If you own a medical practice, considering retirement or seeking capital to address technology needs or regulatory requirements, it’s essential to start planning your exit strategy early to secure you and your family’s financial future. There are several options available, and early planning can significantly benefit you. It’s crucial to identify the factors most important to you, as these will influence the path you choose.
One option historically has been to sell your partnership to your fellow partners or younger associates. However, a popular strategy over the past several years has been to sell your practice to a strategic buyer, such as a healthcare system or another large practice, or sell to a private equity firm under an MSO structure. Each option has its pros and cons, but regardless of your choice, you’ll need to prepare your practice to maximize the opportunity and financial return at the deal’s close.
Preparing Your Healthcare Practice for a Sale
Here are five key financial considerations to help you prepare your practice for a potential transaction.
1. Hiring the Right Advisors Early
Engaging the right advisors early in the process can significantly increase the value of your practice. This includes financial advisors, tax advisors, legal professionals, and investment bankers who specialize in M&A for healthcare practices. These experts can provide strategic advice on improving your financial health, optimizing operations, expanding and growing the practice, and ensuring compliance with regulations. Involving your advisors early allows for more time to implement their recommendations, identify potential red flags or pain points, and ultimately enhance the attractiveness and value of your practice.
2. Quality of Earnings Analysis
Performing financial due diligence, commonly known as a quality of earnings (QoE) analysis, is crucial in understanding the sustainability and reliability of your practice’s earnings. This analysis goes beyond the basic financial statements to examine factors such as revenue recognition policies, key performance indicators, expense management, recent trends, and non-recurring or non-operational items. Some common adjustments found in a quality of earnings report consist of revenue cash to accrual, drug cost normalization, owner’s compensation normalization, and fair market value provider compensation normalization. A high value quality of earnings report can reassure buyers that your practice’s financial performance is stable, predictable, and tells the story of the practice, making it a more attractive investment and reducing the overall length of the due diligence process once engaged with a buyer.
3. Best Practices and Systems
Implementing best practices and having the right systems in place is essential. Ensure that your Electronic Medical Records (EMR) and billing systems are efficient, current, and have a strong reporting function. Reporting functions are critical to a deal and need to be able to provide accurate and detailed reports to a buyer. Additionally, a proper accounting system, such as QuickBooks, Sage Intaact, or even NetSuite, is crucial for accurate financial reporting and transparency. A quality of earnings engagement will understand your accounting system in detail to identify any adjustments or potential issues a buy-side process may find. A proper EMR and accounting system not only streamline operations but also enhance the overall value of your practice by demonstrating operational efficiency and reliability to potential buyers.
4. Revenue and Expense Trends
Most buyers operate on an accrual basis, which matches up your revenues and expenses in the same period, and will likely want to view your own financials on the same accrual basis as well. Understanding the impact of accrual accounting on your practice early on will allow you the opportunity to further enhance your business practices. Buyers are attracted to practices that demonstrate multiple years of positive trends significantly enhancing the perceived value of your practice. Additionally, analyzing expense trends will help identify potential addbacks that increase the value of your practice.
5. Understanding Working Capital and Cash-Free, Debt-Free Transactions
Understanding the working capital component and the concept of a cash-free, debt-free transactions is essential. A quality of earnings provider will analyze net working capital and advise you on the various potential impacts. Buyers will assess your working capital to ensure the practice can sustain operations post-sale. Additionally, many transactions are structured as cash-free, debt-free, meaning the seller retains cash and settles debts before the sale. Clearly documenting and managing these aspects can prevent misunderstandings and ensure a smoother transaction process.
Focusing on the financial aspects of your practice is even more critical when preparing for a sale. Choosing a quality of earnings provider with extensive experience in healthcare will facilitate the transaction process while adding value to your practice.
Author: Michael Ritchie, CPA | [email protected]
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For more information on this topic, please contact a member of Withum’s Transaction Advisory Team.
