Thinking about selling an interest in your medical practice and associated businesses? Your reasons could be one or more of many, including:
- Getting out of the extra hours and stress of running a business to focus on clinical delivery
- Assuring a level of compensation and financial security
- Protecting against further disruptive market changes
Whatever the reasons, it's a complex and risky process. As a former practice management company executive, I've seen it all—including some very successful partnerships. Unfortunately, many physicians regret the sale or their choice of transaction partner within a few months.
So, how can you increase the likelihood of a more satisfying and beneficial transaction that meets your clinical, operational, and financial expectations?
Assemble Your Transaction Team
Planning for the sale of an interest in a medical practice, surgery center, or other clinical delivery business requires a team of internal and external advisors, depending on size and regulations:
· Chief Financial Officer (full-time or fractional)
· Valuation Firm
· CPA / Tax Experts
· Bankers and/or Lenders
· Transaction Attorneys and Advisors
· Wealth Manager(s)
· Healthcare and Compliance Attorneys
· Insurance Advisors / Agents
· Business Broker
· HR and Benefits Advisors
Culture Matters as Much as Financial Valuation
Spend a significant amount of time evaluating the culture of your suitors and assessing the compatibility of your organizations under the operating agreements. Consider:
- How compatible are the decision-making and governance processes?
- Are the missions and objectives of the new partner(s) or parent organization aligned with your vision?
- Is there demonstrated evidence that the key leaders of each organization can and will get along?
Your transaction advisors should help you consider these key cultural elements. And never underestimate the ability of your physician team to evaluate these qualitative and key social considerations. The odds of clinical and financial success increase tremendously when these matters are thoroughly vetted and evaluated in conjunction with the value of financial consideration offered. Too often the highest financial package offered turns out to be ultimately unattainable and shortsighted. This is because the associated plan does not effectively integrate culture, governance, and management style into the new organization. Inevitably, the relationship quickly devolves into an "us versus them" mentality.
"Too often the highest financial package offered turns out to be unattainable and shortsighted. This is because the associated plan does not effectively integrate culture, governance, and management style into the new organization."
Set Realistic Expectations
Every deal is different... just because one healthcare transaction sold for a particular amount or multiple of earnings doesn't mean yours will. It could be higher or lower based on the unique characteristics of your healthcare business and/or the nature of the acquiring organization. All these matters need to be considered when evaluating competing offers.
The buyer often acquires a majority (and thus controlling) financial interest in the business. Keep in mind that they will seek to manage the return on investment and the operational goals upon which the transaction was predicated. While physician input most certainly needs to be incorporated into management processes, the business decision-making paradigm has certainly changed.
Agree to a Capital Plan as Part of the Deal
A common disconnect between selling physicians and the acquiring organization is the level and timing of capital investment needed to achieve intended clinical and financial outcomes. Understand that the level of capital investment required is considered in the valuations, along with your transaction partner's anticipated ability to access or finance the funds needed.
Keep the Agreements Understandable
It is vitally important that all parties understand and have similar views on the terms of the sales agreement and ongoing operating agreement. Overly complex terms are often used to justify higher valuations, compensation, and/or meet specific conditions. The usual result is confusion, underperformance, and frustration between the parties involved. Understandable terms that are transparent and easily measured are most likely to drive appropriate behaviors, satisfaction, and success.
Plan for the Effort and Time Required to Make a Successful Transition
Planning for an effective transition requires your team to know about the transaction, understand the plan, and form the needed relationships. It takes a lot of effort and understanding before and after the deal is closed. Processes will change, as will some team members' responsibilities. Productivity may drop initially, but a well-chosen transition team and effective oversight will build confidence that leads to eventual success. Keep in mind that some team members may not ever accept the change required. They will need to find other roles or companies in which they can be successful.
If well executed, the sale of an interest in a physician practice, surgery center, associated real estate, and other ancillary businesses can be the realization of significant financial aspirations. It can also refresh physician focus and energy on delivering outstanding patient care once the burden of business management is reduced. While negotiating a higher multiple of earnings and the total transaction value is important, it is not the sole consideration. Culture, post-sale terms, earnout provisions, governance processes, and alignment of clinical strategy will have a tremendous impact on the success of the new venture and physician satisfaction.
A fractional CFO can work with your team to prepare for a successful transaction that optimizes value, culture, clinical alignment, and partner satisfaction.
Jason Dean is Area President with FocusCFO and is based in Nashville, TN.