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.
Financial Resiliency Amid Disruption: Your Healthcare Practice
Your medical or dental practice may have to adjust to a “new normal” as states slowly return to broader care permissions after weeks or months of tight, lockdown restrictions. Have you taken advantage of the programs offered to help medical and dental practices survive and what changes can you make to help ensure your practice thrives in a post-lockdown environment?.
Here are some management aspects dentists and physician-owners may want to consider in planning for financial resiliency amid the global disruption brought by the pandemic:
Cash Flow Summary
With so much uncertainty, being able to visualize your cash flows for the next 12 months is crucial. Taking proactive measures to forecast your incoming cash flows will allow you to implement a strategy early on and to timely take appropriate steps. The process includes analyzing your historical revenue stream and collection rates with an objective to forecast your future collections. Reviewing your procedure mix will help you determine what the impact of delaying non-essential procedures will be to your top-line.
Expenses should be adjusted to reflect cost management strategies and cash inflows from government establishments and banking institutions should be factored in to estimate cash balances throughout the pandemic as well as into the recovery period. Conducting a sensitivity analysis may also be beneficial to envision best case/worst case scenarios.
Telehealth
During the COVID-19 crisis, CMS has significantly expanded access to telehealth services for Medicare beneficiaries. This includes the easing of many of the stringent regulations set place by various government entities. Time should be spent reviewing the latest changes, highlighting the different opportunities available to you, and researching different telehealth platforms to see which is most appropriate for your practice.
Due diligence should also be conducted to highlight services that you may virtually perform and bill via telehealth. Disseminating the service to your patients as well as the general public is key to optimizing this tool.
A/R Management
Insurance companies don’t typically pay out as fast as many dental and medical practice managers would like. Understanding tools available to healthcare providers during the crisis could allow you to speed up your collection process. For example, CMS is expanding its payment acceleration program and HHS has announced a provider relief program. Your billing staff may also be utilized to effectuate collections through aggressive A/R management.
Expense Management
Having a handle on your expenses is one key to sustaining a positive cash flow. A first step may be to look into your historical expenses as a percentage of revenue as well as the year-over-year trends. Recent changes should be taken into consideration as well to prudently forecast your budget.
Fixed expenses are typically the biggest threat. However, there may be options available to you depending on the language in your contracts. Review the contracts and agreements you have in place and look for ways to renegotiate with an objective to defer or abate payments. It may be in your best interest to terminate some agreements.
Grant and Loan Opportunities
Keeping businesses up and running is almost just as crucial to owners as it is to the economy. For that reason, there are many grants and loans available to assist you with perfecting your payroll, rent and other costs. Time should be spent pinpointing your situation, reviewing various programs available to you, and working with your financial institution and accountant to pursue loan programs, grants, and line of credits to supplement your cash reserves.
Business Continuity and Recovery Planning
Having a Business Continuity Plan in place is imperative not only to weather crisis times but also to transition back to what many are calling the new normal. This involves reviewing your remote work capabilities, adjusting staff tasks to keep them engaged, increasing oversight of vendors, and other organizational modifications.
Let us help
As experienced medical and dental practice business advisors, we can dig deeper into your numbers and show where you can make changes that will improve your practice’s bottom line. Let us help support your practice’s resiliency by scheduling an initial complimentary consultation with Brian Lasher.
Managing a Healthcare Practice through the Pandemic: Finance and Operation
Medical practices, dental practices, small and rural hospitals and larger healthcare systems alike are feeling the effects of the COVID-19 pandemic. Recent regulatory changes, like the $8.3 billion emergency funding measure that expands Medicare reimbursements for telemedicine and the prohibition of all non-essential medical, surgical, and dental procedures during the outbreak, have upended the planned revenue cycle of nearly every U.S. healthcare practice or business. How can medical practice owners, dental practice owners and other healthcare managers adjust the financial and operational levers of their business to better weather the economic turmoil caused by the pandemic?
Financial steps to take:
- Put together a 12-week cash flow statement to understand better how you can manage the disruption, assessing what should be coming in and what you must pay and can delay paying, including evaluating the best approach to manage your staff given the circumstances.
- Billing staff should work remotely in order to continue billing as usual and connect with insurance companies. Their time should be used to follow-up on past billings and accounts receivables.
- Reach out to your bank to determine if/when you can setup or increase a line of credit for your business.
- Contact your accountant for up-to-date financials and clarity regarding whether you will be paying your sales/use and withholdings taxes as normal or taking advantage of your state’s relief, if applicable.
- Look for state and federal programs you may qualify for, including the SBA’s Economic Injury Disaster Loans.
Operational steps to take:
- Consider employees carefully. Can non-essential staff work remotely or even be laid off or furloughed to find work elsewhere through a healthcare staffing company, given that many large systems are currently understaffed? Use web conferencing to hold staff meetings, utilizing services such as Zoom, WebEx, Skype, Google Hangouts and/or FaceTime.
- Move to telehealth when possible, as CMS changes are allowing increased telehealth reimbursements. Using video visits for patients with compromised health can help them avoid coronavirus exposure. Chronic medicine can be delivered to patients’ homes. Of course, when moving to telehealth solutions, notification to patients and training staff members is necessary.
- Prepare for patient visits by securing the doors and screening patients before entry. Provide hand sanitizer, face masks, and gloves and take basic sanitary precautions that can make a difference:
- Disinfect all surfaces, equipment and door knobs between patient consults.
- Shared resources should be kept clean.
- Proper hand hygiene.
- Waiting-room chairs are placed six feet apart and social distancing respected during interactions as possible; alternatively, you can allow sign-in/call-in at the entrance/via phone and ask patients to stay in their car in the parking lot and call them when you are ready to take them back.
- Deal with elective procedures by rescheduling to a later date. Serve patients when you believe it medically irresponsible to delay but disclose the risks, and keep them separate from patients coming in for non-elective procedures. Please note the difference between necessary elective procedures and not-necessary elective procedures.
- Update your website and phone greetings to communicate your current processes and availability.
Medical practices, dental practices, and small and rural hospitals are more likely to weather the pandemic storm by taking positive financial and operational steps now to mitigate business losses and emerge from the crisis in an even-stronger market position. For individual steps your medical or dental practice or hospital should take, schedule a complimentary phone consultation here or join our webinar, “Managing a Healthcare Practice through the Pandemic: Finance and Operations” on Thursday, April 2 at 12:30 p.m. by registering here.
Making Use of Cash Flow Projections
When you manage your medical practice’s cash flow effectively, you can helpprepare your practice to weather both strong and weak economic times. The key to managing cash flow is the cash flow projection — a forecast of your practice’s cash receipts and expenditures.
A cash flow forecast shows the anticipated flow of money entering and leaving your practice on a monthly (or weekly) basis. With the help of this information, you’ll be able to create strategies to handle your practice’s cash surpluses and deficits and to control your overhead.
Creating a Forecast
The first step in creating a forecast is to examine your accounting records and historical patterns. For each income and expense category, project monthly cash receipts and expenditures. When you combine your practice’s cash balance at the beginning of the month with the projected net cash flow for the month, you can see if you will have a projected cash surplus or deficit at the end of the month.
Let’s say, for example, your projection for October indicates that cash expenditures will exceed receipts by $9,000 and you have an $8,000 cash balance at the beginning of October. Your deficit for that month is $1,000. Update your forecast monthly, if not weekly, using actual financial data.
What To Do with a Projected Deficit
If your projection indicates future cash flow deficits, you’ll need an action plan to deal with them. For example, you might use a line of credit, obtain a short-term loan, take steps to speed up the collection of money owed to your practice, or reduce expenses.
A line of credit will help you even out fluctuations in cash flow. A good accounts receivable tracking system should identify overdue accounts so that you can quickly follow up with delinquent patients and insurers. Stay on top of delinquent accounts with frequent calls and letters.
Reducing your practice’s expenses is another effective strategy for handling projected deficits. Some expense-reducing ideas to consider: an energy audit, a comprehensive review of purchasing policies, a reassessment of your practice’s space requirements, and a review of your current compensation practices.
Maximizing a Surplus
A surplus allows you to pay down a line of credit or invest in short-term or liquid instruments. Your bank most likely offers a variety of cash management services, such as an automated investment sweep, that can help your practice make the most of its excess cash.
An Important Tool
Cash flow projections can identify periods when cash may be tight so that you’ll have time to secure additional credit or take other steps to address the problem. CIG Capital Advisors medical practice management professionals can help identify and prioritize various measures that will help your practice run more efficiently. Specifically, we can help you review your current cash management practices and suggest possible improvements. Click here to schedule an initial complimentary phone consultation with a CIG Capital Advisors professional.
Understanding Medical or Dental Practice Financial Statements
Financial statements are to accounting what CT scans and X-rays are to the medical profession: the financial health of a business or medical practice can be assessed by analyzing its financial statements. While most dentists would prefer to focus on dentistry rather than the business of dentistry, it can be beneficial for dentists (or any physician-owner) to familiarize himself or herself with the basics of financial statements.
Learning how to read financial statements allows a physician or dentist to see where the practice’s money came from, where it went, and where it is now. Dentists and physicians will want to be aware of the following three basic financial statements:
- Balance Sheet. The balance sheet provides detailed information about your practice’s assets, liabilities, and shareholder’s equity. It is a snapshot of the financial status of your practice as of a certain date. Assets are things the practice owns that have value. Assets may include physical property, such as office buildings and equipment, cash and investments, receivables, and intangibles, such as goodwill. Liabilities are amounts the practice owes to others. Liabilities can include items such as taxes owed to the government, bank loans, and money owed to vendors. Shareholders’ equity is the amount the practice would have left over if it sold all its assets for the amount appearing on the balance sheet and paid off its outstanding liabilities. This equity belongs to the practice owners.
- Income Statement. An income statement shows how much revenue your dental or medical practice generated over a specific period, usually a year. It also shows the costs and expenses that went into earning that revenue. The bottom line is the practice’s profit or loss for the reporting period. Pay close attention to the practice’s operating expenses, such as rent, utilities, and supplies. A practice that experiences a net loss may look to reduce its operating expenses in an attempt to return to the black.
- Cash Flow Statement. The cash flow statement reports the dental or medical practice’s inflows and outflows of cash during the reporting period. A cash flow statement tells you the net increase or decrease in cash. Cash flow statements are generally divided into three parts: cash flow from operating activities, cash flow from investing activities, and cash flow from financing activities.
As experienced advisors, we can help you dig deeper into your numbers and show you where you can make changes that will improve your practice’s bottom line. Contact a CIG Capital Advisors medical practice management professional today for a complimentary initial consultation.
The act of adding medical practice value through an administrator’s eyes
CIG Capital Advisors authored a recent article for Fierce Healthcare where we discuss how physician-owners can assess growth metrics in their medical practice and make adjustments that may affect the practice’s value with an eye toward a future sale:
“The act of adding medical practice value through an administrator’s eyes”
The average primary care physician sees more than 20 patients a day, according to a 2018 survey of nearly 9,000 doctors by the Physicians Foundation.
That, along with the 11 hours they devote every week, on average, to paperwork, helps explain why 78% of those same physicians told surveyors they feel burned out at least some of the time.
Oftentimes, this adds up to physicians being too busy with day-to-day responsibilities to have time left over for running the business end of their medical practice, let alone for crafting strategies to drive long-term practice growth, or to consider their legacy as they chart a course toward future retirement.
Ask most physicians about their hopes for the future and they might say that, of course, they want to grow their practice and increase revenue.
It’s one thing to set that as a goal. It’s quite another to determine how and what kind
of growth—and how much—will best suit a particular medical practice and its individual members.
Difficult as it may be, the reality is that growth won’t just result from hard work and hopes. Physicians who are truly serious about strategic growth or maximizing the practice’s value with an eye toward a future sale have
to invest in the process—possibly even setting aside an entire day or more for business building.
Either way, the process always begins with something already familiar to doctors: diagnostics.
Rather than X-rays or blood tests, doctors who want to grow their practice must begin with a panel of financial indicators: tax returns, productivity reports, an evaluation of their payer mix and more. It’s important to examine outlays, too. If a practice is spending more on equipment or staffing, or real estate, than peers of comparable size, bringing those expenditures in line with benchmarks may be the most effective treatment.
It also helps to examine the market. If your practice is in an area with an aging population, your approach to growth is oftentimes different than it would be in a location teeming with young families.
It sounds obvious, but just having the time to find those sorts of data may be well beyond the reach of the average overworked physician. That also explains why achieving growth by simply adding more patients isn’t practical.
This acknowledgment of limitations leads to questions about how best to grow. Is it more advantageous to acquire new locations and the physicians that come with them? Or does it better suit your goals to grow organically with more patients and a handpicked crop of new colleagues?
Finding colleagues who share your treatment philosophy and practice goals is vital, whether planning expansion or an exit strategy. As doctors well know, it’s not a given that those goals and philosophies will be shared. Culture fit is far more art than science, so while acquisitions or mergers may seem like an easy shortcut to growth and the added value that comes with it, they also require due diligence that goes well beyond spreadsheets.
For physicians who anticipate handing off their medical practice, the first step is also diagnostic, although in this case it is an honest valuation of the practice. This isn’t just a matter of placing a price tag on equipment or real estate, though that is part of it. Intangibles play a role, too: your reputation, and your practice’s reputation, have value as well.
For any medical practice contemplating a growth strategy, and for any physician planning a career exit, the most important thing to remember is that, just like patients, no two practices are identical. Consequently, there is no single prescription that will work for every practice.
And that is why a careful, individualized strategy is key to building and maintaining growth, whether for the purposes of seeing a practice through for the next two decades or for the next two years until a buyer arrives.
To schedule an initial complementary consultation to discuss how you can add value to your medical or dental pratice, email Brian Lasher.
Selling Your Practice? Important Issues To Consider
Lay the Groundwork
Start by taking a critical look at your practice’s current financial condition. Identify areas of weakness. For example, does your medical practice experience poor collections or weak cash flow? How do your staffing levels compare to those of similar practices? Issues such as these can reduce the appeal of your practice. It’s to your benefit to deal with them well before you put your practice on the market.
You’ll want to have a realistic appraisal of your practice’s potential worth before you put it up for sale. Tangible assets, such as medical equipment, computers, and furniture, are relatively easy to value, though they generally make up only a small part of a medical practice’s total value. Goodwill is an intangible asset that can be difficult to value. But there are methods that can be used to establish a reasonable estimate.
Identify Potential Buyers
You may receive an unsolicited offer. If you don’t, consider reaching out locally or contacting a broker who specializes in selling medical practices. An experienced broker can identify and contact qualified potential buyers.
The speed with which a sale may occur may largely depend on the deal you’re seeking. Do you want a buy-out that will let you continue to practice as an employee? In that case, looking for a group practice, hospital, or other corporate buyer may be the best route. If the sale goes through to one of these entities, you will be able to continue to work in medicine without the responsibilities of ownership.
If retirement is your goal, you may opt for a gradual buy-in by a physician who will take over your practice. Typically, this arrangement requires you to employ the prospective buyer and, under the terms of the deal, after a trial period of a year or two, offer a partnership with a documented exit arrangement for you. This arrangement could be in the form of a severance package.
Review All Offers Carefully
If you receive an offer, your focus should be on the would-be buyer’s financial condition and the payment terms if you plan on retiring. If you plan to continue working at the practice with the individual or entity who may buy it, you should carefully review all ramifications, including transfer expenses and malpractice terms involved in the sale.
Apart from satisfying yourself about the financial and legal issues involved in the sale, you should also feel that you will be able to fit into the potential buyer’s organization and that your advice and input will be welcomed. Remember, whatever way your medical practice’s sale is structured, there will be tax implications.
The business advisory team at CIG Capital Advisors can help you evaluate potential medical practice sale offers and determine the terms which might make it the right deal for you. Schedule a complimentary consultation with one of our business advisory professionals today.
Optimizing Your Medical Practice’s Income
Enhancing revenue and controlling expenses should be the primary financial focus of every medical practice.
Improving operational efficiencies can help bring a practice closer to achieving these financial goals. Here are some ways you can maximize your practice’s revenue stream and reduce costs without sacrificing patient care:
Keep Coding Current
Coding errors are all too common. Simple errors end up costing medical practices money as well as time to rectify mistakes. Delays or denied claims translate into reduced reimbursements, which, in turn, affect cash flow.
To minimize coding errors, you need to identify the cause of the problem. Typically, miscodes are due to undercoding to avoid penalty risk, using outdated data, or leaving coding decisions to inexperienced support staff. Periodic assessments of your practice’s coding accuracy can help uncover problem areas. These assessments could include a review of your practice’s forms and a comparison of billing codes with the actual services that were provided.
Maintaining updated coding manuals and software, keeping a code reference summary handy in exam rooms, and using online coding resources can help your practice attain a more accurate coding rate. So too will making notes during each patient visit. Be sure to have your staff attend refresher courses to help them stay current with coding practices.
Improve Employee Productivity
Eliminating inefficiencies and boosting employee productivity directly benefit your practice’s bottom line. Try these approaches to improving the productivity of your practice:
o Define productivity goals and offer incentives to your staff for reaching those goals.
o Delegate administrative functions so that physicians spend the greater part of their day seeing patients.
o Maximize physician and medical assistant billable time by planning patient flow carefully.
Better Control of Staff Time
Are your overtime expenses increasing from quarter to quarter? While some overtime is unavoidable, a consistent rise in overtime hours deserves some scrutiny. Review the payroll records of your non-exempt employees to determine who worked overtime and why. Was your practice fully staffed and simply busy or was it short one or more employees on the days when the overtime occurred? If overtime was necessary because you were short-staffed, see if this was due to vacations or some other controllable situation. It may be time to revise your practice’s policy on vacation time if scheduled time off was the cause of the overtime.
Update Fee Schedules
If your practice hasn’t raised fees in some time, you may want to consider appropriate increases. Just be aware that some patients may be resistant to fee increases and could switch to another provider. In addition, take a look at the reimbursement rates of all the plans you participate in. Run the numbers to determine whether it makes financial sense to continue accepting patients from some of the plans that reimburse poorly.
Buy Smarter
Medical and office supplies make up a portion of a practice’s expenses. Yet, some practices rarely shop around for more competitive prices. You can control expenses by becoming a smarter shopper. Pick some of your practice’s “high-volume” items and find out how much other vendors are charging. Use that information to negotiate lower prices with your current suppliers, consolidate orders with fewer vendors, or switch to new suppliers to save money.
Eliminating inefficiencies and boosting employee productivity directly benefit your practice’s bottom line. The business advisory professionals at CIG Capital Advisors can work with you to identify areas in your medical practice where streamlining operations may help optimize your practice’s bottom line.
Measure Your Medical Practice’s Performance
Is your medical practice moving forward, standing still, or losing ground? You’ll know the answer if you compare different aspects of your medical practice’s operations to appropriate benchmarks. CIG Capital Advisors’ Medical Practice Dashboard makes it easier to compare your practice to peers around the U.S. What To Measure There are two types of benchmarking: […]
What Ophthalmologists Need to Know Before Selling Their Practice to a Private Equity Acquirer
The private equity acquisition market has been heating up in recent years, and private ophthalmology practices whose physician-owners are in the market to sell stand to gain from the industry’s interest. Part of the private equity market’s rush to acquire ophthalmology practices stems from a historically large surplus of cash– $2 trillion as of the […]