Successful Physician Group Succession Planning

Succession planning is one of the most important decisions a physician owner will face —when and how to retire from a practice. Yet many physicians neglect to plan their exit. All too often, they think they can wait to sell the business when they’re ready to retire without realizing they need to have their practice well positioned and ready to hand off ahead of time. Preparation can be the difference between success and failure.

There are many tried and true steps physician partners can take to facilitate the smooth transition of ownership. While succession planning has some science behind it, it is also an art. There are indeed any number of variables which must be taken into consideration in specific situations. Perhaps one of the biggest is the physician owner’s personality, which could play a significant and unexpected role in determining how the future plays out for the practice.

The Desire for Clones

In working with numerous practices over the years, I have encountered many physicians who believe their successors must be clones of them, since their way of operating has brought the business to where it is today. This mentality is shortsighted. The most important thing is to align values and use unique styles of the individuals to achieve these values. Too many physician owners get frustrated if their junior partners don’t emulate them. What the owners really should be doing is taking the time to talk with them, hear their perspective, and even learn something from them. Physicians who are stuck in an unworkable model may be getting their practices stuck as well.

Personality and Style

Physicians who start private practice are usually very strong people who took a lot of risks to achieve success.  It is not realistic to expect the next generation of ownership to fit their exact mold. A better strategy is to determine the roles and responsibilities that give their probable successors the best opportunity to showcase their skills and then let them flourish using their own style. Your personality and style shouldn’t be the overwhelming consideration when choosing a successor to run your practice.

It can come as a big surprise to some physician owners that their incoming partner’s style, even if different from theirs, is a big hit with patients and staff members. For instance, it may represent a welcome change to move from an emotional, passionate, frenetic physician to one who is calm, thoughtful and never panics. What should never be lost, however, are the aspects of style that have made the practice successful . . . non-negotiable things like responsiveness and patient care.

Taking the Time to Plan Ahead

Succession planning can be contentious or it can be orderly. The difference depends on all participants in the process being willing to put the practice first and work toward the common goal of long-term sustainability. Smart physician owners will take time to uncover what other partners bring to the table, even if it looks different from the status quo. When values are aligned and owners back down from the belief that their way is the only way, the transition will be smoother and the future quite bright. Succession planning gives you time to train up your successor, show them the ropes, make sure that they really understand your business.

Remember too, that transparency is crucial both internally and externally.  Proactive communication about leadership changes alleviates the normal fears associated with change and uncertainty.  Plan for this.  Poor management of this process shakes organizational credibility and effectiveness. The bottom line is that transitioning from a practice takes time and preparation.  There are a variety of issues that must be considered, which is why it requires education and adequate planning to ensure the handing over of your practice is seamlessly executed.


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Developing a Shared Vision

When working with physician partners on strategic planning, one of the key items that I ensure we address is vision. It is imperative to develop a shared vision for the physician practice. In some strategic planning efforts, a vision for the practice is developed after a vision for the patients has been discussed. This is with the assumption that a shared organizational vision may be dependent upon a shared vision of how the patient population should be treated.

Whenever this is done, it is important to agree on where the practice wants to be in three to five years. It is often helpful to focus on where you want to be at the end of the period covered by the strategic plan, so this time period may be shorter, but certainly no longer than five years.

This three to –five-year vision might describe the practice broadly, in terms of its mix of programs, reputation or status inside and outside its primary target community, key accomplishments, and relationships with referring physicians. Specific descriptions might be included in relation to service/target area, program scope and depth, funding, governance, staffing, relationships with other groups, visibility, etc.  This form of “visioning” can be done in many ways. For example:

  • Groups can physically draw their vision of the future, then work to identify common elements and use them to establish a joint vision.
  • Groups can role play what they would want to be able to say about the practice’s major accomplishments and reputation to a newspaper reporter five years from now, then use this as a basis for developing a shared vision.
  • Groups can play the role of various supportive stakeholders (i.e. patients, referring physicians, etc.) and each develop a series of statements describing the practice as they would like to see it in a specified number of years.  Then these visions can be shared and meshed.

Physicians may also want to devise a formal worksheet indicating where they see the practice in either broad or specific terms. For example:

  • Broad categories – Describe the practice in five years, in terms of categories such as program, resources, status, relationships, organizational development, and governance.
  • Specific characteristics – Describe the practice in five years, in terms of categories such as target area, target populations, budget, staff size and composition, staff/component structure, program areas, offices/locations, board size and composition, relationship with local hospitals.

Physicians would then share the information from these worksheets and discuss in order to reach some form of shared responses.  The full group must reach consensus on a shared vision.  The physicians may opt to take turns describing the practice in terms of specified categories or topics (e.g., missions, program scope, resources, relationships), then consensus can be reached on major statements and categories.

Regardless of the approach and tactics used, it is imperative that all physician owners share a common vision and that all staff members are aware of desired future direction of the practice. Vision is the thing inside of us that guides us.  It creates a desire to grow and improve.  Vision embodies our hopes and ideals. It gives us a sense of purpose.  Vision brings us flashes or glimpses of what is possible.


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Ensure a Strategic Merger of Practices Doesn’t Fail

Mergers occur when two or more physician groups create a new and larger business entity that combines the resources of the original practices. While physician group mergers can have a profound impact on the business, too often practices view the merger itself as the strategic end game. Successful groups, however, understand that the deal is a means to an end and not an end in itself. The process of merging physician groups can go off without a hitch, but this is not always the case.  Practices looking to combine their efforts may run into certain problems along the way, such as these:


One of the primary reasons that mergers sometimes fall apart before they can ever be completed is the differences between those attempting the merger in the first place.  Differences in opinion or management style may cause potential partners to fail to see eye-to-eye, causing the merger negotiations to break down.  This can happen for other reasons as well.  Differences in personality may cause two potential partners to part ways, even though it may be mutually beneficial to combine their efforts.


Differences in corporate culture from one organization to the next also can pose problems for physician groups looking to combine efforts and resources.  This is closely related to the differences seen between future partners, but applies to the entire organization as a whole, rather than the differences between those at the top of the “corporate” food chain.  The ability to combine two physician groups with seemingly polar opposite cultures requires both planning and a certain level of artistry.  Cultural differences can threaten the outcome of a merger.


One of the most significant problems that can occur is the post-merger integration that must take place.  Physician groups that combine their efforts and resources must learn to do so by bringing all of the constituent elements of their practices together.  This is easier said than done.  The amount of planning and negotiating required to bring this about is fairly significant and usually takes place during the merger process.  This integration planning is closely related to cultural issues because it requires those involved in the planning process to determine what the resultant culture will look like after the merger.


Practice leaders often make simplistic and optimistic assumptions about how long it will take to capture synergies and how sustainable they will be. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and often the stimulating effect of the combination on the individual physician groups.  However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble. It is important to be realistic about timing. Persistent management attention is needed to capture them.

Diligent Planning

The most successful physician groups link effective strategic formulation, pre-merger planning, and post-merger integration. Having all three components is critical for success:

  • A vision, strategically formulated, for where the practice is going and how the deal fits.  Practices then identify the appropriate targets and get the deal done.
  • A pre-merger process that targets physician groups with the right capabilities, gets the deal done, and begins the integration through rigorous planning and building of trust among the players.
  • A post-merger process that seeks to capture well-defined sources of value and is led in a way that captures as much value as possible as quickly as possible.

The merger will work best if both physician groups agree on the vision for the overall practice going forward and where the acquisition fits into that vision. Unfortunately, for many physician groups, the vision and true strategy work is begun after the acquisition. Too often the transaction focuses on the numbers without regard to the hard work of creating market-disrupting strategies.  The result is an underperforming merger.

Mergers represent a challenging and risky strategic decision.  The decision to merge should be fully challenged before physician groups decide to go ahead, particularly given the average performance of the returns and the risk associated with the potential outcomes.  Even with thoughtful planning and preparation, best practices and focus, success is not guaranteed.  However, applying the best practices should enhance the chances of success and help avoid catastrophic pitfalls.


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Joint Venture Pros and Cons

When engaging independent physician practices in strategic planning as well as succession planning, the topic of joint ventures sometime emerges. You might have a killer idea, but lack the resources, finance or specific knowledge skillset to deliver it. With the strong competitive forces in many areas, physicians sometimes contemplate a joint venture with another organization such as a hospital as a means to protect their practice without selling out entirely. Sometimes, collaborating with another business that is able to plug the gap can be the way forward, giving you credibility as you move into a new area.

There are of course many details to study when beginning to think about such an endeavor. Joint ventures are complex relationships and take many different forms. They also need careful planning to make them work. Moreover, the challenges and opportunities are unique to each market so you must not view a potential joint venture through the lens of what may be occurring elsewhere. Broadly speaking though, there are some advantages and disadvantages to consider when weighing the prospect of entering into a joint venture with another entity.


There can be significant advantages in creating a joint venture. Some benefits include:

  • The ability to collaborate with other partners when making business decisions.
  • Entering related businesses that previously presented high barriers to entry.
  • Gaining access to expertise without the need to hire more staff.
  • Sharing the financial responsibility of capitalizing the business.
  • The parties can share risks and costs.
  • Leveraging existing technologies used by the other organization.
  • Establishing a presence in new, untapped markets.
  • It is only a temporary arrangement between the parties.
  • The parties have access to additional resources as they are coming together for a mutual and specific goal.
  • The parties can complete a project which they may not have had the finances or staff to complete on their own.
  • Increasing opportunities for growth of your business including financial growth.


There can be, however, some pitfalls of entering into a joint venture. Some disadvantages include:

  • Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal.
  • Coping with differing cultures, management styles, and working relationships that prevail in each organization.
  • Managing communication with physicians, senior managers and employees in both organizations so there’s a consistent understanding of the objectives of the joint venture.
  • Either of the parties making poor tactical decisions which may affect the desired outcome of the project. These are usually caused by a misunderstanding of the roles of each organization.
  • Lack of commitment to the project by any of the parties.
  • There are times when flexibility is restricted.

Forming a joint venture with another healthcare organization may be seen as a plausible solution. The success of a joint venture though, highly depends on thorough research and analysis of the objectives. There really is no such thing as an equal involvement and a variety of management structures is possible. Because different entities are working together, there is a great imbalance of expertise, assets, and investment.


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Strategic Engagement of Recruiters

Undoubtedly, bringing on a talented physician or practice manager will help to ensure your medical practice operates more efficiently, is profitable, and has happier employees. Finding such an individual, however, can sometimes be challenging, since your practice is not the only one attempting to recruit that stellar candidate. So, if you like gambling in casinos and/or have plenty of time to spend interviewing countless candidates, you should put an advertisement in your local paper or online. Otherwise, your time and money would be better spent using a recruiter to find your ideal physician or practice manager who you will value for years to come.

A good recruiter will weed through the candidates and give you just a few (no more than three) who appear to be a good fit for you and your practice. Additionally, seasoned recruiters will do thorough reference checks and logistical coordination of interviews, which frees up your already tight daily schedule. They also are great at being the “go-between” when it comes to compensation negotiations, so after the hire is made there is no bad blood between employer and new-hire. Of course, when it comes time for the interview, there are several items you need to ensure are covered.

Top Characteristics

Here a few things that you should ensure the candidates have when you are conducting your interview:

  • Appropriate education level
  • Practice managers (Do they need a high school diploma? Specific type of college degree? Master’s degree?)
  • Physicians (Are they trained in the procedures that you currently provide? Are they trained in procedures that you would like to add to grow your practice?)
  • Business acumen
  • Practice mangers are your business person, so don’t skimp on this criteria. You are not hiring them to perform surgery; you are hiring them to keep the practice in order.
  • Physicians will most likely be partners someday, so while they don’t need to be business savvy from day one, they should at least have the interest in learning about the business side of running a practice.
  • Leadership capabilities (Are they motivating? Can they delegate? Do they communicate well? Are they empathetic? Do they have a sense of attention to detail?

Warning Signs

Recruiters should be interviewing candidates in great detail before they ever send them your way. Joe Ciaramitaro, President of CorpSearch Int, notes:

“The proper vetting practiced of candidates are being done by professionals that do this type of work the entirety of every day. You want essentially a short-term hiring partner here, where success is achieved and measured by the ability to work and trust the recruiters experience and shooting straight with the recruiter so they can trust and help you through the entirety of the process the most. It will be sometime an arduous journey to the end result of the successful hire you really want but timely and well thought out communications between presenter of your opportunity to the world of candidates out there, the recruiter and yourself, will ensure the greatest efficiencies and outcomes of your search.”

It is the job of the recruiter to be acute and to have a thorough selective process. Even the best of recruiters may miss something when they screen candidates, so here are a few red flags you should be on the lookout for when conducting your interviews:

  • Did the candidate ask about salary upfront? (Actually, when using a recruiter, the candidate should not even bring it up since the recruiter should have already covered the salary range, benefits, etc.)
  • Did the candidate ask about long hours?
  • Did the candidate slam their former co-workers?
  • Does the candidate appear to have poor people skills?
  • Does the candidate appear to miss the point about patient care? (This can sometimes be the case with practice managers if this will be the first job they have in a medical practice. Obviously, patient care is a priority. The candidate that does not get that will not do a job well since they will be unable to relate to the tasks the clinical staff perform on a daily basis. The manager does NOT have to have clinical experience to do a great job as a practice manager.)

A new physician or practice manager is a crucial member of your staff and critical to the success of your practice. Finding the right individual is not easy, but being open about your requirements to a recruiter can help to facilitate the search for a perfect fit. Engaging a recruiter as a trusted member of your strategic hiring needs will ensure they have a good grasp about the type of candidate that will be ideal for your particular practice.


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Introduction to Medical Practice Valuation

At some point, there will come a time to sell your practice. It could be in part to a partner or as a whole to another group or hospital. In any case, the practice will need to undergo a valuation, which is a detailed and complicated process, oftentimes confusing because let’s face it, it is not like you sell your practice every year. One thing that can help you on your path is to understand some of the basic tenants of practice valuation.

Understanding Terminology

If you are considering selling your practice, make sure you understand terms and appraisal definitions. Oftentimes a physician will ask their accountant to appraise the business, but the physician may be surprised to find that the “book value” given by the accountant is far different than the “Fair Market Value (FMV)” that he could actually receive at time of sale. It is not that the accountant is incorrect at all. Rather, the accountant and the physician may be operating under a different set of terms and definitions, without knowledge of each other’s perspectives. Realizing that there is no absolute sales price is the essence of FMV. When determining valuation, look for a price range with a reasonable floor and ceiling.

Understanding Value

For starters, value isn’t an absolute number. A medical practice’s tangible and intangible assets can be grouped into two broad categories: physical assets and non-physical assets. Examples of physical assets include accounts receivable, leaseholds, medical equipment and furnishings, medical records, and real estate. Examples of non-physical assets include buy/sell agreements, goodwill, managed-care contracts, restrictive covenants, and staffing. Estimates of value differ significantly, depending on the purpose of the appraisal, the acumen of the appraiser, etc. Astute appraisers will consider a host of questions. What is the value of the practice for purchase or sale? What is the value of a practice for merger? What is the value of practice assets for joint venture with a corporate partner? What is the value to establish buy-in or buy-out arrangements for partners? What is the value of practice assets for purchase or sale, apart from ongoing operations? To answer these questions, physicians must understand how practices are valuated.

Informal Terms of Valuation

The “asking price” is often arbitrary and difficult to substantiate, and typically is reduced by a significant percent during negotiations. The “creative price” is derived by way of creative financing.  For example, the practice may provide the down payment. The “emotional price” may involve either a motivated buyer or seller, who pays an under- or overinflated price for the practice. The “friendly price” is reserved for associates, partners, or other colleagues. The “realistic price” is one that both buyer and seller believe is fair.

Formal Terms of Valuation

Practice appraisers use FMV as the standard to derive a reasonable value for a practice.  FMV means an arm’s length transaction between an unpressured, informed buyer and an unpressured, informed seller. The “business enterprise value” of a practice equals a combination of all assets (tangible and intangible), and the working capital, of a continuing business. The value of “owner’s equity” equals the combined values of all practice assets (tangible and intangible), less all practice liabilities (booked and contingent). The “working capital value” equals the excess of current assets (cash, A/R, supplies, inventory, prepaid expenses, etc.) over current liabilities (accounts payable, accrued liabilities, etc.).


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Entering Your Practice into Strategic Joint Ventures

A joint venture agreement is an agreement between two or more healthcare entities usually entered with a specific goal in mind.  Each party is invested in terms of capital contribution, the time devoted to the project, and the effort put forth to complete the defined tasks.  These business partners pool their resources and expertise to achieve a particular goal.  The risks and rewards of the enterprise are also shared.

The reasons behind forming a joint venture include business expansion, development of new service lines, or moving into new markets.  Each party who enters into a joint venture agreement will want to maintain their separate business/entity and  enter into the business arrangement with a strategic goal in mind.


Your practice may have strong potential for growth, with innovative ideas and services.  However, a joint venture could give you more resources, greater capacity, increased technical expertise, and access to established markets and marketing channels.  In a very broad sense, joint venture formation should consider legal, tax, business, and cultural issues.  Joint ventures may take the form of different legal structures, but beyond legal and tax considerations are a large number of broad business and cultural issues. As a start, you should carefully consider and/or define:

  • The purpose of the joint venture
  • Specific goals for the venture
  • The resources and value to be dedicated to the venture by the participants
  • The cultural “fit” between the participating entities
  • The specific responsibilities of the participants
  • Potential impact to your current practice’s reputation
  • The control mechanisms in place
  • How you will handle cash calls and personal guarantees if required

Assess Your Readiness

Setting up a joint venture can represent a major change to your practice. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy.  Consequently, it is important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect.  In fact, you might decide that there are better ways to achieve your business goals.  You may also want to look at what other practices are doing, particularly those that operate in similar markets or specialties to yours.  Seeing how they use joint ventures could help you choose the best approach for your business.  At the same time, you could try to identify the skills they apply to partner successfully.

You can benefit from examining the business of your own practice.  Be realistic about your strengths and weaknesses and consider performing an analysis to discover whether the potential joint venture entities are a good fit.  You will almost certainly want to find a joint venture partner that complements your own practice’s strengths and weaknesses.  You should take into account your employees’ attitudes and bear in mind that people can feel threatened by a joint venture.  It can also be difficult to build effective working relationships if your future joint venture partner has a complete different way of doing things.  If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits.  Joint ventures often enable growth without having to borrow funds or look for outside investors.

Due Diligence

Conducting due diligence on any potential partner is a top priority for practices considering joint ventures.  Before entering into agreements with another entity, check into the credentials of potential member(s), including the existence and availability of the resources, property, and human capital that potential partners bring to the joint venture.  The ideal partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organizations.  Broadly, you need to consider:

  • Do you share the same clinical and business objectives?
  • Can you trust them?
  • How well do they perform?
  • What is their attitude to collaboration and do they share your level of commitment?
  • What kind of reputation do they have?
  • Do they already have joint venture partnerships with other entities?
  • What kind of management team do they have in place?
  • How are they performing in terms of clinical operations, marketing, personnel, etc.?
  • Are they financially secure?

Consulting with the proper legal counsel prior to establishing the agreements is of course crucial when deciding whether to pursue a joint venture.  Regardless of the length or breadth of the legal agreements you may use, if there is not a high degree of consensus and willingness to work through upcoming problems with your new joint venture partners, you may find yourself bogged down in unpleasant and costly disputes.  Try to make sure your new partners are a good fit with you and define the business as much as possible ahead of time.  An experienced consultant should be able to guide you.

Taking the time to fully understand the process, evaluating potential outcomes, and conducting due diligence on potential partners are three great first steps in moving forward with a joint venture.  While all of this may seem overwhelming, joint ventures, if executed thoughtfully and correctly, can lead to new revenue streams, shared resources, and incredible results.


Contact ABISA for healthcare consultancy support or speaking engagements.

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