When selling, plan and be patient

Before you develop an exit strategy when selling your practice, know what to expect.

By Robert Calandra, Contributing Editor

Senior broker Scott Daniels advises ophthalmologists how to do it. So does analyst Brad Ruden. Count attorney Mark Kropiewnicki among this group, too.

Across America, ophthalmologists eyeing retirement are seeking guidance about how to sell their practices as they wind down their careers.

Most are solo practitioners tired of the headaches and responsibilities that come with owning a practice. Many still want to see patients for a few more years but as a salaried employee.

“Most of them are 63, or there about,” Mr. Kropiewnicki says of the doctors he’s advising. “The idea is they are going to sell their practice to someone else and go to work for them for the last three to five years of their career. We’re seeing a lot of that with some success.”

The operative word in that last sentence is “some.” Let’s examine various ways to increase your odds.

Have patience, compare apples

Selling a practice has lots of moving parts. You have to find the right buyer who will pay the right price — and if you aren’t ready to retire your laser, one who could offer you an employee contract. This can take anywhere from six months to three years. If you practice in a rural spot, tack on more time since there are fewer potential buyers for country practices.

Credentialing is another issue to consider. The buyer can’t apply for credentialing until an offer is accepted and the purchase and sales agreements are signed. Mr. Ruden, a certified valuation analyst with MedPro Consulting and Marketing Services, says in Arizona it can take a minimum of six months from the time a buyer is identified until the transaction is closed. What’s the average time to find a buyer?

“Six months to 12 months if you are in a metropolitan area,” Mr. Ruden says.

When the sale closes the best deal may fall short of what the selling ophthalmologist was expecting. Sellers often accept a lower price for their practice for a better employee contract. The ultimate goal, according to Mr. Kropiewnicki, JD, LLM, president of the HealthCare Group in Plymouth Meeting, Pa., is for the physician to “find a landing place at the tail end of [his or her] career.”

“Maybe you can get a `good will’ hard asset value for your practice,” he explains. “But then you get a bad employment agreement and they are going to be a pain. You have to look at the whole package, apples to apples.”

Finding that “apples to apples” deal, says Robert Wiggins, MD, senior secretary for ophthalmic practice at the American Academy of Ophthalmology, takes patience and advance planning.

“This planning should ideally begin a few years before the physician’s anticipated retirement date in order to provide time for succession planning, including new physician recruitment,” Dr. Wiggins says.

Starting the process

Like all else in America, sales of ophthalmology practices dried up after the 2008 financial meltdown. Seven years later, however, the market is back and it has big players — but no hospitals. Institutional players, all.

“These are either ophthalmology groups looking to expand or they are Wall Street types,” says Mr. Ruden.

That’s good to hear. But what’s discouraging to know: If half of age-eligible ophthalmologists do retire, or at the least down-shift their careers, available practices would flood the market. Thirty-nine percent of all ophthalmologists are older than 55, according to a 2013 Medscape survey. A 2013 Kantar Media Eyecare study found that 71% of all ophthalmologists are in group practices. “When you look at the age distribution of practicing ophthalmologists there are a lot more near the retirement age than there are at the young end of the spectrum,” Mr. Ruden says

If there is a glut of available practices the market “is going to put downward pressure” on prices, says Mr. Daniels, president and senior broker at Practice Concepts in Newport Beach, Calif. So doctors considering selling in the near future, say sometime in the next three years, might want to get the ball rolling now because chances are practice values will go down over time.

“If you look at your practice as an investment, there is a pretty good chance that your business is going to be worth less in the short term,” advises Mr. Daniels, “So you’re better off selling now. Take the cash out of the business and invest in something that is going to make you more money.”

The financial questions

Start the selling exploratory process by identifying potential buyers. Ophthalmology, explains Mr. Daniels, is a location- and profit-driven profession, and while the former is important — your location could become a satellite office — the latter is essential. Before you hang out the For Sale sign, make sure your financial house is in order.

Most buyers can only pay what the bank will lend. And what the bank will lend is based on the practice’s financials. So do an accurate accounting of revenues and expenses. Once the numbers are in order, don’t relax — continue doing surgery and seeing patients.

Mr. Kropiewnicki says after solo practitioners decide to sell they often tend to relax. Don’t do it: if a practice’s income falls, so does its value. The amount a buyer’s willing to shell out is directly related to its name, reputation, patient volume, records, and all the other intangibles that make it profitable — what Mr. Kropiewnicki calls the “income stream.”

“The big thing I say is, don’t slow down,” Mr. Kropiewnicki says. “If you are trying to get top dollar, keep your practice going at the same level, even if it means paying someone else to do it. Hire someone to come in one day a week if you want to take off but keep the value there.”

Matchmaker, matchmaker, make me …

Another option to exit a practice: Bring in a younger doctor. There are several ways to do this, but essentially the younger physician comes in as a partner and over time buys out the older doctor.

But a transition arrangement can be complicated and fraught with conflict. One, the practice must generate enough income to support two doctors. If not, the doctor on the retirement glide path usually takes less. And two, because ophthalmology doesn’t have the equivalent of a Match.com or eHarmony, the search for Mister or Miss Right Younger Doctor can devolve into a speed-dating nightmare.

“You don’t want to marry somebody on the first date,” says Mr. Daniels. “You want to see if you get along. So that may be six months. You may go through three, four, five people by the time you get a partner. That could take two or three years.”

Even after the match is made, the younger doctor, who will likely buy 50% of the practice to start, may have different priorities. She may want to buy new equipment or bring in a decorator to gussy up the office. That’s money out of the retiring doctor’s pocket.

“If you want to retire in three years, you are better off selling 100% of the practice and then have an employment agreement and work for three years,” Mr. Daniels says. “It takes the liability off your head and you don’t need to compromise.”

Some solo practices are too small to attract outside buyers. In those cases, Mr. Daniels suggests that the physician simply practice until retirement day and close up shop. Or the doctor can hunt down a solo ophthalmologist close in age with a similar income and merge practices.

“So if you both are doing $300,000 in revenue you come together and effectively have a short-term partnership that is easier to sell,” Mr. Daniels says.

Three things of value

Most group partnerships have shareholder agreements that address doctors who want out. The agreement usually specifies triggering events such as death, divorce, disagreement, disability, loss of license and retirement.

That written, all agreements are predicated on three items of value, Mr. Ruden explains. The shareholder agreement ordains how much the departing partner will get and how it will be doled out. If it’s an amicable separation, the doctor will receive his share of the hard assets, separation pay for uncollected receivables and good will value. The money is usually paid over a period of time.

If the parting is contentious and the departing doctor will become competition, the agreement is likely anything but.

“When you leave we are going to pay you for your hard assets over five years and your receivables over five years,” Mr. Kropiewnicki says. “But we are not giving you anything for good will because you are taking it with you across the street to continue to work that income stream.”

Generally speaking, some agreements have hard trigger dates — a doctor must retire at 65 and the partnership must buy her out — and soft dates that permit a physician to give six months’ or nine months’ notice. Most agreements also contain a method for valuing the practice along with the name of the person or company that will perform the evaluation.

“The company pays for the appraisal and if one of the partners doesn’t agree with the appraisal they [get] their own,” Mr. Daniels explains. “If the two numbers are within 10%, then you take the average. If it isn’t, then those two appraisers pick a third appraiser and you take the median of the three.”

It’s important to have something in writing even in a two-person practice. For instance, if one partner suddenly dies, things can get messy. It’s an emotional time and the dead partner’s family is not only grieving the loss of their loved one, but also their financial security.

“If you die, your family doesn’t know what you said to your partner over drinks late one night when you had a handshake agreement to do such and such,” Mr. Daniels says. “The more you have in writing the better and the easier it is to come up with a less painful outcome.” OM