Keith A. Reynolds 0:00
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Speaker 1 0:23
Very rarely do good things come from off the cuff kind of last minute decisions when you're back into a corner. So, one thing, one thing my dad taught me was, you know, failing to prepare is preparing to fail, you welcome

Austin Littrell 0:46
to Off the Chart, a business of medicine podcast, featuring lively and informative conversations with healthcare experts, opinion leaders, and practicing physicians about the challenges facing doctors and medical practices. My name is Austin Luttrell. I'm the associate editor of Medical Economics, and I'd like to thank you for joining us today. In today's episode of Medical Economics Managing Editor Todd Shriog spoke with Kevin Baker, Director of Business Development and Emergency Care Partners, about how physicians can prepare to sell their practice and plan for succession long before they actually need to. They get into the most common mistakes physicians make when selling, the factors that drive a practice's valuation, how selling to a hospital system or private equity group changes the deal and the tax and emotional realities that sellers tend to underestimate. Kevin Baker, thank you for joining us. And with that, let's get into the episode.

Speaker 2 1:39
I'm here with Kevin Baker from Emergency Care Partners to discuss selling your practice and tips for succession planning. Kevin, thanks for joining me.

Speaker 1 1:48
It's a pleasure to be here. Todd, thanks for having me on.

Speaker 2 1:50
So, Kevin, what's the biggest mistake you see when with physicians start thinking about selling their practice?

Speaker 1 2:00
It's a great question, and I think first and foremost, you need to get yourself a good advisor in your corner, so this advice may be counter to maybe some of my own interests, because we always love looking at proprietary deals rather than banker or broker-led deals, but having an advisor in your corner who understands deals in your industry is absolutely key, that can be a CPA, attorney, or financial advisor, but get good advisors. So, first is kind of building the right advisory team early on, and I mean, a couple other mistakes that I've seen in my experience here are waiting and failing to prepare, and so that, that is really a huge mistake that shareholders make. They kind of wait to the last second, and then another common mistake is not getting your finances in order right, and so many practices kind of skirt by with financials that allow them to file their taxes and just move on. What you really need is a set of financials that allows a prospective buyer to compare across time periods, compare KPIs for your business, and so the more prepared you are here, that'll set you apart from other sellers who are just very disorganized in that regard, and then kind of the other, the last big point I would call out is focusing solely on price or valuation, and having that dictate when the right time to sell is the highest headline offer is not always the best deal. Physicians really need to look at the deal structure, how much you expected to get at close, how much is contingent? What are the post-close employment expectations, etc. So, those are some of the common mistakes that I've seen.

Speaker 2 3:49
So, how far in advance should a physician start preparing if they're looking at selling their practice? And are there any key milestones or timelines they should be following?

Speaker 1 4:01
Yeah, timing is a huge, a huge part of the process, and it's something that comes up all the time. The best transactions are rarely reactive, but intentional, and begin years before transactions. So, succession planning is all about looking in the mirror and asking yourself, if I step away in three to five years, you know, what would need to be true for this emergency medicine practice, for example, to continue to thrive without me. And so I would just say, you know, don't wait to think about succession planning until you actually need succession planning, and this can be very difficult, you know, if you're a physician, you're very busy managing the day to day practice, you know yourself, it can be a challenge to really come up for air and give yourself space to think about planning for the future, and so very rarely do things come from very, very rarely do good things come from off the cuff kind of last minute do. Decisions when you're back into a corner, right. And so the analogy I like to use here is, do you think you'll, you'll likely make a rational decision when your furnace breaks in the middle of winter? Maybe not, right? Maybe you'll, you'll likely pay a premium to have someone come in and fix it as soon as possible, because you're kind of in a bind, right? You need to have something done at that time, and so you really don't want to wait to think about a transaction until it's too late. So start thinking about it now, and start talking to people, even though you know you may want to move forward a few years down the road. So one thing, one thing my dad taught me was, you know, failing to prepare is preparing to fail, and that that one line rings very true for groups considering a transaction down the road. And just to close it out, I mean, making the necessary preparations will only benefit you as a seller. It will maximize the value for your group, it gives you, the seller, greater leverage and more control, and it reduces attrition as well for your teammates, among other benefits as well.

Speaker 2 6:08
What factors have the most significant impact on valuation, and are there factors that physicians often overlook?

Speaker 1 6:17
Yeah, no, this is a great question that we get all the time, and you know, value is driven by a number of different things, but is mainly a combination of financial performance, risk profile, and future growth opportunity. So, the starting point on valuation is always earnings, but to take it a step further, it's high-quality earnings, which is often measured by EBITDA, or earnings before interest, taxes, and depreciation. And so, as a buyer, you know, we want to know how reliable and sustainable those earnings are. On the risk side of things, you know, the things that we look at here in the emergency medicine space are things like reliance, you know, how much reliance does the physician group have on hospital subsidies? How reliant are they on locums providers? Is their hospital ED contract coming up for renewal? Is ED volume trending down? Is there growth? Is there a growing trend of self pay or an unfavorable payer mix trend? Is it difficult to recruit providers, etc. and some of those are, you know, things specific to emergency medicine, but others are, you know, some of those are kind of very broad across other specialties across medicine as well, and so if you have a good answer to all of these things, it really boosts your chances of getting a premium valuation, and then there's the growth potential, and so generally speaking, a buyer will pay more when they believe there is room to expand through addition of new ED locations, cost savings opportunities, revenue cycle improvements, etc. So those are kind of the key factors that I see that drive drive valuation the most.

Speaker 2 8:04
What financial and or legal documents should physicians have in order before approaching potential buyers or partners?

Speaker 1 8:14
Yeah, I would say really, you know, this is this is definitely an area that physician groups can kind of tidy up as they kind of think about going, going to sale, and the first thing that comes to my mind is, what is your legal entity structure? Are you an LLC, are you a partnership, are you an S corp, are you a C corp? When you start to get into the corporations, the groups that are, you know, C or S corps, there tends to be some tax implications with those types of transactions, and so if you are an S corp, if you are a C corp, I highly advise you, connect with your tax attorney, connect with your CPA, and understand what things you might need to put in order today in order to set yourself up for a transaction down the road, so that you can get those tax advantages that many of these transactions are able to get through long-term capital gains treatment. So that's kind of the first thing, and then second, secondly, I mean, make sure that your ownership or your cap table is really up to date, try and document any physician partner buyout arrangements as well. So many times this is something we see all the time, you know, a lot of times there's some off balance sheet arrangements of, you know, longtime partners that retire and they get AR value for their business, and they're kind of paid out over three, four years. Sometimes those are on the balance sheet, sometimes they're not, sometimes they're not even recorded, and so recording them and making sure you've got clean, up-to-date books, legal documents that support those transactions is very, very key. And then start preparing, start preparing for a data room, you know, a data room is kind of, you know, the industry term for collecting. All of the legal documents, financial documents, operational documents in one location, and start, start collecting those legal documents today. So, any vendor contracts that you have, any payer agreements, any of those types of things, start getting them in one central location, so you can prepare adequately.

Speaker 2 10:21
What are the key differences between selling to a hospital system, a private equity group, or bringing in, say, a junior partner? What should physicians consider for each option?

Speaker 1 10:34
Yeah, no, it's a great question, and many times providers, they do have these options that you laid out right, if they're looking for some liquidity, if they're looking for succession planning, there's only a few options out there, right? As you said, you can sell, you know, you can sell to your partners, right, and you can have your partners buy you out. Many times, what I've seen is, is that that tends to be a very small figure, it tends to be the amount of your accounts receivable that you've generated over the last 3456 months, and that money isn't necessarily paid out to you today up front. It tends to be paid out over 234 years, and so from a from a liquidity standpoint, you're not getting much, and you're not getting much upfront. That's what I've seen when when physician partners kind of sell to the rest of the partnership, and then hospital employment, you know, I, this is, you know, this is not news to most folks, but hospitals aren't necessarily, they don't have a bunch of cash just sitting on their balance sheet, ready to make large acquisitions of physician practices, it certainly happens, but many times they're not very competitive on their valuations, and so many times what those transactions look like, going from an independent group, for example, to a hospital employee, are maybe they'll bump up your, your annual salary for a few years at kind of like this teaser rate, this teaser comp, so that you're making maybe above average compensation for the first two to three years post transaction, and then it kind of shifts to a productivity base, right, or maybe a flat hourly base, which is substantially lower than that, and so that's those are some of the things that I've seen how hospitals end up, you know, partnering with independent groups, and how that transaction kind of looks like most times you're not maximizing the value of the practice that you've built, though. In that instance, and then for other larger companies, other strategic companies like ourselves that have additional capital from other partners to grow, you know, usually we're able to really maximize the opportunity of the of the liquidity event, and being a strategic partner, we can really be very competitive on valuations, because we're able to realize certain synergies right by bringing this practice into the fold. These could be revenue, top line synergies, or expense synergies, and so being able to partner with a strategic like that can provide a lot of great benefits, because it maximizes the value that we can, that we can ultimately pay, and many times companies like, like ours, you know, we offer equity as a part of the transaction proceeds mix as well, which has tax advantages, but also helps helps the seller kind of diversify their holdings a little bit.

Speaker 2 13:22
How should physicians think about staff transitions and patient continuity when planning their exit?

Speaker 1 13:31
Yeah, it's, it's, it's a, it's a really great question, and something that we get quite a bit is, and this kind of touches more so on, you know, I would say the emotional aspects, maybe, of a transaction, right? And you know, I think this part is often underestimated. You know, for many physicians, the practice that they built, it's not just an asset, it's their life's work, and so it represents years of sacrifice, call coverage, countless weekend and night shifts, recruiting struggles, patient relationships, managing a team, etc. So, even when a sale makes perfect financial sense, the numbers are ticking and tying, it can still feel emotionally complicated. And so, this is why physicians need to prepare kind of for two parallel processes, the transaction itself, and then secondarily the identity transition, right. And so selling may reduce stress in some ways, but it can also raise maybe deeper questions, right? Like, Who am I if I no longer, if I'm no longer the owner? How much autonomy am I willing to give up? What do I want the next chapter of my career to look like I think one of the most helpful things physicians can do is define success for themselves beyond the closing table, and so is success maximizing value, is it protecting your staff, is it preserving clinical quality, creating more personal freedom of. Um, ensuring the practice continues to serve the community, those answers shape both the deal and the emotional experience of the transition, and I would say, if the person that you're partnering with doesn't, if clinical quality and team, like the teammates that you serve, are not at the top of that list, I would be a little wary of partnering with that person, because in healthcare, clinical quality is everything, right? It's everything in our business, and the team, the administrative, non-clinical team, and the clinical team that support that patient experience is everything, is a part of a physician practice business, and so it's also important, I think, to be very candid about ambivalence, right? And so many emergency medicine docs, for example, I know they're very decisive, they're very analytical, but transitions like this are personal, right? And so taking the time to think through your legacy, your lifestyle, and purpose is not a distraction from the deal, it's part of making the right one.

Keith A. Reynolds 16:14
Hey there, Keith Reynolds here, and welcome to the p2 management minute. In just 60 seconds, we deliver proven real-world tactics you can plug into your practice today, whether that means speeding up check-in, lifting staff morale, or nudging patient satisfaction north. No theory, no fluff, just the kind of guidance that fits between appointments and moves the needle before lunch. But the best ideas don't all come from our newsroom, they come from you. Got a clever workflow hack, an employee engagement win, or a lesson learned the hard way. I want to feature it. Shoot me an email at K Reynolds at mj life sciences.com with your topic, quick outline, or even a smartphone clip. We'll handle the rest and get your insights in front of your peers nationwide. Let's make every minute count together. Thanks for watching, and I'll see you in the next p2 management minute. Bye. if

Speaker 2 17:05
you're a physician thinking of selling, how open should you be with your staff? Because if you start asking for financial reports, maybe you've never asked for, you start tidying up the operations, maybe there is some strange lunchtime meetings. I mean, employees are observant and smart. They're gonna go, I think he or she may be selling the practice. Like, how open should you be with your employees?

Speaker 1 17:34
Yeah, I think it's, it's really on a case by case basis. I think you really have to understand what's the culture of the practice, what's the communication style of the practice today? And if it's very open, you know, I think you can, you can likely err on the side of sharing more, but you know, I think it, you really have to show, I think, some level of discretion early on in the process, especially when you're kind of early stages and still trying to feel out, like, hey, is this a marriage that I want to, I want to jump into with two feet. So, I definitely think there needs to be a level of discretion, and I think early on, you know, if what's what's best, if you have a CPA, you know, that's a third party from the non-clinical team that supports you day to day, having this, the buyer interact really directly with the third party rather than your, your employees is a good way to kind of shield them from any kind of discussions around a partnership, and so really try and focus on those third party relationships that you have with your advisors early on to be as discreet as possible, but if you have to, if you don't have that, I think bringing in having a heart to heart discussion one on one with a key member of your team, whether that's the COO or the chief finance person at your practice, and just saying, "Hey, there's nothing set in stone, but we're thinking about some strategic options here, and this is one of them. Can you just help me collect some data, answer their questions, and you know, send some documents their way? And many times, you know, we haven't had any issues with that, but certainly sellers are definitely weary about sharing too much and having news get out very prematurely, and so that those are some tactics that I've seen to help kind of mitigate that

Speaker 2 19:24
you touched on this a little bit earlier, but I think it's important to really emphasize the point. What tax implications should physicians be aware of when structuring the practice sale, and what are some strategies that can help minimize that tax burden?

Speaker 1 19:40
Yeah, great question, Todd. I will preface this question with, I am not a CPA, so consult your tax advisor. Right, that's just a disclaimer, but it's a great question, because there are multiple financial benefits from a transaction. I think many people just think about the headline number or the enterprise value, right, and. Where the thought ends, but there's a lot more to it. Many transactions also include equity in the company that's buying you, right? So, and that equity has incredible value, right? First, it allows you to kind of diversify your holdings a little bit, right? Before the transaction, you are this the owner in a single practice in one isolated geography with one health system partner, and that poses a lot of concentration risk. Right now, you get equity in a larger business, you're, you're, you're an equity owner in a national company, you sort of diversify this risk away in a national platform in multiple states with multiple hospital partners, etc. The second thing on equity that I just want to quickly touch on in healthcare, right? Investors like to typically see at least 15% returns, and that's that's on the very low end. So, using that math, I mean, it would take about five years to kind of double your equity investment with that equity from the transaction, which tends to be a very solid target for investor-backed businesses to exit, so you can actually see liquidity from that equity, and, and so, jumping to the tax advantages, right, for completing a transaction, usually, if you're a high earner, like, like most physicians are, you're being taxed at a high marginal tax rate using ordinary tax rates, ordinary income tax rates, and typically what happens in a transaction, and again, there are some exceptions, depending on if you're set up as an LLC or a corporation, you're able to receive cash proceeds at a tax-advantaged long-term capital gains tax rate, which is very beneficial for a seller, and many times the differential between ordinary tax rates and long-term capital gains can be five to 25% differential in tax rate, so it can be very, very substantial for sellers, and the other, the financial benefit that I just want to quickly highlight, that's slightly outside of tax, is there's a net present value benefit for doing a transaction, right? And that basically just says, right, as the saying goes, $1 today is worth more than $1 a year from now, right? And so the buyer is usually paying a multiple on those earnings, or EBITDA, which usually represents multiple years of earnings that you would get upfront today at closing, and so you could just take that money and throw it in the S and p5 100 or a high yield savings account and probably get some very nice passive income from that chunk of money from the from the initial transaction

Speaker 2 22:40
for physicians who want to continue practicing part-time after a sale, what terms should they negotiate upfront to ensure a smooth transition?

Speaker 1 22:50
I think communication is everything. If that's your intention going into a transaction process, let the buyer know. Right, the worst possible thing I think you could do is delay communicating that to them until the 11th hour of a transaction process, and buyers don't like, they don't like risk, they don't like surprises, and so first and foremost, you really need to communicate that upfront, but usually when you communicate these things, as long as there are is a bench of providers beneath that physician seller that can pick up some of the slack, they can pick up the hours, they can pick up the shifts, it's usually not an issue, it's usually not an issue at all. And so I would really advise folks, if that is your plan, just make sure you communicate it, and that could, because that can have some serious implications to you personally, right? If you go from full time to part time, you know, the biggest implication that I think of immediately is benefits, right? Are you going to be eligible to receive medical, dental, vision benefits being a part time provider, as opposed to full time, right? And so those are just some of the things that you have to consider if you're going to make that change. And when you have the right advisors and you have the right planning ahead of time, usually you're able to make those decisions, you know, very easily, and you know with less friction.

Speaker 2 24:19
Is there anything else that physicians need to know that we haven't talked about?

Speaker 1 24:24
I think planning and preparation is really everything. I highly advise, if you're thinking about succession planning at all, or thinking about passing the baton to the next generation of physicians that are more junior in your practice, start today, start having conversations. Signing an NDA does not force you to close on a transaction, you know. It allows you to get more information, make an educated decision on how you want to proceed with the future of your practice, and so that's really the biggest thing. I would encourage a lot of independent physician practice owners to do is simply prepare, start having the conversations today.

Speaker 2 25:08
Very good, Kevin. Thanks for joining me.

Speaker 1 25:10
Thanks for having me on, Todd.

Austin Littrell 25:22
Once again, that was Kevin Baker, Director of Business Development and Emergency Care Partners, speaking with Medical Economics Managing Editor Todd Triok on behalf of the whole Medical Economics and Physicians Practice teams. I'd like to thank you for listening to the show and ask you, please subscribe, so you don't miss the next episode. As always, be sure to check back on Monday and Thursday mornings for the latest conversations with experts, sharing strategies, stories, and solutions for your practice, you can find us by searching Off the Chart wherever you get your podcasts. And if you'd like the best stories that Medical Economics and Physicians Practice publish, delivered straight to your email six days of the week, subscribe to our newsletters at Medical economics.com and Physicians practice.com Off the Chart, a Business of Medicine podcast is executive produced by Chris Mazzolini and Keith Reynolds, and produced by Allison Latrell. Medical economics and physicians' practice are both members of the MJH Life Sciences family. Thank you.

Transcribed by https://otter.ai