As our clients reach the ages of 55 to 60, many begin considering what their transition plan to retirement may look like. Some want to practice into their 70s, provided they have no serious health issues. Others contemplate leaving practice between the ages of 62 to 65. The process of determining an exit strategy can be difficult, and it brings a unique set of challenges, especially since many vein practices are built around a solo practitioner.
Some doctors find transition planning difficult because they are not certain of their intentions. Frequently when I ask a client when they plan to retire, I might be told “maybe five years from now”. It’s important to start thinking about options that are available to you, even if you’re not sure exactly when you want to retire. Delaying hurts your chances of maximizing your practice’s value. It also increases the chance that death or disability will intervene, leaving you or your family without a well-developed plan.
Over the years, some of our clients have achieved significant wealth and decided to pick a date and close the doors of their practice. While that may be an option for some, I strongly encourage a client to consider making a deliberate effort to find a buyer or successor for their practice. Unless you have run out of options, shutting down your practice is not an ideal way to end a long and, presumably, rewarding career. Not only would you forfeit a financial return for the practice that you may have spent your entire career building, closing a practice can be every bit as difficult and stressful as starting a practice.
While planning your exit strategy may take a considerable amount of time and effort, you will be glad that you did it, particularly when you consider the alternative. If you decide to close your practice, you would have to collect patient and payer receivables, terminate loyal staff members, find a repository for your patient records, and notify patients of your plans and help them find a new doctor to handle their medical needs, among other unenviable tasks. It’s a lot easier and more satisfying to follow a transition plan that assures that your practice is viable after your exit.
Acquisition and integration of vein and vascular practices has become commonplace over the past few years. The options available to you may include:
- Sell your practice to a competitor or multi-specialty group practice;
- Hire and mentor an associate physician to eventually purchase the practice from you; or
- Build a larger vein and vascular entity through merger / acquisition to attract attention from private equity or special interest buyers.
To maximize your practice value, establish clinical and operational standards that demonstrate that your practice is a bankable, scalable, sustainable business. Smaller practices may get attention from a buyer at a much lower price point because value is in the location, patient base or relationships with referral physicians.
A much higher value is placed on a practice that delivers high quality, cost-effective care with significant cash-flow and margins. When you are in practice for yourself, your focus is on making a comfortable living for yourself and your family. When your practice is an acquisition target, the focus of the acquiring entity is on ROI for the investors.
An existing group, whether a competitor or a larger entity consisting of numerous practices, will often be the best potential buyer for several reasons:
- It presumably has the financial capacity to pay a fair price;
- It can facilitate the transition by allowing the seller a variety of timelines to transition out of the practice; and
- It may be motivated to acquire your practice and protect its service area, keeping your practice from a competitor looking to enter the market. Because of this, your plan should include contacting existing practices inside and outside of your service area to determine whether any of them are interested in acquiring your practice. This might best be accomplished by using a third-party to inquire without disclosing your identity upfront.
Merger and Acquisition
Another strategy that can produce an excellent payday in exchange for your equity ownership position is a Merger and Acquisition model. Combine several practices through merger or acquisition, then sell the new practice entity. The private equity community is very active in this space if there is a strategic presence in a geographic area with a strong clinical and administrative team. You can take advantage of multiple locations to grow the geographic footprint. The more transactions assimilated, the more that value grows.
Transitioning from Employer to Employee
Another potential issue with practice acquisitions is job satisfaction among newly acquired 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, possibly increase their 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 acquiring entity engages the selling entity 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.
The acquiring entity should discuss expectations early, offer leadership positions to the acquired physician(s), be transparent in decision making, and treat the selling physician(s) with respect. A key to a successful transition is ensuring physicians still have a voice in their future. It’s important to try to make the physician(s) feel involved, and that they have a voice that can be heard and will allow them to continue to have some influence as to what happens to them going forward. The selling entity understands that many final decisions rest with the acquiring entity, but it serves the acquiring entity well to realize that this is a big change for a physician to transition from employer to employee
Hire an Associate
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 doctor 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 one to three years and then buy a share of the practice. An interim period of partnership usually works well for both parties.
Bringing an associate into the practice allows the departing physician to ease into retirement, provides for an orderly transition of patients, and makes the arrangement more economically feasible for both parties. For example, after two to three years as an employee, the associate could purchase a 50% equity stake in your practice and work as your partner until your retirement date, at which time he or she would complete a buy-out for the remaining 50%.
Focus on All Options Simultaneously
Effective transition planning involves pursuing different strategies simultaneously. The Merger and Acquisition strategy involves looking for an entity (competitor, hospital, multi-specialty group practice, national practice) to buy your practice. The Associate strategy involves recruiting a physician to work besides you and eventually purchase your practice. The first approach is unpredictable; the second requires considerable time and expense.
A respected third-party with industry experience in M&A can serve as a helpful guide. These professionals have gone through this process before. The very fact that you hire an expert can establish credibility with potential merger partners, lenders and investors. Advisors bring a working knowledge of growing medical practices. They also bring an independent perspective, strategic thinking, objectivity and contacts. Don’t hesitate to utilize third-party advisors, they can be a resource while you are focused on patient care.
Referrals are the source of some of the most common issues that occur when a hospital or health system acquires a physician 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.
Employed doctors do not have the same emotional and financial stake in their practice as independent doctors. The compensation plan of the acquiring entity must have a strong retention element. Physicians may seek employment with a larger entity to have a consistent, predictable income. But the cost structure of the acquiring entity is different from that of an independent physician practice. Establishing a transparent compensation program, with incentives, is key to avoiding disappointment on either side.
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