Thinking about Retirement?
As a solo practitioner, you have two main options for transferring practice ownership.  For either, preparations should begin early.
BY BRAD RUDEN, M.B.A.

I am often approached by solo practitioners who have recently begun contemplating their eventual retirement and wish to lay the groundwork for the necessary ownership transition of their practice. If you are in this situation, you have two options. One is to recruit an associate for an eventual buyout; the other is to sell the practice outright to a qualified buyer.

The option you choose should be dictated in part by how soon you wish to retire and the economic specifics of your practice, such as patient and surgical volume, physical space, staffing, and profitability. For example, if you have limited office space and little excess volume, it would be prohibitive to recruit an associate. Or, if you are not eager to retire immediately but would rather ease into a lighter work schedule, you may be less inclined to sell outright.

Whichever path you decide to take, I recommend laying the groundwork at least 3 to 5 years in advance of actually implementing the desired exit strategy. This gives you plenty of time to put all the pieces in place to ensure, as much as possible, a successful outcome for all involved.

Option One: Recruiting an Associate

If you'd like to recruit an associate, the first step is to analyze the practice to determine if there is enough patient volume to share with a new doctor. If not, then you must be willing to slow down and forgo some work -- and the resulting income -- in order to transfer some patients and surgeries to the new associate.

Other aspects of the practice to consider are:

► Is the office large enough to handle two doctors working at the same time?

► Is adequate support staff available or do extra technicians need to be hired? Remember, the cost of new staff not only includes salary but also their benefits and payroll taxes. As a general rule, I add 30% of an employee's salary to the overhead to cover these extra expenses.

► Is there adequate equipment for two doctors or do new exam rooms need to be added and furnished?

Additionally, much care must be taken to ensure the right person is brought on board. Extreme caution must be exercised during the screening and recruitment process as hiring the wrong physician may leave you with no practice sale, a damaged practice and demoralized staff, and less time in your active career to adjust course and find the right candidate the next time around.

Lastly, I recommend incorporating the buy-in/buyout agreement as an attachment to the new associate's employment contract. This helps to prevent surprises or misinterpretations during the employment phase and prior to commencing the buyout. The point is to avoid a scenario in which the practitioners have different opinions about the value of the practice. An associate leaving pushes back the owner's retirement timeline as he or she must then re-recruit or accept a lesser offer in order to facilitate the current associate's buy-in.

While you may not be able to identify a specific price today for the practice being sold in the future, you can at least agree on the formulas or methodologies that will be used to identify the value of the practice. This takes most negotiations out of the picture at the time of the buy-in so the parties simply need to apply the previously agreed upon arrangement to ascertain the practice's value.

There are several advantages to recruiting an associate for an eventual buyout:

► It allows for an orderly transition of ownership, providing a definite timeline for the senior doctor's exit.

► It enables the new associate to become familiar with staff, office protocols, patients, etc.

► It can be set up as a stock transaction, enabling the seller to realize certain tax advantages with the income gained from the sale.

Option Two: Selling Outright

If you decide to pursue an outright sale instead of a partnership route, you can take steps to better position the practice for sale. Take these steps in the 2 to 3 years leading up to the desired date of sale:

Emphasize the practice's profits. The value of a practice is tied to the amount of revenue that it generates. The 18 to 24 months prior to a sale are the most frequently analyzed and scrutinized. During this time, it helps to make an extra effort to maximize your productivity/collections and minimize discretionary expenditures. Although a professional valuation will account for discretionary expenditures when examining cash flow, in most buyers' eyes, a dollar of net income is still more attractive than a dollar of adjusted cash flow.

Discretionary expenses most easily targeted for review are travel, entertainment, all forms of insurance coverage (property, health, auto, professional liability, etc.), and any inflated family wages. If you own the practice and real estate through separate corporations, you should match the rental payments to the current market rates. As for updating equipment, minor expenditures can be justified but any significant equipment purchase decisions, unless vital to ongoing operations, should be put off and left for the new owner's input.

Accurately report all income. As a physician, you operate in a service industry. The value of any business entity in a service industry is related to the amount of revenue generated from performing that service. It follows that the more cash generated from performing the service, the greater value your business will have. If you do not accurately report all income, you inadvertently undervalue your practice and run the risk of alienating potential suitors.

A potential buyer always tries to establish the true financial health of a practice. Any discrepancy in your financial statements and federal tax returns will need to be clearly and accurately explained. Anything less raises doubts and could result in no sale or a reduced offer.

Have supporting documents and other pertinent information readily available. The financial statements and any appendices should provide an overview of the practice's monthly/annual operations and portray an accurate picture of the true financial health of the practice. To accomplish this, you should have your accountant or administrator prepare complete, accurate and neat financial statements as well as other supporting documents/appendices for the buyer's review.

Areas to address in appendices are number of active medical records, a background of key staff members who will be staying, an overview of transferable managed care contracts, transferability of the office lease, and the selling physician's restrictive covenant. The point is to "tangiblize the intangible," to paint a picture of business operations that does not appear in the financial statements.

Pay attention to the "curbside appeal" of your practice. Visual impressions are important. When selling a house or car, you clean it up to make it presentable for potential buyers. You should do the same for your practice to increase its appeal and salability. The practice facelift needn't be a major project, it can be little things such as having the carpet cleaned, increasing the frequency of lawn mowing, and having daily "trash pick-up inspections" of the parking lot. You may find it useful to assign one or more employees to keep certain areas of the office neat and presentable, especially in the days immediately preceding a buyer's visit.

Have the practice appraised by a professional. Most physicians and administrators have little or no background in practice valuation. Also, your personal interest in the outcome will render a self-valuation almost useless.

Placing a value on any business, especially a service business such as a medical practice, is as much an art as a science. Even among experienced professional evaluators, there can be disagreement as to the value of any given practice. However, a professional valuation is a necessity, not only for establishing the sale price, but also for use by the purchasing physician in qualifying for a loan. An independent professional will provide more credibility and the experience to utilize multiple techniques to establish a justifiable and defendable fair market value.

There are several advantages to an outright sale:

► The senior doctor has no exposure from an associate alienating staff or patients prior to the ownership transition.

► The senior doctor can keep all profits and not have to reinvest into the practice by hiring additional staff, purchasing additional equipment, paying the employment costs of an associate physician, etc.

► The owner can work at full speed up to the date of retirement.

► It is a "clean" transaction that can take place in a short time frame.

Advance Preparation is Key

Whether you decide to exit your practice via partnership recruitment or an outright sale, the key is to lay the groundwork well ahead of time in order to provide for an orderly ownership transition. This gives you plenty of time to put the pieces in place to ensure, as much as possible, a successful outcome for all involved.

Brad Ruden, M.B.A., is the owner of MedPro Consulting & Marketing Services in Phoenix, Ariz. You can reach him at (602) 274-1668, by e-mail at bruden@medprocms.com, or via his Web site at www.medprocms.com.