Planning for a Rebound: Preparing to Buy a Medical Practice

For some time, you have thought about expanding your practice. However, you haven’t taken things much further because the right opportunity hasn’t appeared. Now, the micro-economic climate in your market is rapidly changing and a nearby practice may be put on the market soon. It looks like it would fit in perfectly with your plans for expansion, but before you make an offer, you need to proceed with care.

Consider the Big Picture

Review the financial projections for the practice you plan on buying. Revisit your assumptions about patient numbers. Determine how long it will be before the practice begins paying for itself. Look into potential staffing issues.

Clarify What You Are Buying

Before considering what may be an appropriate purchase price, other important aspects of the sale — structure, payment terms, tax allocation, collateral, and post-sale employment of the seller — must be discussed. Be sure that such items as accounts receivable, deposits on equipment, and property leases are discussed as part of the negotiations. Determining exactly what’s included in the sale will minimize potentially costly future disputes.

Benchmark the Asking Price

Work with a professional advisor to determine whether the asking price is in line with recent sales of similar-sized medical practices in your region. You have more room to negotiate on the asking price if you have recent sales data for comparison purposes.

Determine the Type of Sale

Will it be an asset sale or stock sale? If it’s a stock sale, you generally will not get a tax deduction for any of the purchase price since stock is not a depreciable asset. The seller is, however, able to pay tax at capital gains rates. An asset sale may be more advantageous for the buyer from a tax perspective, as assets can be depreciated. Depending on the tax allocation of the purchase price among the assets acquired, you may be able to dramatically reduce the after-tax cost of your purchase by taking all the available write-offs from depreciating the assets included in the sale. In addition, an asset sale excludes the practice’s liabilities.

Select the Method of Financing

Some lenders are more aggressive in seeking out business, so you should be willing to work with out-of-state and out-of-region lenders to get the best terms.

Have the seller finance part of the sale because it creates an incentive for him or her to cooperate on any of the many issues that may arise after the sale is completed. Just be aware that the seller may expect a security interest in the practice, including its future receivables.

Use an Escrow

The typical sales agreement contains numerous assurances, known as “seller representations and warranties,” promises from the seller that all statements about debts, assets, and tax liabilities are true. However, if the sale is for cash, it may be wise to negotiate to hold back part of the purchase payments in an escrow fund to protect your interest in case any representations turn out to be untrue.

Be Aware of Pre-sale Practice Expenses

All of the practice’s bills should be paid off before the transfer occurs, if practical. Adjustments can be made at the time the sale is closed.

Use a Covenant Not to Compete

If retirement is not the motivation for the sale, it is generally advisable to negotiate a covenant not to compete. The covenant should be reasonable as to the duration of the covenant and any geographic restrictions.

We Can Help

If you are planning the purchase of another medical practice, either now or in the future, we strongly recommend that you talk to us first. We can help you review the financials and help protect your interests throughout the process.  To schedule a complimentary consultation with a CIG Capital Advisors professional, click here.

Stay the Course

The good news within these numbers is that for the month of May, the FAAMG stocks and other 495 stocks were up almost equally. This could be quite constructive, as a broader number of stocks contributing to the overall return of the S&P 500 may lead to a healthier market.

We are encouraged as more states begin the process of re-opening their economies. It remains to be seen how the civil unrest that has followed the death of George Floyd in Minneapolis over the past few days will impact re-opening efforts.

On May 22, Barron’s published an article, “Day Trading Has Replaced Sports Betting as America’s Pastime. It Can’t Support the Stock Market Forever.” Within this article, Jim Bianco from Bianco research argues many people who typically would gamble on sports went to the stock market as sports have been shut down. In addition, many Americans took their coronavirus stimulus check and invested it into stocks. Online brokerages have seen a surge in new accounts this year. Robinhood saw three million new accounts in the first quarter, and the total number of stock positions more than doubled year-to-date⁽⁶⁾, even with the platform suffering crashes and glitches on heavy trading volume days.

Bianco believes that this retail investor mania has driven much of the markets’ 30%+ retracement from the low.⁽⁷⁾ Retail investors piled into low-priced stocks that were down considerably, hoping to make big profits if they rebounded. The dangers here are i) hundreds of companies have withdrawn their revenue guidance for 2020⁽⁸⁾, ii) only 63% of companies beat analysts’ consensus expectation – the lowest quarterly figure in seven years⁽⁹⁾, and, finally, iii) multiple pharmaceutical companies have put out “market-moving” positive press releases without remotely having the vaccine data to back up their claims⁽¹⁰⁾.

As we talked about in our recent webinar, we at CIG believe the path to successful investing over the long term is to develop a plan, exercise discipline, and stay the course. Retail investors piling into stocks that are down significantly or betting on vaccine cures, looking for short term profits, is not a long-term plan.

The most encouraging news in May was the May 28 unemployment claims report that showed continuing claims decreased by 3.86 million to 21.05 million. This is the first decrease since February, before the shut-downs. Although the absolute level of continuing claims is still over three times higher than the post-Great Financial Crisis high of 6.64 million⁽¹¹⁾, we are happy to see claims heading in the right direction. Volatility, as measured by the VIX, has also decreased from 34.15 on April 30, to 28.43 on June 1. This is still high versus historical averages; however, it is a far cry from the March 16 high of 82.69⁽¹²⁾.

If volatility continues to fall and high frequency data following the progression of the economy reopening improves, we are likely to continue with the plan to rebalance towards the strategic equity targets. If volatility surges and reopening efforts are hindered by a resurgence in coronavirus cases due to the recent crowds of people protesting, we have a plan. Please always be mindful that our main objective is to reach the return necessary to achieve your goals as outlined in your financial plan, not to pursue returns without regard to risk. Valuations remain excessively high. 

Boosting your healthcare practice’s cash flow during a pandemic

Many medical and dental practice owners were surprised to find their offices closed by statewide shutdown orders preventing non-essential medical and dental services.  Even as states reopen elective healthcare, practices may find a drastically different market for services.   That demand uncertainty for medical and dental services, coupled with the threat of future intermittent care stoppages, makes this a good time for physicians and dentists to focus on boosting their practice’s cash flows in order to better prepare for the short- and long-term future of healthcare during a pandemic:

Telehealth

Telehealth is a great ancillary service to add to your practice. More than ever, it should be incorporated to boost your practice’s revenue stream.

Centers for Medicare & Medicaid Services (CMS) has issued temporary measures to facilitate the use of telehealth services during the COVID-19 Public Health Emergency. Included in these changes is the ability to bill for telehealth services as if they were provided in person. Another temporary change allows providers to deliver care to both established and new patients through telehealth.

In addition, CMS has also expanded the list of covered telehealth services that can be provided in Medicare through telehealth.

Providers may provide telehealth services to patients through commonly used apps that normally would not fully comply with HIPAA rules. Some of the more popular examples of these apps include FaceTime, Zoom, or Skype. However, the platforms should not be public-facing, such as Facebook Live.

Healthcare providers may also reduce or waive cost-sharing for telehealth visits during the COVID-19 Public Health Emergency.

Coverage for telehealth services may differ throughout the various commercial payors as well as from state to state.

Chronic Care Management

The popularity of Chronic Care Management (CCM) services has been increasing in recent years, especially as providers are realizing that they may bill for services they would regularly provide free of charge.

Chronic Care Management is defined as the non-face-to-face services provided to Medicare beneficiaries who have multiple (two or more), significant chronic conditions. Rather than being exclusive to physicians, other clinicians, such as Nurse Practitioners and Physician’s Assistants, may also provide CCM services; however only one clinician can furnish and bill for any particular patient during a calendar month.

The practice must have the patient’s written or oral consent and use a certified EHR to bill CCM codes. The creation and revision of comprehensive electronic care plans is a key component of CCM.

CCM incentivizes a higher standard of care for patients with multiple chronic conditions and offers an additional $42 to $139 per patient per month based on time and complexity.

U.S. Department of Human & Health Services (HHS) Provider Relief Fund

The Provider Relief Fund is provided to support healthcare providers fighting the COVID-19 pandemic. The funding supports healthcare-related lost revenue attributable to COVID-19.

Providers must accept the HHS Terms and Conditions and submit revenue information by June 3, 2020 to be considered for an additional General Allocation payment.  All facilities and health care professionals that billed Medicare FFS in 2019 are eligible for the funds. It is important to note that these are grants, not loans.

A physician can estimate his or her payment by dividing 2019 Medicare FFS (not including Medicare Advantage) payments received by $484 billion, and multiplying that ratio by $30 billion.

Paycheck Protection Program Loan Forgiveness

The Paycheck Protection Program (PPP) is a loan designed to provide a direct incentive for small businesses to keep their workers on payroll. The main attractive feature of this program is the ability to have some if not all of the loan proceeds forgiven. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. If a laid-off employee declines an offer to be re-hired, the forgiveness amount will not be reduced, however it is advised to get written confirmation of the fact.

The forgiveness portion of the loan consists of money used for payroll, rent, mortgage interest, or utilities. A reduction in payroll may reduce the amount that may be forgiven; 75% of the potential forgiveness amount should be used for payroll.

It may be in your best interest to review the PPP Loan Forgiveness Application to help you understand how the forgiveness portion will be calculated. We advise you to review with your accountant and/or legal counsel before submission to the U.S Small Business Administration.

Creative solutions and persistent actions to boost cash flow may help your practice overcome the COVID-19 crisis.  Contact a CIG Capital Advisors Business Advisory Services professional to look for ways your practice might be able to increase cash flow amid the pandemic.

Sources

CIG Asset Management Update April 2020: Uncharted Territory

Equity markets embarked on their own version of the much hoped-for “v” shaped economic recovery during the month of April, even as economic data continued to record nasty numbers. The S&P 500⁽¹⁾ gained +12.7%, recovering much of the prior month’s losses. Outside of the U.S., the MSCI EAFE net⁽²⁾ was up +6.5% and the MSCI Emerging Markets Index was up +9.2%⁽²⁾. Within fixed income, the Barclays U.S. Aggregate Total Return Index ⁽³⁾ returned +1.8% and the Barclays U.S. High Yield Index⁽³⁾ increased +4.5% for the month.

In April, there was a continued tug-of-war between economic reality and hopes that the worst of the pandemic may be behind us:

On Friday, April 3, it was reported that the March unemployment rate rose to 4.4%, the highest since August 2017.⁽⁴⁾ Over the following weekend, many anecdotal news stories came out, spreading hope that COVID-19 was peaking. The ensuing Monday, April 8, the S&P 500 was up +7.03% for the day⁽⁵⁾.

The weekly unemployment report on April 9 showed another 6.6 million in weekly claims⁽⁶⁾, only to be quickly forgotten about as the Federal Reserve issued a statement within seconds of the Department of Labor release. The Fed announced a $2.3 trillion relief package including the Main Street Lending Program, to lend money to mid-sized businesses, and a municipal and corporate bond buying program.  This latest Fed action put them far past anything they attempted during the 2008 Great Financial Crisis.

The April 16 weekly unemployment claims were 5.2 million⁽⁶⁾, and the following day, a report that Remdesivir, an anti-viral drug may help treat symptoms of COVID-19, was made public.

Then on April 21, West Texas Intermediate oil futures settled at a negative number – never before had that happened! The following day, President Trump tweeted that we could shoot Iran boats down in the Persian Gulf, and of course, the oil and the stock markets rallied.

On April 23, weekly unemployment claims totaled 4.4 million⁽⁶⁾. The following day, April 24, President Trump said that Apple CEO Tim Cook told him in a private conversation that he believes there will be a “v” shaped economic recovery, and markets moved higher.

April 30 weekly report brought another 3.8 million unemployed claims⁽⁶⁾. The following weekend, several states began to gradually reopen their economies.

As can be clearly seen in the above timeline, every extremely negative economic statistic that was reported in April was met soon after by either a Federal Reserve announcement, a Trump tweet or positive news stories about pandemic hopes.

No rallies are more violent than bear market rallies and seeing April produce one of the most forceful rallies in decades fits that playbook. We would argue that the markets just followed a historic playbook given historic interventions on the monetary and fiscal fronts. Warren Buffett indicated at his May shareholders’ meeting that he’s not finding places of value to invest and has announced the selling of all airline shares with the view that the impacts of the recent crisis will not magically disappear but will take time to filter through the system.

In the meantime, what is driving the performance of the S&P 500 Index? To oversimplify, it comes down to five companies; Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL). The acronym that most on Wall Street use is FAAMG. Year-to-date through April 30, the FAAMG stocks are up an average of +10% versus the other 495 companies in the S&P 500 down -13%⁽⁷⁾.

The performance spread between the FAAMG stocks and rest of the S&P 500 will most likely narrow over time. The lagging 495 stocks could begin to catch up with the leaders, FAAMG could start underperforming, or a combination of the two.

We have mentioned before that it’s not possible to forecast the path of the pandemic. In contrast to the above, states reopening and the massive Federal stimulus have already produced “green shoots” suggesting that the economy could begin to recover.  Starbucks announced on May 5 they planned to open 85% of its locations by the end of the week, with contactless pickup and cashless payments. Simon Properties, the country’s largest shopping mall operator, announced it would open malls as states allow it. Recent activity on the Apple map app is showing signs that driving activity is starting to rebound. We would especially like to strike an optimistic tone on that last point.

Here at CIG we continue to be proactive and nimble as we see how long this bear market rally and tug-of-war can continue.

This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

SOURCES:

1. Calculated from data obtained from Yahoo Finance, as of May 1, 2020.
2. MSCI, as of May 1, 2020
3. NEPC
4. Bureau of Labor Statistics, April 3, 2020
5. Calculated from data obtained from Yahoo Finance, as of May 1, 2020
6. United States Department of Labor.
7. FactSet, Goldman Sachs Global Investment Research

CIG Asset Management Update March 2020: March Madness

Market volatility continued through the month of March and continues month to date at extreme levels. Long time readers of our updates know that we have been warning about asset bubbles and Central Banks’ recent actions since last year. Valuation, volatility and liquidity are the three main areas that we believe investors should focus on right now.

Valuation: In spite of a -20% year to date return for the S&P 500⁽¹⁾ through March 31^st, U.S. stock market valuations are still quite high relative to the size of the U.S. economy on a historical basis. The ratio of total U.S. market capitalization to GDP (TMC/GDP), reached an all-time high of 151.3% in December 2019⁽²⁾. As a result of the sharp sell-off in March 2020, TMC/GDP dropped -21% to 119.2% as of March 30^th(2). As easy as it is to measure total market capitalization on a daily basis, nobody knows how much or for how long the U.S. economy (GDP) will decline. The TMC/GDP ratio fell to 75 or lower during the post-Dot Com recession in 2001 and the Great Financial Crisis in 2009. An argument could be made that if the contraction in the economy is large and persistent enough, the U.S. stock market may not have yet seen its low.

Volatility: March witnessed two of the top 20 daily percentage gains and two of the top 20 percentage daily losses for the Dow Jones Industrials Average (Dow), ever⁽³⁾. Generally, these periods of extreme moves to the upside and downside have not occurred at or near market bottoms. Major market bottoms have occurred once volatility becomes more muted. Please reference the table below. As of this writing, we can add an additional top 20 up day. The Dow was up +7.7% on April 6, 2020⁽³⁾.

Liquidity: Following the rare emergency interest rate cut on March 3^rd, the Fed cut the fed funds rate again by 1% to a 0 to 0.25% range at a subsequent emergency meeting on Sunday, March 14th. The Fed balance sheet expanded by an average $1 million per second from March 18^th to March 31^st.  Bank of America believes the balance sheet could expand to $9 trillion by the end of the year (~40% of the U.S. economy.)⁽⁴⁾ This is an exponential move from the expansion that began in late 2018. Typically, when the Federal Reserve pumps money into the financial system, stock market volatility calms down. In spite of unprecedented Fed action, volatility in March remained high. In fact, for the month of March, the stock market as measured by the S&P 500, moved intra-day an average of 5%, the most for any month on record. Even through the depths of the Depression or the Great Financial Crisis, the average intra-day move did not surpass 4%.⁽⁵⁾

Despite the continued ups and down, we would offer a little additional commentary beyond what we have discussed in the two recent webinars and above. For March, the numbers speak for themselves. The S&P 500⁽¹⁾ lost -12.4%, while the MSCI EAFE Net Index⁽⁶⁾ of developed international equities was down -13.3% and the Emerging Markets Net Index⁽⁶⁾ declined -15.4%. The Barclays U.S. Aggregate Total Return Index ⁽⁷⁾ returned -0.6% last month. The Barclays US High Yield Index⁽⁷⁾ decreased -11.5% for the month. Hopefully, you are not too glued to CNBC or Fox Business News which we have warned house-bound market watchers about, given the media’s continued emotional rollercoaster and market manipulation (yes, we are talking about you, Bill Ackman).

In March, we kept our heads down and continued to focus on the one of the most important aspects of our relationship with clients. Beyond the investment expertise that we offer, our job is to ensure when times like this arise that we work together to restrain any exuberant investment behaviors as well as moderate our fearful investment behaviors.

The actions that we took in March in the Dynamic portfolios exemplify this goal. When the ten-year Treasury bond declined to an all-time low yield, we reduced portfolios exposures to long-term bonds. As you may recall, prices increase when bond yields fall. When it appeared that equity markets were temporarily bottoming, we increased our stock market exposure by adding to the equity hedge fund manager. During the last week of the month, when it looked like the House of Representatives would approve the CARES Act, we increased Treasury Inflation Protected Securities (TIPs) and more market sensitive equity positions. Overall, the Dynamic portfolios ended the month with more stock market exposure but not dramatically so.

Last week, we began our quarterly rebalancing of portfolios towards their strategic targets. We identified some areas that seem to be successful in this current environment, and we reduced cash and bonds that previously worked but are less likely to do so going forward. We are taking incrementally more risk via adding to defensive equities like healthcare and consumer staples. In certain portfolios, we added a “value-add” fund that is focused on a trend-following process which can work in higher-volatility markets.

On a positive note, we would quote Dr. Anthony Fauci: “You can’t rush the science, but when the science points you in the right direction, then you can start rushing.”⁽⁸⁾ We have many laboratories looking to develop and roll out a vaccine. When the science is ready, a solution to the virus could come well before the usual 18 months. Even if we end up “going old school” and transferring plasma from previously infected individuals, we will get to the mountaintop and, ultimately, see a safer public health, economic and investment environment. Until then, we will continue to very nimble and proactive as we manage the portfolio allocation.

This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

1. Calculated from data obtained from Yahoo Finance, as of April 1, 2020.
2. https://www.gurufocus.com/stock-market-valuations.php
3. https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average
4. “How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020 citing report from Bank of America
5. Bloomberg, Jonathan Ferro as of March 31, 2020
6. MSCI, as of April 1, 2020.
7. NEPC
8. https://www.brainyquote.com/lists/authors/top-10-anthony-fauci-quotes

Diversification Can Help Protect Against Market Crashes

The idea of diversification is very old and can be, in some cases, useful for survival. How many times in life have we heard “Don’t put your eggs all in one basket?” In investment terms, market crashes like the one we witnessed in March 2020 can happen. Losses such as these can be bad for your financial and mental health as well as your ability to meet your financial plan or retire. Diverse investment strategies and assets can behave differently in various crashes, and this differentiation of responses increases the chance your portfolio will survive a market crash. Here’s why a diversification strategy is important:

Diversification in terms of investing became more popular in the early 1990s and really took off in the early 2000s. Whether it is emerging market bonds, wind parks, real estate, etc., the diversification argument became more obvious after the DotCom Crash of 2000. At its core, diversification forces you to “buy low and sell high,” an adage that is arguably commonplace and easily mocked. But it really works. Just look at March 2020’s market returns.

In March 2020, COVID-19 appeared to impact most asset classes. As a result of our investment strategy and process, we became worried about the asset valuations in early to mid-2019. This led us to diversify away from an over-concentration in stocks and into a more varied portfolio of assets.  Consequently, we were better prepared for March 2020 and had exposure to longer-dated Treasury bonds and gold, which were some of the only major asset classes up last month.

In 2019, prudence and diversification came under fire. With the S&P 500 Index up a massive 31%[i], investors with diversified portfolios felt like they left money on the table. In 2020, diversification came roaring back as investors realized the above-mentioned benefits of having parts of their portfolio perform when risky assets struggle. What a difference a few weeks and months can make! March 2020’s crash was the quickest decline in stock market history[ii]. During market crashes, diversification not only helps to potentially shore up returns, but also provides a source of money for rebalancing. With a 20% decline in equities in just under a couple of weeks, buying low and selling high is paramount for investment success over the long term.

In March 2020, the Federal Reserve balance sheet has increased +$1.1 trillion and the European Central Bank’s balance sheet has increased +$400 billion[iii]. Another $2 trillion fiscal stimulus bill is being considered in the U.S.[iv] So, we may yet again be lulled into believing that a period of elevated U.S. stock market valuations and low market volatility could persist throughout this decade. In that case, diversification may return to its regret-maximizing ways, where there will often be an underperforming asset (in this case, bonds or cash) in your portfolio that you wish you had sold, just like there will often be the asset (usually, equities) you wish you owned more of because its price went up the most. That said, when market volatility inevitably returns, you realize that staying diversified is worth it in the long run.

At CIG Capital Advisors, we attempt to pursue diversified portfolios for clients by employing the following thought processes. First, we invest only in investment choices we understand. Second, we determine investment and asset allocations based on collecting as much data as possible, employing common sense constraints, doing fundamental research, and rebalancing portfolios regularly. Lastly, we adapt to change, try to learn continuously, seek new sources of returns, and re-evaluate allocations regularly. We tend to shy away from an investment with an effortlessly smooth return history. These might or might not be safe as many of these strategies are the equivalent of picking up pennies in front of a steamroller.

While there are many known unknowns related to COVID-19, we anticipate continued volatility in the near term as the economic fallout from the pandemic is realized. As always, we maintain diversified, risk-balanced portfolios for clients to help ride out potential market selloffs, and to evaluate, and sometimes capture, the opportunities that present themselves. We conclude with a famous quote from Benjamin Graham, the British-born American investor known as the “father of value of investing,” “the essence of investment management is the management of risks, not the management of returns.”[v] Thus, diversify!

This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

[i] Yahoo Finance

[ii] Bloomberg, Goldmoney Research

[iii] https://docs.google.com/spreadsheets/d/1s6EgMa4KGDfFzcsZJKqwiH7yqkhnCQtW7gI7eHpZuqg/edit#gid=0

[iv] Source: “How big could the Fed’s balance sheet get?” Financial Times, April 5, 2020 citing a report from Bank of America

[v] https://www.azquotes.com/quote/1259823