Timing your Exit from your Medical Practice

Regarding succession planning, I have been approached by physicians looking to exit their practice anywhere from three months to seven years.  I cannot stress enough the importance of planning ahead, especially if you are a solo medical practice; anything short of twelve months and you will almost always find yourself on the losing side of the transaction.  This article is aimed at any physician contemplating exiting their practice at some point.  Perhaps you are finally at the point in life where you are considering retirement; with all the work you have put into your practice, retirement is a welcome sign and you are contemplating selling. Most physicians are caught on the “entrepreneur merry-go-round”, dealing with business issues, family, staff, banks and so on, and find it difficult even to plan this year’s strategy, let alone figure out whether it’s time to sell.

Initial questions to ponder

As you begin to contemplate selling, ask yourself why are you wanting to do so, because most buyers will ask you this exact question.  It is fine if you are retiring or looking for a new challenge, etc., just be honest with yourself.  Along those lines, consider why someone should buy your practice.  Do you have new equipment, a strong referral base, large patient volume, solid financials, etc.?  Remember that a new owner is primarily interested in how much cash the practice will generate.

The need to start planning early for an exit
If your passion has waned and you’re finding it more difficult to get excited about growing your practice, then now might be the time to consider selling. After all, if you’re not building your practice and continually thinking about next steps, it could start declining, making it more difficult to sell. It is much easier to sell a medical practice that’s on an upward trajectory.

If the business is going to collapse without you there, that will become apparent during the due diligence phase. If your practice has several physicians but you do not have proper succession in place, you’ll need to work on moving other physicians into the roles to replace you eventually.  You should seriously consider calling a transaction consultant who can help you through the process.  Ideally, you want to contact an experienced consultant at least two to three years before selling, to gather from him or her what housekeeping needs to be done in your medical practice to get it ready for market. Unfortunately, many physicians are so caught up in the day-to-day running of a practice that they put all of this off until they are less than a year from wanting to retire.

Major steps in selling your practice
When exiting your practice, you will certainly want to consider who your potential buyers are, and it may not be as easy as you think. Selling a medical practice is more than a tour of the office, a handshake and exchanging a check. It can be complicated, often messy and intense. It will take several months of data gathering, negotiations, analysis and various emotions before it’s over.  In its simplest form, here are four of the major steps in proceeding with the sale of your practice:

1.  Nondisclosure agreement.  The first step is giving the potential buyer just enough information to help determine a price. It’s important that you don’t give a potential buyer any information until they have signed a nondisclosure agreement. This will protect your information and ensure the buyer is only using it to formulate an offer.

2.  Due diligence.  After preliminary due diligence using the information you have supplied them with, as well as other research, the buyer will typically give a range of value for your practice, which may or may not be in line with your asking price. If discussions are going well, then the potential buyer will likely want to examine more items as part of their due diligence, including tax returns, key contracts and agreements, etc.

3.  Letter of intent.  Once the buyer has a cohesive picture of your practice, they can hone in on a more precise value. This is laid out in a letter of intent, which covers the purchase price, the structure of the deal, whether it is an asset or stock sale, the escrow parameters, the working capital allowance, and other details. While this is a very intentional document, it is non-binding.

4.  Purchase agreement.  After negotiation, review of legal terms and final due diligence, a purchase agreement is created.  This is the legally binding agreement which is agreed upon by both parties and will be a road map for how things play out once the deal is closed.

You may opt to stay on

While you might be thinking of selling your practice and retiring, you might instead wish to stay on in a consultancy role, part time. In fact, practice owners may be asked to stay on temporarily after a sale has been executed, even if only in a part-time role. This arrangement is somewhat common for many medical practices to ensure continuity because perhaps the biggest source of concern for prospective buyers is that existing patients will disappear when ownership changes. Any reductions would diminish the value of a buyer’s newly acquired asset.  There are a few considerations though that you might want to think about.  For example, as a seller you may anticipate less money up-front as this will be offset by a “salary” to help in continuity with patients and referring physicians.

Final thoughts

Selling your medical practice can be financially rewarding as well as give you the personal satisfaction that what you created will continue after you. Your patients will be happy, and the jobs your practice provides will continue. Also, you will give another physician a chance to be a small business owner.  While each medical practice owner chases success in his or her own unique way, there are some things nearly all physician practice owners have in common: hard work, determination, a vision of what could be, and the will to make it happen.  But there is also another common factor that binds together all physician practice owners: the need to someday transition your practice to its next owner.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Transitioning the Practice to your Children: Family Member Succession Challenges

Recently I was contacted by a physician regarding his desire to do succession planning.  He has two sons that are physicians who currently work at the practice and he is looking to start the arrangements to eventually hand off the reigns.  In my experience, succession planning with family members is usually straightforward, but it is always more sensitive of an endeavor.  Conversations around the next generation of leadership are inherently more complicated and emotional due to family dynamics, individual expectations, and financial concerns.  In the end, there are several major reasons that transitions from the founding physician to the succeeding son or daughter tend to fail:

  • Lack of will – – the founding physician simply doesn’t want to give up control
  • Lack of viability – – the practice is so dependent on the founding physician that it cannot operate without his or her continued, active participation
  • Lack of planning – – the successors aren’t prepared, trained or experienced enough to take over management of the practice

So, how then should you start the succession planning process and transitioning of the practice to your children?  Consider these key focus areas:

Begin an open conversation about the future of the practice

A lot of uncertainty and confusion can arise from the assumptions when family dynamics mix with business operations. As such, the first step to developing a robust succession plan for your medical practice as a family business should be to sit down and have a candid conversation with the physicians that are family members of the practice. It’s important to have a clear sense of who would like to take over the reins, and who would not. Working with family is rarely easy, and some degree of conflict is bound to arise. Just because you are family doesn’t mean you all have an identical set of core values, and having a core set of values that everyone agrees on can help guide you through these challenges. Remember that any decision your practice makes should be in support of its values and mission. That way, even if there are disagreements in style and process, all family members will be working in the same direction towards shared goals.

Establish a talent development plan

Once you have a sense of who is interested in taking on leadership of the practice, it can be helpful to provide some structure around a path for onboarding into the practice. This process can help to clarify the expectations for each family member who joins the group. If you have more than one child who is a physician, then identifying the right successor is one of the most significant steps in succession planning. The primary successor should be identified by competence, not by any other considerations and compulsions. One way to do so is to first identify the qualities or attributes a successor must possess to succeed in the practice. The family member who possesses the maximum of so identified attributes should be selected for succeeding you.  If you are handing off the practice to two children, then setting up clear governance will be extremely important.

Formalize the succession process and prepare an exit plan

Having a talent development plan in place for onboarding family members into the practice is important, but it is not sufficient for ensuring a successful transition of power from one generation to the next. Adding structure and accountability to this plan by having a formal succession plan in place is key as it also communicates your plan for the future to all staff members of the medical practice. Bringing in an external consultant who has experience with physician group succession planning is a great way to add some objectivity to this process, thereby increasing the perceptions of fairness around how you make various decisions. Clarify in advance under what circumstances the succession plan will take effect: whether on retirement or unplanned departure or changing financial situations. These questions help determine what the succession plan should detail most. Keep in mind that an early or late exit of the physician owner can have advantages as well as disadvantages for this medical practice as a family business.

Groom the successor and respect the transition of power

Once you are prepared to have your son/daughter succeed you, he/she needs to be groomed and developed to assume the helm of the business. It can be done through various ways like giving on-the-job training, working under mentors and advisors, and delegating some authority to the successor much before the actual passing on of the baton takes place. Of course, grooming more than one member to become the successor of business is not a bad idea, but at times it may create confusions and complexities leading to strenuous succession battles; therefore, if you are handing the practice off to two children at once, clear governance will be paramount. The last step in handing over control to the next generation is respecting the process. This means taking a step back when necessary, and letting the new leadership take over. It can be difficult for some to let go of a practice where they have spent most of their medical career, or perhaps even built from the ground up. If you have followed the steps of a formal succession plan, and spent a good deal of time gradually making this transition, you can leave confident that your successor has the skills and expertise necessary to move the practice into this next phase.

Final thoughts for your success

I cannot stress enough the importance of clear communication and the cooperation and commitment of everyone involved.  This includes key staff members such as your administrator, nurse practitioners and physician assistants, but also trusted advisors such as your accountant.

For those contemplating succession planning, remember it’s never too soon to start.  Succession planning helps you balance both personal and business interests and helps ensure that your family-run medical practice gets through the transition successfully.  Without formal succession planning, these practices run the risk of not being sustainable. Some physician owners regard succession planning as simply a question of informally handing over the practice from one generation to the next. They do not want to plan or think about their withdrawal from the business. This reluctance typically arises from a strong sense of attachment to the practice, an aversion to letting go of control and power, fear of retirement, and also the inability to make succession choices between their children. Financial factors often also play a part.  Just remember, if you want your practice to survive and your patients to continue to be cared for, you will eventually have to hand off the reigns.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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