What are the main reasons a doctor may want to sell a medical practice?
One of the top reasons is more related to the business side of things, rather than the treating of patients. Running a medical practice is a lot of work and is reliant on a good staff which can be hard for many doctors to find the right balance. On top of that is dealing with insurance, credentialing, long hours and so on. Many of the doctors we work with realize that they want to be able to leave at 5pm and spend more time with family, rather than working round the clock. They realize if they take away the ownership piece, they can have more time for other life enjoyments so selling the practice makes sense to them. For others, it could be retirement, relocation, health reasons, and so on. Many just get to a point in their career, look at the potential tax increases on the horizon, think about what they might be missing in their lives, and just say, now is the time to sell.
How long does it take to sell a medical practice?
There are many factors that go into selling a medical practice and at Omni Practice Group we advise doctors consider a five year plan. Some think they can sell their practice in 6 to 18 months, but we have found that the more successful sales are planned several years in advance.
What do you recommend a doctor do first once they have made the decision to sell?
They should get together with a financial analyst such as those we have at Omni Practice Group, and/or their CPA. They need to take a detailed look at their finances and consider how much they are going to need to retire, or to make a move. Some doctors have been surprised that their finances are actually better than they realized and that selling the practice soon is the best idea. While others find that they need to make adjustments to their earning potential and daily operations in order to bring the practice to a higher level of profit before putting it on the market.
What other factors should be considered when preparing a medical practice for sale?
1.Waiting to sell when the income is lower can potentially cost hundreds of thousands dollars in lost equity.
2. Look for areas where you can increase the value of the practice. The value is tied to the cash flow and profit levels.
3. Review staff costs and rent. Is the practice over-staffed, under-staffed? What about the square footage? Too much, not enough?
4. Don’t invest in any capital assets such as new laser equipment, etc. Many doctors feel these types of purchases are assets to the practice in terms of sales value, but they are not.
How long does it take to place a sales value on a practice?
We offer what we call a Snapshot Valuation where we look at the last few years’ tax returns and production reports if available. From there, we can quickly provide an idea of what the value is which, as mentioned earlier, can be a nice surprise to both the doctor and their financial planner. In other cases, it helps lay the groundwork for what has to be done to prepare the practice for the optimal sales price.
Do you also recommend selling real estate that is part of the practice?
At Omni Practice Group we are also licensed commercial brokers specializing in medical real estate so in addition to selling the practice, we can also assist with any attached real estate. When a doctor owns the building we first ask if they want to continue to own the building as being a landlord can bring sleepless nights and responsibilities the doctor may no longer want to hold. We also discuss the many stories we have to share from previous experience, as well as the pros and cons of continued ownership such as:
1. The new owner of your practice decides to move once their lease is up and build their own medical building close by, not only leaving your building empty and in need of upgrades, but creating competition for you. This could leave you with a vacant building that is designated as medical and could be more difficult to lease or sell in the future.
2. When the real estate market is high, it makes sense to sell. When it is low, it is worth considering the risk of holding onto it for a few more years.
Are you able to sell a practice that has a lease in place?
Yes. It is very important to have an expert help with lease negotiation as there are many scenarios that can take place. The most important thing is to ensure that the lease can be extended to the new owner for a period of time that makes sense for them to profitably maintain the business. It is also important to make sure that the lease does not contain language such as building tear down, vacate notices or clauses pertaining to lease assignability. Many banks require that the term of the lease be the same or greater than the term of the loan they are providing to the new buyer.
What is the best type of medical practice to sell?
There isn’t necessarily a best type of practice as the value of the practice is the profitability. Saying that, the best practice is the one that gives the seller the highest value which would be a practice that has their overhead under control, and the practice is still growing. Production numbers should be up, rather than down and showing a steady increase. Both buyers and banks want to see steady growth and the potential of future profit margins.
How does Omni Practice Group work with a doctor looking to sell their practice?
We start with an initial phone call with the doctor to determine timing and needs. We always start with the valuation of the practice which requires discovery paperwork to be completed by the doctor and their providing us with the past five years of tax returns, as well as Company P&L Statements, (Profit and Loss Statements), production reports, etc. The initial valuation is usually delivered within 10 days. After that, we will arrange an in-person meeting with the doctor and spouse or partner to go over the valuation together, as well as take photos of the practice and discuss in detail what we are going to do to put the practice on the market, what may need to be done in advance of putting it on the market, and a fair market sales prices. Then we put together a very professional business offering/practice prospectus which is about 40 pages long and details everything about the practice including the demographics of the area, staff, marketing, profitability, and many other details pertaining to the practice and the surrounding area.
Do you also market the practice to potential buyers?
Yes. Once the business offering/practice prospectus booklet is complete, we begin marketing the practice and list and advertise it nationally across many platforms including national websites, State associations, mergers and acquisitions sites, biz buy-sell sites, and the other places buyers look. We also send out letters to potential buyers we have in our own database. The name of the practice and the sales price are kept confidential, but we do mention location such as Los Angeles, San Francisco, New York, Chicago, Miami, etc. When the buyers contact us, they are required to sign a non-disclosure which clearly states that they can’t mention the sale of the practice to anyone but their own advisors and our inner circle.
Do you assist with the actual showing of the practice to a buyer?
Yes. Like a real estate agent would show a home, Omni Practice Group shows a practice so the doctor does not have to do any of that which most of our customers prefer. During the showing, we discuss the practice, growth opportunities, staff, location, etc., and then if they are interested the buyer submits a Letter of Intent so they can proceed with doing their due diligence, and sales price negotiation. Unlike other firms, Omni only represents the seller in this instance, not the buyer. Once a price has been agreed, the buyer moves forward to secure financing and instruct their attorney to draft the purchase and sale agreement for the buyer to review, share with their attorney and amend as necessary to bring the sale to closure. From there the seller can sail off into the sunset, or go home and rest, whatever may be their dream.
Who typically buys a medical practice?
Buyers range from an individual who might want to own their own medical practice, to a small group that may own four or five other medical practices, all the way up to large corporate groups or private equity companies that are looking for opportunities to get into the aesthetic medical field.
What tips do you have for the doctor that is looking to buy a medical practice?
Buyers generally have different goals. It’s just like buying a house. Some buyers want a place that is ready to move in, needs hardly any work and is turn-key. While other buyers are up for a challenge and want to do a remodel. The buyer should decide before they begin their search just what it is they are looking for and get in touch with a firm like Omni Practice Group who can help set parameters and begin a search on their behalf, much like a home real estate agent would. In this instance we would work with the buyer to finalize the deal as they have become our customer at this point and we would assist with due diligence, looking at areas for growth and profitability and/or recommending changes to cut down on overhead. We also negotiate on their behalf to bring the purchase to fruition.
Is now a good time to buy or sell a medical practice?
Yes and for many reasons. The real estate market is great at the moment, but there is also a high number of doctors at or around retirement age (50% of doctors are over the age of 55) and are looking to start living their best life now!
To listen to the interview with Rod Johnston of Omni Practice Group at Aesthetic Insider™ Radio, CLICK HERE!

​If you already own a practice, have you ever considered buying an existing medical practice located close to your first practice and merging the two together?  If you ask most doctors, they will say the best way to build a practice is through taking care of your patients and bringing in new patients via word of mouth and marketing.  And, they would be correct.  However, acquiring a second practice and merging the two together makes sense in many ways.
 
First off, have you ever calculated the cost of acquiring a patient via old fashioned word of mouth?  It requires a lot of work if you include everything from building your brand, training your staff, maintaining a spotless, high-tech practice, etc., the cost could easily be hundreds of dollars or more per patient.  The cost of acquiring a patient via marketing is even more.  Acquiring a medical practice with existing patients can typically run from several hundred dollars per active patient to $1,000 per active patient.  Slightly less to maybe equal of acquiring a patient through a normal channel.  However, you get a high volume of patients very quickly in addition to adding income to your pocket.
 
Secondly, you acquire a stream of revenue at a near dollar to dollar relationship.  If the selling practice is producing $500,000 per year, you should be able to repeat the $500,000 in revenue by merging the practices together, or worst case, slightly below the $500,000.  The good news, is you don't bring over all of the expenses of the selling practice.  You typically can save in a number of ways including reducing staff of the selling practice, utilities are not double as the practices merge to one location, there is only one rent payment (more on that in a minute), only one set of books, so only one payroll service and one bookkeeper and accountant and several other services can be eliminated.  So, while getting the majority of the revenue to increase your practice collections, you only get a portion of the expenses.  This increases the income of the practice owner - you!
 
Thirdly, by acquiring another doctor’s office, you reduce the number of practices in your area by one.  Less competition equals more new patients for you.  You can hire the selling doctor as an employee to help with the medical transition as well as perform some other things that will help with patient retention.  

​Taxes are a fact of life, and an extremely important consideration when considering a medical practice transition or sale. Let’s explore some potential tax mitigation strategies to consider.

Stock Sale. If you are incorporated, sale of the stock in your corporation to the medical practice buyer can potentially yield you the greatest tax savings, because the sale of stock is almost exclusively taxed at the lower fixed capital gains rate as compared to the higher, tiered ordinary income rates. However, and this is a BIG however, stock is a non-depreciable asset to the buyer. As such, the medical practice buyer is not able to write off the sales price and essentially ends up buying your practice with after-tax dollars. Consequently, a buyer is likely only to agree to buy your stock if you are willing to reduce your purchase price by 30 percent or more. For this reason (and many associated legal and liability complications), almost all medical practices are sold as “asset sales.” In other words, the seller retains his/her corporation and all of its stock and instead sells all of the tangible and intangible assets of the corporation (i.e., the medical practice). The buyer is then able to depreciate and amortize (write off) the entire purchase price.

Price Allocation. The IRS requires the total price of a medical practice for sale to be allocated to the various types of assets being sold and that the allocation be made according to the fair market value of the assets. As a general rule, the tangible assets are taxed as ordinary income above basis, and the intangible assets are taxed as capital gains. (Above basis means the difference between what you are selling the tangible assets for and your book value or depreciated value.) Any consideration for a covenant not to compete will also be taxed as ordinary income. Since fair market value is somewhat subjective, there is some room for negotiating the overall allocation of the purchase price. As a medical practice seller, you will save taxes if you can negotiate with a buyer for a lower allocation to tangible assets (equipment, furniture, fixtures, supplies, etc.) and a higher allocation to intangible assets (goodwill and patient records). (Unfortunately, it will benefit the medical practice buyer to have just the opposite allocation, so consideration must be given to making the allocation fair to both parties.)

Carry back a note. Sellers frequently ask us, “Won’t I save on taxes if I self-finance part or all of the sales price (i.e., carry back a promissory note from the buyer)?” The answer is, “No, but maybe . . .” As mentioned above, the portion of the price in an asset sale that will be taxed as ordinary income will be due in the year of the sale. That recapture will be taxed regardless of the receipt of any actual cash at closing, which means you owe the ordinary income tax associated with the recapture even if you do not receive a cent at closing. Consequently, if you do not want to have to pay to sell your practice, it would be prudent to ask for enough of a cash down payment to cover the tax liability you will incur from the recapture. Since most of the remainder of the sales price will be taxed as capital gains and since the capital gain tax rate is a fixed rate, the same tax will be applied and the same tax amount owed whether you receive that portion of the price now or paid to you over time; unless . . . there is a change in the capital gains tax rate before the note you are carrying is paid off. If the rates go up, you would be taxed at that higher rate on that income as it comes in. Otherwise, self-financing a portion of the price serves only to defer capital gains tax, but it will not lower the total tax. (Also note that the interest portion of any promissory note payments will be taxed as ordinary income to the holder, while the principal portion subject to capital gains will be taxed at the capital gains rate.)

Sale Timing. As discussed above, the tax associated with recapture over basis on the sale of tangible assets will be determined by your ordinary income tax bracket in the year of the sale. If you are planning to retire after the sale of your practice and, consequently, will have a drop in your ordinary income level, it may behoove you to strategically time the sale of your practice until after the start of the next tax year. Also, if you have owned your medical practice for less than one year, you should, if possible, wait at least one full year before selling it since the sale of goodwill within a year of ownership will result in the higher short-term capital gains rate being applied instead of the long-term capital gains rate.

“C” Corporation Consideration. If you are currently incorporated and being taxed as a regular “C” Corporation, the sale of goodwill by your corporation will likely be subject to double taxation, once as capital gains inside your corporation and then again as ordinary income when paid as a distribution to the shareholder(s). There is some case precedence that allows for the shareholder(s) of “C” Corporations in closely held and professional businesses to sell goodwill individually, outside of the corporation, thus avoiding that double taxation. If this applies to you, consult with your CPA and/or tax attorney regarding the details of such a tax strategy and its application to your particular situation.

1031 Exchanges. If you are selling a medical practice now and are planning to buy another practice within six months, a 1031 or “Like Kind” Exchange may be a tax deferral strategy to consider. It allows you to defer the taxes associated with recapture over basis you would otherwise incur with the sale of your tangible assets. A 1031 Exchange has very specific and rigid requirements. Consult with your CPA and/or tax attorney regarding the details of such a tax strategy.

Charitable Remainder Trusts. Charitable Remainder Trusts are not subject to capital gains tax. As such, a seller may potentially eliminate capital gains tax on the sale of his goodwill by donating it to a qualified charity. The downside, obviously, is that the seller must donate the goodwill proceeds to that charity. This is another strategy where you would want to receive guidance from your CPA and/or tax attorney.