are looking to grow your practice, test new geographies, or increase brand equity by purchasing another practice in a similar or complementary field, you are in good company.
Deals like these can be difficult (and sometimes risky), and you shouldn’t immediately jump on the chance to purchase any practice hanging up a “For Sale” sign. How do you find a medical business (for sale) that’s worth acquiring? We’ve put together a primer on identifying the practices that make the most sense for your business to acquire:
1. Get Expert Help
Engage the services of a seasoned healthcare attorney, and an equally well-versed accountant, to shepherd you through this complex process. Acquiring a company is a significant financial commitment, and you don’t want to make a costly mistake. These experts can lead the negotiations to ensure you’re paying the correct amount when you’re buying a medical practice.
2. Get Mentally Prepared
Be ready for change. You may have to adapt your current systems and culture, or you may need to revamp, which can cause disruptions to patients and staff. But the benefits will outweigh the pain, since you’re skipping the startup costs of starting from scratch and also picking up existing (and hopefully lucrative) patients, staff, and equipment.
3. Identify Your Dream Practice
Before you start shopping, it’s imperative to think about your goals. Identify the type of practice you’d like to have long-term. This way, you’re not swayed by what’s out there, and you can stay focused on your needs and objectives. For instance, which services will you offer, what culture will you create, what demographics will you cater to, and which geographic area will you target? And remember, there are some things you can’t change, like a bad location or the presence of competition. There are also some things that are hard to change, like ineffective technology, older equipment, and furniture. Just know when to walk away.
4. Fully Understand the Culture
Now that you’ve found some options that align with your goals, take a clear-eyed look at culture through the lenses of patients and staff. Does it mesh with your cultural vision? Ask patients and staff what it’s like so that you can cultivate a deeper understanding. Examine the processes to see how they operate, and how easy it will be to synchronize with your current practices and vision.
5. Do Your Homework
Time to crunch the numbers and check the purchase price. According to Medical Practice Brokers, you’re generally looking for a valuation that’s 1-4x the annual net earnings, and 20-80% of their annual gross collections. On average, an internal medicine practice might fetch about 35% of their annual collections. You’ll need an expert appraisal or a Uniform Standards of Professional Appraisal Practice (USPAP) valuation. Take into account all financial metrics, such as the following, in order to better grasp the greater financial picture:
- Accounts receivable and payable
- Cash flow
- Revenue forecasts
- Growth rate of new patients
- Reimbursements and fee schedules for private payer and Medicare contracts
- Length of employment for staff
Then dig deeper. Check in on any legal issues that are outstanding, and have the practice inspected to ensure that there are no building, environmental, or code issues. Do a background criminal and civil lawsuit check and credit check on the seller and see if you can ascertain why they are selling (if you don’t already know), so you don’t run into any surprises. Not only will this protect you down the road, but it will help you determine a fair price and set of terms for buying into a medical practice.
6. Put It All Together
Now it’s important to look at your overall layout moving forward: operational costs and costs to augment the practice. These fixed costs include payroll, building maintenance, IT costs, utilities, and inventory. You may also need new equipment, furniture, or software (and even additional staff). Don’t forget to factor in costs during the transition time, when you may lose productivity (and, unfortunately, patients). Think ahead to tax planning and make sure you’re not violating any anti-trust laws. Make sure to include asset protection and estate planning as well.
This is a huge investment. And it can pay off massively. If you do your due diligence and don’t rely on emotions, you can make a smart decision that will benefit your practice and patients for years to come. If you have any additional thoughts on the process, let us know. And don’t forget to download our whitepaper, “Four Trends Medical Specialists Need to Know,” for more information about changes impacting the medical space. Happy shopping!