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Maximizing value: M&A transaction strategies for physicians practices
M&A markets are improving. Here are the steps physicians practices can take to improve valuation and reach an optimal sale outcome.
M&A markets are showing modest signs of recovery in 2024. Valuations are still strong for top-performing practices, as multiples have not declined significantly. However, there is increased scrutiny on how pro-forma EBITDA is being calculated, and the days of getting credit for operational savings or revenue lifts without a clear path to execution are over.
As a potential seller, it’s more important than ever to be prepared well in advance of signing a letter of intent. Careful planning at least 12 months out from a transaction is one of the best ways to help ensure a successful closing at an optimum valuation. Some best practices to consider are as follows:
- Conduct a strategic review of goals and objectives for the organization and key stakeholders. Doing a deal is not the right answer for every organization, but evaluating objectives and strategic alternatives allows owners to make an informed decision on whether or not to pursue a partnership of some kind.
- If a transaction is the chosen path, fully educating and aligning key stakeholder goals at the outset is essential to obtaining buy-in and avoiding misunderstandings along the way.
- There should be a plan in place for “rising stars” within the organization who are not yet owners, so that they are fully aligned and the partnership works for contributors. Options to consider include an accelerated path to full or partial ownership (and corresponding participation in the proceeds) and/or transaction bonuses and profits interests.
- Choosing the right investment partner is also critical. Oftentimes, this may not necessarily be the highest bidder. The most important considerations should be: cultural fit, reputation partnering with similar physician groups for successful outcomes, operational expertise, philosophy around decision making, and autonomy running the practice post-closing.
- Advance planning is crucial for achieving both tax efficiency and your objective with distributing proceeds to the owners.
- Do you plan to distribute proceeds equally or variably based on relative productivity/compensation?
- If variably, then if you are an LLC or other entity taxed as a partnership, you should check your operating agreement, as it likely states proceeds of a capital transaction are to be split based on ownership percentage, in which case this needs to be amended as early as possible in the process, preferably long before going to market.
- If variably, and if you have S Corp or C Corp tax treatment, then other options need to be explored, such as “personal goodwill,” special bonuses, a restructuring or other strategy.
- If a C Corp, you also need to discuss best ways to avoids double-taxation burden in connection with an asset sale (such as pursuing a stock sale, a personal goodwill sale, or other structure).
- Do you plan to distribute proceeds equally or variably based on relative productivity/compensation?
- Consider doing a sell-side quality of earnings analysis to provide you a realistic view of your group’s value, including beneficial “add-backs” to EBITDA, to best prepare you for buyer due diligence and to increase the likelihood of closing a deal. If done well, it should more than pay for itself. Remember that every positive adjustment to EBITDA can have a real impact to purchase price once a multiple is applied.
- If you have a lean finance and accounting staff, evaluate hiring temporary resources so they can help you prepare for the quality of earnings process. If on a cash basis of reporting, convert to accruals before the quality of earnings begins. Consider engaging an independent billing and coding resource to evaluate the quality of revenue.
- Do a “housekeeping” check of recurring legal and compliance pitfalls that can cause devaluation; this is a long list, so please refer to this checklist below.*
- Doing a deal and managing your business at the same time is challenging. Choose advisors who will take the burden of the transaction away from you and allow you to focus on running your practice.
If you are a physician owner, there has never been a better time to proactively maximize the value of your practice. Preparation and planning are essential to help ensure a successful outcome. Check out our on-demand webinar to learn more.
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Preparing for success in transactions: Best practices for physicians
*Compliance Checklist to Maximize the Value of Your Medical Practice (and Avoid De-Valuation)
- Are you checking all employees and contractors against the federal and state exclusion lists (on a monthly basis?)
- Are you conducting all required compliance-related training on an annual basis for ALL employees?
- 1 hour of annual corporate compliance training (on compliance policies, hotline reporting, etc.)
- 1 hour of annual HIPAA compliance training (on HIPAA policies and procedures)
- 1 hour of annual anti-harassment training
- Have you been refunding old (>1 year) credit balances to payors and patients?
- Are all HIPAA privacy and security policies in place and being fully implemented in actuality?
- e.g., password-protected laptops, secure transfers of billing/patient data, auto shutoff screens, locked filing cabinets, etc.
- Have you gone through “penetration testing” to confirm safeguards are in place to avoid cyberattacks?
- Are all agreements with hospitals and referral sources compliant?
- If your group has “DHS” covered by the Stark Law, are you distributing profits for such DHS in a legally compliant manner?
- This includes special modes of allocation for the technical component of imaging services, DME, PT, injections, etc.
- Have you confirmed via a third-party audit that physicians are correctly coding and documenting E&M and other key services?
- Are midlevel providers being appropriately supervised and billed?
- Are you routinely waiving copayments?-- Hopefully NO
- Are you providing or receiving anything of value in exchange for referrals (both ways) -- Hopefully NO.
- If you have an ASC, is it operating in a compliant manner?
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Margaret Shanley
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