Traps to Avoid with Physician Practice Mergers

Any private practice physician understands the difficulty of starting a practice from scratch.  The countless hours and sleepless nights one must endure to achieve a successful practice is what truly makes these physicians entrepreneurs. However, it is also necessary to accept the fact that keeping the business alive is just as difficult, if not more so. In most cases, crucial decisions should be made in order for the practice to move forward, including potential buyouts as part of a growth strategy or exit strategy.  This is one case where mergers come in.

Mergers and acquisitions (M&A) is an umbrella term that covers quite a lot.  For this article though, I am narrowing it down to just mergers; that is, two or more practices “joining together” as compared to a practice being “bought out entirely”. If you are a physician practice owner who is considering a merger at some point, it is vital to learn more about this process early in the game. As I have written about in previous articles, while a merger can prove vital for your practice, the business will definitely go through some changes in order to stay relevant and profitable. Mergers are a principle way for some practices to expand.  If you do so, however, there are certain traps you must avoid.

Finding a good fit
Trap: Failing to reach a meeting of the minds. Each owner may have an initial idea of what he or she wants to accomplish with the merger, but together they may fail to flesh out the details to achieve their goals. For instance, one may be older and views the merger as an eventual exit strategy. That’s fine, but this can mean the older owner may have a conservative approach to the business and may not want to spend money on expansion. The younger owner may be more willing to take risks and may disagree on the direction of the practice in this situation. If both owners have failed to discuss their expectations candidly, they will probably become frustrated and unhappy after the deal has closed, which can undermine the success of the merged practices. Many physicians use consultants here early on to help facilitate these discussions and ensure the two practices are truly open about their desires and intentions.

Trap: The inability to mix company cultures. One practice may have very talented personnel; the other has more name recognition, which can translate into greater marketing success. Or one practice may bring capital to the table that the other needs for expansion. Even though on paper a merger may seem like a good idea, owners and employees of the two practices may not mix well. One team may be used to autonomy; the other may thrive under micromanaging. Make sure that your proposed marriage with another practice won’t suffer from incompatibility.

Control
Trap: Failing to clearly establish who gets what. Rarely is a merger a 50-50 proposition. Carefully allocate each owner’s percentage before committing to the merger. Give consideration to pre-merger accounts receivables as well as any promised/expected bonuses that have not yet been paid before a merger is completed.

Trap: The inability of one owner to cede the last word. One of the key issues for physician practice owners when two practices merge is who will call the shots. Until the merger, each owner has been supreme within his or her practice. Decide who will be in charge when the merger is completed. Make sure each owner knows which one has the final say. There are ways to have these decisions rotate for fairness and also ways to deal with tiebreakers. These are critical components of your governance documents.

Other issues to settle before the merger include:

  • Practice name. Will one name survive? Will you create a new name?
  • Positions on the governance board.  Decide in advance how many representatives each former practice will have on the new board.
  • Staff retention. When practices merge, there is duplication of functions and you need to avoid redundancies. Negotiate before closing the merger who will stay and who will have to leave.

The unknown
Trap: Failing to bring in professionals at the outset. Physician practice owners may shake hands on a deal before even talking with a consultant or their accountants and attorneys about the merger. This mistake can be critical.  A seasoned consultant can help owners think through the structure of the deal as well as (and perhaps more importantly) the shape of the practice after the merger.

Trap: Incurring unanticipated liabilities. What you don’t know can hurt you in a merger. When deciding whether to merge with another practice, be sure to do your due diligence and check for any debts, judgments (or potential judgments), payroll and other taxes, contracts with suppliers, employment contracts with staff and other obligations you may incur. Again, here is where an experienced consultant is well worth the cost.  Due diligence can be very time consuming.

If your practice has one type of retirement plan and the other has a different type of retirement plan, decide which plan will be used by the new company. This and other benefits will be uncovered and evaluated during due diligence by your consultant, and as previously mentioned there will need to be a plan put in place before the merger is consummated as to what these benefits will look like post-merger.

Final word
You don’t necessarily have to merge in order to grow your practice. You can gain many of the advantages that a merger offers while retaining your autonomy simply by deciding to work closely with another entity. You may be able to accomplish your goals via a joint venture with a hospital, for example. Of course, any arrangement outside of a merger can have some legal healthcare implications, so you should certainly talk with a healthcare attorney before proceeding down one of these avenues.

M&A is a powerful strategy that practices have been using for decades. As long as it is done correctly and with enough preparation, you’ll be able enjoy its benefits, in the long run, should you choose to do it. Use your outside professionals early on and the road to future success will be laid out much more clearly.

==============================================================

Contact ABISA for healthcare consultancy support or speaking engagements.

Follow on Instagram or Facebook or LinkedIn

Does Your Practice Have a Succession Strategy?

For many physician owners, their practice is like their child. As such, they invest the majority of their time and resources into ensuring the business stays healthy and has opportunities to grow and maximize its potential. Few focus on preparing for that inevitable moment in the future when they will have to hand their baby over to someone else.

While succession planning is a critical concern for a business of any size, it could literally be a matter of life or death for a physician practice. Physician-owned enterprises are particularly vulnerable because business discussions can be complicated or derailed by the emotions involved in addressing such difficult issues such as aging, death and financial affairs. To ensure that the medical practice you worked so hard to build and nurture continues to thrive after retirement or death, you must develop a succession strategy that enables an orderly transition of both ownership interests and management responsibilities while minimizing complications between the partners.  Additionally, your succession strategy must provide for economic support of all relevant parties involved.

Setting a Succession Strategy

While there is no “one size fits all” succession planning solution, and the details will vary according to the distinct dynamics of your situation, the following are key considerations as you embark on developing a succession strategy: 

1. Start early.  Ideally, it is best to begin this process as far in advance as possible. This will give you the opportunity to explore all of your options and prevent hasty decision making that can undermine the stability and value of the business. 

2. Identify your successors.  This might be the most challenging aspect of this process for physician practices.  As I have written about before, there are many considerations in the selection and grooming of a physician partner. You may have a physician in the practice that does not have the interest or skills to take over the practice. Therefore, to ensure that you place your practice in the best possible hands, I recommend making a rigorous and honest assessment of the relative strengths and weaknesses of all potential heirs.  Consultants with experience in physician succession planning can be well worth your investment here. Engaging such an outside expert to conduct this analysis to help make objective and rational decisions regarding the best future interests of the practice and to de-emphasize emotional attachments (as well as any potential family politics) will ultimately be effective for the succession strategy.

It is also important to remember that management and ownership are not necessarily one and the same. Thus, it may be in the best interests of the practice to appoint an employee to take the business to the next level. Even if physician owners are not holding the business operations reins day-to-day, they will still retain an ownership interest and exercise the requisite level of control via various governance mechanisms (partnership meetings, executive control, voting shares, etc.).

3. Determine the right legal structure for transferring your business. There can be significant financial implications and tax consequences with ownership changes.  Furthermore, there are numerous legal methods for transferring your business.  As a result, the experienced consultant you engage should be pulling in your accountant and attorney at the appropriate times so that together, the team can advise you on the correct direction and appropriate steps. No two medical practices are the same and you should be leery about professionals approaching you with any sort of template or preplanned outcome.

The best option for you and your business will indeed depend on a host of needs and circumstances particular to your practice. In the past, I have written on several transactional methods.  Two common avenues are for physicians to sell their practice outright or transfer ownership to another partner in the practice.

  • Selling your practice outright.  This creates cash for you to use as you ride off into the sunset.  The sale would be based on fair market value (FMV) after a valuation is performed.  Potential buyers include other physicians or practices, hospitals, or private equity-backed MSOs (management services organizations).  Depending on how the sale is structured and what all is included, there could be various tax implications.
  • Transferring your ownership interest.  Essentially a buy-sell agreement prearranges the sale of the practice to another physician partner.  This agreement enables you to maintain control until the occurrence of a triggering event that the agreement specifies.  At that time, the buyer typically becomes obligated to purchase your remaining interests from you.  There are many different ways that buy-sell agreements may be constructed and I cannot say I have ever seen two that are exactly the same, but this is a simplification of generally how they work.

4. Get professional assistance. Though trimming expenses is always a key concern for physician practices, skimping on succession planning today can jeopardize financial security for you and your family and threaten the continued viability of the business you worked so hard to build. As you saw from the brief overview in this article, there are substantive complexities to managing this process. It is strongly recommended that you begin by contacting a seasoned consultant with experience in succession planning.  As I mentioned above, that individual should be bringing in other professionals (i.e. attorney, accountant, financial advisor) throughout the process so that collectively a sound succession plan will be constructed.

What’s Next?

When you first begin working with the consultant, he/she should be devising a strategy based on your timelines.  Some physician owners I work with want a rapid exit and thus we work to create a diligent plan that allows for such a departure from the practice. Other physician owners are looking at an exit some ten years from now.  In those cases of a future planned exit, I recommend that the succession plan be updated every two or three years.  There is so much change in the healthcare industry as well as local competitive factors and also internal physician partner dynamics, (not to mention any personal changes in your life), that a periodic review of the strategy is definitely warranted. Good luck!  Your patients, referring physicians, and employees are counting on you to have a strategy to hand off the baton.

==============================================================

Contact ABISA for healthcare consultancy support or speaking engagements.

Follow on Instagram or Facebook or LinkedIn