Is Retirement In Your Future?
- Posted on: Oct 15 2018
As doctors age into their late 50s or early 60s, many begin considering retirement. For a doctor in private practice, I would recommend thinking about your exit strategy 5-7 years before you intend to retire. Without proper planning, you may end up closing your doors without compensation for the value of your practice and the years of sweat equity building referral relationships.
Closing a practice can be every bit as difficult and stressful as succession planning. Closing a practice requires managing many potentially troublesome legal, ethical, and practical details during a time when you are likely to have declining interest. The process can produce many months of angst for the doctor, the doctor’s family, and staff.
The preferred strategy is to find a buyer or successor, well before your retirement
Some doctors find transition planning difficult because they are not really sure about their intentions. When asked when they plan to retire, they say, “Maybe five years from now.” It’s important to get started early, even if you’re not sure exactly when you want to retire. Delaying hurts your chances of maximizing the practice’s value. It also increases the chance that death or disability will intervene, leaving you or your family without a well-developed plan.
Proper transition planning can take anywhere from 18 to 24 months. This gives you the best chance of retaining most, if not all, of the practice’s value. It allows for recruiting a committed buyer (i.e., another doctor, competitor, private equity), negotiating the documents that set forth the buyout terms and arrangements, and indoctrinating the successor(s) to the practice and its patients. It also allows time to repeat the steps if the initial transaction implodes during the process, which is not unusual.
Before you begin this transition, keep in mind that most doctors tend to overestimate the value of their practices. In my experience, most doctors do not have difficulty arriving at the value of their practice assets and receivables. But they are unfamiliar with the term “EBITDA” and do not have an understanding of what their practice’s EBITDA calculation is. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a measure of a practice’s profitability. EBITDA can be used to analyze and compare profitability between practices because it eliminates the effects of financing and accounting decisions.
EBITDA really communicates what kind of cash is this practice going to generate for the buyer? What are the earnings? What’s the profit forecast without interest, taxes, depreciation and amortization in the income statement and balance sheet? The value to a buyer interested in your medical practice is cash flow expectation. During healthcare M&A transactions, a potential buyer is going to examine what they think the potential cash-flow, or EBITDA, is going to be in the future, and how likely it is that, as a new buyer, they will be able to achieve or surpass that number.
EBITDA is calculated on a 12-month basis. If your practice has recently completed their fiscal year, a buyer can look at the most recent annual financial statement to determine EBITDA. If a valuation is done in the middle of a fiscal year, it’s common for a buyer to use what’s called the trailing 12-months. The trailing 12-month model looks at the EBITDA of the four most recent quarters, and then adds them to current mid-year data to reach a consensus.
Two Strategies. The most effective transition planning requires pursuing two different strategies simultaneously:
- Trying to find a competitor or another interested party to buy the practice; and
- Recruiting an associate to eventually buy you out.
The first approach is unpredictable … the second requires considerable time and expense
Finding a Buyer. An existing group will often be the best potential buyer for several reasons:
- They may have the financial capacity to pay a fair price;
- They can most easily facilitate the transition by allowing the seller to phase out gradually; and
- They have a strong reason to negotiate in good faith – protecting their current service area and referral base from another buyer.
Because of this, your plan should include contacting existing practices, even if you consider them competitors, to determine whether any of them are interested in acquiring your practice. You should require an NDA be signed by all parties prior to beginning discussions. Occasionally, a group practice will approach a solo doctor they believe might be nearing retirement to ask about the potential for a merger or sale, but more often it’s the solo doctor or designated intermediary who has to make the first move.
Finding an Associate. Until a buyer has formally agreed to purchase your practice, your efforts to recruit an associate should continue. Many residency programs, as well as local and state medical societies, offer physician recruitment resources at little or no cost. If you are in an area where it may be difficult to recruit physicians, you may need to engage a physician recruitment firm. Bringing a new associate into the practice may be the best option if you’re interested in easing into retirement with a part-time schedule.
A typical arrangement would allow the new doctor to come on board as an employee for two to three years and then buy a share of the practice. An interim period of partnership usually works well for both parties. This allows you to ease into retirement, provides for an orderly transition for your patients, and makes the arrangement more economically feasible for you and your successor. For example, after two to three years as an employee, the new doctor might buy a fifty percent (50%) equity share of the practice and work as your partner until your retirement date, at which time he or she would complete the buy-out for the remaining fifty percent (50%) equity. Some arrangements may factor in a reduced clinic schedule for the senior doctor during the transition period.
Worth the Effort. While effective transition planning can take considerable time and effort, you will be glad you did it, particularly when you consider the alternative. If you fail to carry out an effective transition plan, you may find yourself having to shut down your practice. In addition to losing any economic return on the enterprise, you would have to collect receivables, terminate loyal staff members, find a repository for patient records, notify patients of your plans and help them find a new doctor to handle their medical needs, among other unenviable tasks that are beyond the scope of this article.It’s a lot easier – and more satisfying – to follow a transition plan and see to it that the practice is in good hands.
Build a Strong Practice. Build the practice so that it can run without you, utilizing revenue producers (i.e., physicians, NPs / PAs, sclero & aesthetic RNs, RVTs) after you leave. This can mean growing the practice into a bankable, scalable, sustainable business before you sell. Smaller practices usually get attention from a clinical buyer at a much lower price point because value is in the patient base. However, the real money is in selling a going concern — a practice that delivers professional medical services and achieves high EBITDA numbers. The focus now shifts from making a living to return on investment for investors.
You have built the practice by delivering what patients want and need. Now it is time to shape that practice to emulate what buyers and investors want and demand.
Referral Complications. Referrals are the source of some of the most common issues that occur when a hospital or health system acquires a doctor’s practice. Naturally, the promise of increased patient referrals is a key reason for an independent practice to integrate with a hospital, but the reality doesn’t always meet that promise. What if most of your vein consults are coming from independent physicians that already face stiff competition from hospital or health system employed PCPs? Your referral sources may be unwilling to continue referring their patients to your practice out of fear that those patients may be courted by the hospital and transfer their care to a new network physician. Your PCP referral sources may prefer to retain referral relationships with independent physicians.
Discuss the expectation of referrals early in the acquisition process. If your community has a mix of employed and independent physicians, the referrals all come down to relationships. There is no guarantee that if a hospital buys your practice, your current referral patterns will continue.
Dissatisfied Physicians. Another potential issue with practice acquisitions is job satisfaction among newly employed physicians. Independent physicians are accustomed to being in charge and to commanding respect when they own a practice. Physicians often transition from employer to employee because they want to eliminate administrative burdens, focus on patient care, get better compensation, and have a better work-life balance. They may make the mistake of thinking they’ll get all of that and still maintain their autonomy and decision-making power. It’s a shock when that doesn’t happen. If the practice acquirer engages the selling physician(s) at a granular level before the acquisition and build not only a shared vision and a commitment to agreed-upon expectations, but also routine methods for consistent, honest communication, the success rate of these acquisitions should be very high.
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