There are more than 800,000 active physicians in the United States and more than 50 percent of them are owners of their own practice. If you’re one of them, you have likely noticed a recent trend in the industry: consolidation. Specifically, consolidation financially backed by private equity. This is true of a multitude of subspecialties across the healthcare industry.
The main reason behind this is to create cost reductions by consolidating physician practices into larger groups and distributing expenditures. The long-term plan for the PE firm is to then sell these managed-care groups to insurers or larger health systems, which pay a premium for groups that already have care-coordination, robust data and high quality of care.
This evolving trend in the industry can be a windfall for some physician-owners looking for a lump-sum, up-front payout for their practice. At the same time, this new wealth presents its own complications, as does the identification and execution of the actual practice’s sale.
In this piece we’ll briefly discuss some of the issues that you as a physician-owner should consider both prior to and following the sale of your practice.
Planning Ahead
You’re ready to sell your practice, and while that may come with a sigh of relief and a sizeable lump sum payout, it also likely means a hindrance to future earnings. This may be the result of a non-compete if you leave the practice or a reduction in salary as a result of the up-front earn-out.
Knowing these likely scenarios means knowing yourself and your financial goals for the future. Whether you’re planning to head into a graceful retirement or are looking to spend and invest more aggressively, you need a basic cash flow model. This model should answer questions such as, how much money will I need if I live to age 95 given my needs (e.g. kid’s college education), desires (e.g. fishing boat) and goals (e.g. maintaining current spend levels at equivalency of $500,000/year salary)?
Based on this modeling, you can work with your advisor to determine an appropriate asset allocation model, levels of risk tolerance and other higher-order thoughts around portfolio construction, wealth transfer and philanthropy.
There are also significant tax implications for a single-tax-year lump payout. What methods will you use to protect this newfound wealth? How to protect your children when that wealth is transferred and how to offset or defer taxes through retirement planning vehicles?
These are the types of questions that we at Patton, Albertson and Miller specialize in answering, including a special focus on physician-owners facing this particular moment in their professional lifecycle. These are questions not to be taken lightly and can, in fact, alter the negotiation and deal structure of your eventual exit.
Capturing The Moment
As with all “trends” there is an upcycle and a downcycle given enough time. The M&A trend is currently in favor of physician-owner sellers with PE firms and subsequent acquirers highly interested and engaged. However, the valley may not be far off, with the buyers reclaiming the upper-hand. How can you capture the moment when it’s in your favor?
The first step harkens back to our last conversation. Plan for yourself and know when your firm has reached the metrics that will make any exit aligned with your needs, goals and desires. Moving too early can be just as disruptive to your financial future as moving too late.
Aside from working closely with your financial advisor, it is also prudent to hire a healthcare M&A advisor. These advisors can assist in identifying potential buyers, preparing the business for sale and negotiating terms of the sale. These firms often work hand-in-glove with your personal advisor to ensure that deal terms create a meaningful opportunity that is good for your practice, your employees and you and your family.
Ideally, your financial advisor also has an in-house team of exit planning experts to integrate the full stack of your personal and professional needs. This is what you find at Patton, Albertson and Miller. We understand the emotions and the hard-dollar rationality involved in selling a business. Our in-house expertise allows us to create meaningful efficiencies that work in our clients’ best interests. We also typically work with transactions ignored by the Wall Street shops due to their size, and have a particular expertise in the complexity involved with selling a healthcare practice.
Post-Exit & In Conclusion
It is our wish that as you approach the selling of your practice that you take a broad evaluation of all your financial options from pre-planning through post-exit. Following the sale of your firm, how will you holistically evaluate your wealth and provide for your family’s financial independence and the funding of your own next steps and interests?
Much like patient care, this is an ongoing and specialized relationship, one that we at Patton, Albertson and Miller understand at a material level. With a strong focus on business owners and physicians we combine our distinctive custom portfolio approach with a value investing orientation to achieve results for our clients. But in the end, this relationship is not about us, it is about you. If you feel that our expertise is a potential match, we invite you to call us to schedule a complimentary evaluation of your comprehensive personal wealth picture. We will also provide you with our insights on the healthcare M&A landscape and what opportunities may exist for you and your firm. We look forward to hearing from you.
