The mechanics of selling a medical practice
Decades ago, retiring doctors could easily sell their practice to a young doctor. Although this is sometimes the case today, changes within the medical industry have significantly affected the buying and selling of medical practices.
According to a New Jersey doctor Dr. Joseph Eastern, MD, most physicians entering their careers are less interested in practicing alone than their colleagues of a generation ago. Thus, today’s young physicians are not the typical purchasers of a medical practice. Rather, this role is largely filled by hospitals, HMOs, or large practice groups. Another factor contributing to this trend is the increasing complexity of rules governing medical practice sales, which necessitate the high price of paying a third-party expert.
Hire a professional financial advisor to handle the valuation
Still, Dr. Eastern urges medical practice sellers not to get discouraged. One strategy for finding the most desirable buyer and structuring the best deal is to ensure an accurate valuation of a practice. This can be accomplished by hiring an experienced and impartial financial consultant to handle the assessment. In addition, the financial consultant should disclose and explain all techniques used in the valuation, providing documentation to support the conclusions. Dr Eastern stresses the importance of bearing in mind that the valuation may not equal the purchase price, which can be affected by factors such as legal constraints.
After entering into a valuation agreement, sellers should consider the structure of the transaction. The three most common structures are purchase of assets, purchase of company stock, and merger. According to Dr. Eastern, many buyers have a soft spot for buying assets because it gives them the flexibility to choose only valuable items. However, most sellers prefer to sell stocks. This allows owners to sell the whole practice, which is worth more than the sum of its parts. In addition, the sale of the entire practice often provides sellers with tax advantages. Fusion, while not as popular as the aforementioned structures, is growing in popularity.
Sellers of medical practices should be mindful of tax issues
It is imperative that sellers consider tax issues. Dr. Eastern points out that the majority of private practices are corporations whose stock sales will produce a long-term taxable capital gain at a rate of 15-20%. Therefore, he advises sellers to accept a slightly lower price if the structure of the sale has an impact on lower tax payments. Sellers can also defer taxes through installment payments. However, they must ensure that the IRS does not confuse these payments with referrals, as this is illegal.
Some sellers may remain employed by the firm for a fixed term, which may also benefit the buyer. This can help improve patient retention during transition. It also gives patients time to get used to changes in the practice.