More than half of the nations’ physicians now work as salaried employees. The remainder of physicians, who are primarily in large independent groups, are contemplating their next move.
Panelists on Weaver’s recent webinar, “Before Buying or Selling Your Physician Practice, Listen to This,” provided insightful commentary about what is happening in the marketplace, along with transaction considerations.
Here are some key highlights from the conversation, specifically as it relates to sellers:
Independent physician group sellers face numerous challenges, including succession planning, regulatory burdens, reimbursement squeezes, and changing competitive dynamics.
“For every physician group, there are different dynamics…many are just looking to offload administrative duties and business risks to the buyer so they can focus on practicing medicine.” – Panelist Joe Geraci, Partner, Husch Blackwell
Buyers of physician practices include risk based entities (e.g. health plans), health systems and private equity groups. Each buyer group has something unique to offer.
- a. Risk-based entities generally assume the payer contracting role and / or only a specific practice business-line, often in a concentrated geographic area. With less integration, this model generally allows for more independence versus a full acquisition.
- b. Health systems offer a level of familiarity, staying power and comfort. While they may not provide the largest upfront cash consideration, the compensation packages and alignment benefits are typically attractive
- c. Private equity offers an opportunity for greater upfront cash and future upside for roll-over equity. However, physicians typically receive a compensation reduction in exchange for these benefits.
“Most physician groups are already down the path with one particular buyer…it is unusual for a physician group to explore opportunities with all three buyer groups” – Panelist Kate Bechen, Partner, Husch Blackwell
The top legal areas for physician groups to address prior to sale include:
- a. Validating or correcting legal ownership status. Independent groups may have been more cavalier about properly tracking and documenting physician owner additions and subtractions. In the event of a sale, having the correct legal ownership is important.
- b. Minority dissenters. There may be individuals who do not want to participate in the sale, which will require special planning for a spin-off. A spin-off prior to sale may need significant legal attention and could delay a transaction if not properly planned.
- c. Side arrangements. Physician members may be engaged in professional activities outside the main practice (such as other medical businesses or services). Understanding whether these activities will pose any complexity for employment under the buyer is important for transaction planning.
- d. Contracts. Certain contracts may require advance notification or have special provisions that trigger in the event of sale. Understanding these contractual issues are important for transaction planning.
“Getting ready for the sale of your practice is worth every dollar…it creates a smoother transaction, puts the group in a better negotiating position with the buyer, assists in post-transaction planning and is less costly than otherwise addressing these issues during due diligence” – Panelist Kate Bechen, Partner, Husch Blackwell
Top valuation areas for sellers to consider include:
- a. Trends matter. Most buyers are focused on the last twelve month financials; however, COVID has created some complications. Preparing for sale is NOT a reason to let operations slip. The sale process can take months and buyers will be keen to notice declining business trends.
- b. Accounting matters. Buyers will convert financials to an accrual basis during due diligence and make adjustments to revenue and expenses. Adjustments include removing the impact of nonrecurring or one-time items or events, including COVID disruptions.
“In many cases, buyers agree to paying a multiple of earnings….during due diligence there may be several accounting adjustments that change the base earnings level for that calculation” – Panelist Brian Teefey, Director, Weaver
- c. Resiliency is important. Practices that were able to adapt and demonstrated a quick recovery from pandemic disruptions are receiving more favorable valuations than others.
- d. Ability for growth and risk factors ultimately drive valuation. Diversified, well-positioned practices with the infrastructure and potential to expand will receive higher valuations than others. Smaller practice groups with limited growth potential may receive lower valuations.
“We have seen high valuations for physician practices, especially for those of size with sustainable competitive advantages and a scalable infrastructure.” – Panelist Corey Palasota, Managing Director, Weaver
A successful buy or sale requires the commissioning of a qualified team to advise through the process, including legal representation, transaction advisory and use of a qualified valuation firm.
For more information or any other questions, please contact a Weaver professional today.
If you have any questions or need additional assistance, our panelists can be contacted as follows:
- Joseph Joe Geraci | Partner | Austin, TX Attorney | Husch Blackwell
- Kate Bechen | Corporate Attorney | Milwaukee, WI | Husch Blackwell
- Corey Palasota | Weaver | Assurance, Tax & Advisory Firm
- Brian Teefey | Weaver | Assurance, Tax & Advisory Firm
The increase in physician practice mergers and acquisitions across most specialties is projected to continue for the foreseeable future. For…