How a medical practice sale works.

How is a medical practice valued?

A buyer is paying for future earnings, so valuation starts with what the practice earns after paying a physician a market salary to do the seller's work. A practice whose owner takes home a large income only because they work long hours may be worth less than one that earns well with a normal schedule, because a buyer has to pay someone to do that work.

Then the buyer weighs how dependable those earnings are. Revenue spread across many payers and referral sources is worth more than revenue tied to one contract or one referring group. Patients who are loyal to the practice are worth more than patients loyal to the departing physician personally. Signed leases, stable staff, clean billing records and a payer mix that will not change after the sale all add to the price.

Valuers combine three views. An income view prices the earnings a buyer can expect. A market view looks at what comparable practices have sold for. An asset view counts the equipment, furniture, receivables and supplies, with the building usually valued and sold separately if the physician owns it. The goodwill, the patients, the name and the referral relationships, is the part people argue about. A professional valuation is worth paying for, especially when the buyer is a hospital or anyone the seller will refer patients to afterwards.

Who buys medical practices?

Buyers fall into a few groups, and each wants something different. Knowing which one fits the practice, and the seller's plans, shapes everything that follows.

What are the steps in selling a practice?

Start with the seller's own plans. Retiring outright, staying on as an employee, or selling a share and keeping some ownership lead to different buyers and different deals. Decide that first, and allow a long runway: a rushed sale often sells for less.

Next, get the records in order. Buyers will ask for several years of financial statements and tax returns, billing and collection reports, payer contracts, leases, equipment lists, staff rosters and any compliance history. Gaps found during due diligence cost money at the negotiating table.

Then come the valuation, finding buyers, a letter of intent that sets the price and main terms, and due diligence, where the buyer checks everything. The purchase agreement follows, usually with a separate employment or transition agreement for the seller. Before closing, someone has to deal with payer contracts and credentialing, the patient records and who keeps them, staff employment and how patients will be told. After closing, the transition period, when the seller introduces patients and referring doctors to the buyer, decides how much of the goodwill survives.

Questions to ask

• Does the seller want to retire, stay on as an employee, or keep part ownership?
• Are several years of financial statements and billing reports ready to share?
• Who will hold the patient records after the sale, and how will patients be told?
• Will the seller refer patients to the buyer afterwards, and has counsel reviewed the terms with that in mind?

What does a practice broker do?

A broker runs the sale. A good one helps set the asking price with a valuation, prepares a confidential summary of the practice, finds and screens buyers, keeps the sale quiet until the seller is ready to tell staff and patients, manages offers and keeps due diligence moving. Specialty experience matters, because buyers for a dental or veterinary practice behave differently from buyers for a medical group.

Brokers charge in different ways, commonly a commission on the sale or a set fee, and the agreement may give them a period of exclusive rights. Ask for the fee, the exclusivity terms and a list of practices they sold in your specialty, in writing, before signing. A seller who already has a buyer, such as an associate, may need a valuation professional and a health care attorney more than a broker.

Which federal rules apply when a practice is sold?

Two federal rules come up in nearly every practice sale: the privacy rules that govern handing patient records to the buyer, and the referral rules that govern deals with anyone the seller will send patients to afterwards. State law adds rules on patient notice, record custody and restrictive covenants, which a health care attorney in the practice's state should review.