Almost two years ago, I did what many family physicians say they will never do: I sold my practice. Today, I am no longer the co-owner of a two-physician family practice, but the employee of a large health care corporation. In the eyes of many of my physician colleagues, this means I sold out. If only things had been that simple.
The health care environment has undergone a profound transformation over the last few years. Daily we feel the effects of how the “business” of medicine is changing around us — fueled in part by penetration and control of the market by HMOs and other payers. As family physicians, we are concerned, and rightly so, about being able to manage increasingly complex day-to-day office operations and having the know-how and the clout to deal with payers.
In the area where I practice, we are seeing more and more physician groups organize into corporate structures, weakening the ability of small, independent practices to reach large groups of patients. This has resulted in a tremendous loss of critical income and a growing sense of insecurity.
In my situation, my senior partner was set to retire as soon as we could find an acceptable new physician. Despite spending a great deal of time and money on the recruitment process, we were repeatedly unsuccessful. The idea of a partnership in a thriving community practice had no appeal to the young physician applicants. Almost uniformly, they had no interest in being involved in the business aspects of medicine, meaning I would have to shoulder those responsibilities alone. Instead, these young physicians were seeking the security of a large health care system. They wanted to be employees, not entrepreneurs — and who could blame them?
As I contemplated my uncertain future and that of my practice, I lost whatever faith I had once had that a small family practice could survive for long in this environment. Like the young physicians I had failed to recruit, I too began seeking security and hoping for a practice setting in which I could offer quality care to my patients, satisfy my family's needs and be happy.
The hunt for a buyer
If you have ever contemplated selling your practice, you understand the tremendous weight of such a decision. My decision to sell did not come easily, and the selection of a buyer was even more difficult. At age 36, I wasn't quitting medicine, so I would be working with — or for — whoever bought the practice. My retiring partner was aware of this concern and allowed me to facilitate the sale of our practice.
I limited my search for a buyer to large health care corporations because they seemed best equipped to deal with the critical business aspects of medicine. In a corporate environment, management responsibilities would be centralized with experts who deal daily with the changing intricacies of managed care and third-party payers. Management support would go beyond simply assisting with contract negotiations or the purchase of supplies; it would also offer complete services to help ensure the smooth, efficient daily operation of my practice. Relieving me of this burden would surely improve my personal life, increase my professional satisfaction and help me create an environment in which I would have more time to focus on patient care. My patients would reap the benefits of more services and improved physician-patient-staff interaction.
To find the right buyer, one that was geographically powerful and whose vision and values matched my own, I researched the leading systems in my local and regional markets, mostly by talking directly with their physicians and medical directors. (See “Questions to ask.”) This was a time-consuming but necessary process as it narrowed the field of potential buyers to just a handful.
Application forms for joining these large systems were usually from 30 to 50 pages long, and with each potential buyer I had to “open the book” on my practice. They all wanted information on my practice finances, active patients, office hours, employees, managed care contracts and on and on.
While the accountants, lawyers and others poked around my office and reviewed the myriad of reports, my staff was, of course, uneasy. Keeping them abreast of what was taking place, who was shuffling through the office and why became very important. The process affected my staff perhaps as much as it affected me. After all, they would have to adapt to a new employer and new terms and conditions of employment. They were also keenly aware that their daily work routines would soon be changing. It's not at all surprising that many practices lose some of their staff when they go through this stressful process. Luckily, the salaries and benefits offered to staff in the final negotiations worked to their advantage and gave them enough incentive to weather any difficulties of the transitional phase.
Questions to ask
To help you narrow the field of prospective buyers, talk to physician colleagues who belong to the organizations. Questions such as these will help you decide whether an organization is worth pursuing:
Are you happy working for this organization?
Is it all you expected it to be?
Has your practice changed since the transition? If so, in what ways?
Has there been talk of any future changes for your practice or for the organization as a whole?
When you have a problem or concern, whom do you contact? How do they respond?
Who makes the day-to-day operational decisions for your practice?
How much contracting and buying activity is still going on within the organization, and where is it being directed?
Where does the organization get its financial resources?
What are the nature and quality of support services?
How are family physicians involved in policy making that affects the quality of patient care?
You should pose similar questions to the medical directors of the organizations, although ideally they should be willing to offer information about the organization and what your future would be like together.
One of the most important and most frustrating aspects of the selling process was the practice valuation. For many physicians, this step is unsettling because we often don't understand the process and, therefore, have little faith that we're getting a fair deal. As a seller, you have to keep in mind that potential buyers are concentrating on your practice's intangible assets. Typically, family practices have very limited “tangible asset” value (most of our office assets have depreciated and real estate is very rarely involved). The intangibles include practice characteristics such as practice history, revenue history, location, hours of operation, overhead, salaries, staffing levels, ancillary services and third-party payer participation and mix.
An independent third party calculated the actual dollar value of my practice. The accounting firm based the appraisal chiefly on our practice trends and performance over the last three years — paying most attention to the previous 12 months. The standard valuation formula used in our area is the discounted cash flow method. With this method, appraisers look at a practice's past income to project its earnings over the next five years. The projected earnings are then discounted to today's dollars. This method seems to provide fair and consistent results, and in my experience, buyers stand pretty firm on the assigned value.
The figures from the valuation formed the backbone of each organization's offer, but the financial aspects of the offers never swayed my partner and me in our actual decision making. The real deciding factors surfaced during the remainder of the negotiations.
Getting down to business
As I worked through preliminary negotiations with potential buyers, my main objective was to assess whether each candidate was sincerely dedicated to helping me and my practice succeed. I could get a pretty good idea of each organization's commitment simply by the format and components of its proposal. Some proposals were loaded with terms and conditions, while others spent a great deal of time on matters such as growing the practice and what they planned to do for us.
In many cases, I could infer the organization's commitment to its physicians from its compensation arrangement and incentive plan. Its plan for the future helped me see how much autonomy I could expect, and naturally I was drawn to those organizations that demonstrated professionalism and honesty. I looked for a willingness to reward physician performance and respect my shift in professional life, from private practice to employee. I also looked at the basics, such as who would be my physician colleagues and leaders, what practice management services were provided and whether the organization had sufficient capital to develop and be successful over time.
When discussing employment agreements and other legal documents, I learned one valuable lesson: The better the organization, the clearer and more specific its contract. Complicated compensation formulas and unrealistic financial targets were a clear sign to beware and to ask for specific examples of how their formulas would work from year to year. I wanted everything in writing; examples could even be worked into the body of the contract, if needed. At this phase of the process, I was relieved to have an experienced health care attorney representing my interests.
After several long months of research and scrutiny, I finally decided on the system I wanted to join. It then took another seven or eight months of negotiations to agree on the final contract, conduct due diligence and close the agreement. The buyer was Great Valley Health, a corporate health system that contracts with physicians for Jefferson Health System, a hospital alliance and one of the major health care players in the Philadelphia area. Great Valley Health seemed most in tune with my ideas for my practice's future and my own future, and it seemed the most physician friendly.
Great Valley Health is currently composed entirely of primary care physicians, so I feel confident that family practice is well-represented. I also believe that the corporation will enable me to continue building an active and growing practice, although I am now technically an employee. I see my new practice arrangement as a means to start working with, and not against, payers. Our practice has access to quality marketing and much greater physician recruitment abilities than before. All of these endeavors would have been very difficult for me to accomplish in a small, independent group setting.
The right decision?
When you've invested significant time, money and a part of yourself into your practice's success, it's not an easy decision to sell. I hope eventually to get away from the stigma of “selling out,” because money was never the issue. The dollars certainly were not enough to launch an early retirement. The real issue was identifying the option that would best enable my practice to grow and evolve with the market while giving me professional and personal satisfaction. As expected, I've had to give up some autonomy, but I am at ease with my decision and feel confident that my patients are receiving high-quality care.
From his recent experience, the author offers these tips to consider when selling your practice:
Be patient. The time from your initial decision to sell until you finally have a contract in hand could be 18 months or longer. Take your time and carefully work through the selling process. Don't accept the first offer that comes your way, don't sign a contract if issues are unsettled and don't cut corners.
Do your research. You'll need to know all you can about the big players in your area. Be sure to talk to colleagues, employees of the organizations and their medical directors to find out what the organization is really like.
Keep your staff informed. It might be your practice that's up for sale, but it's their jobs that will be impacted. Be sure you include them in the process.
Don't do it for the money. If money is all you're after, you'll probably be disappointed. Rather, seek out an organization that values its physicians, supports family practice and will help you practice good medicine.
Be prepared to sacrifice some independence. Becoming an employee of a large organization doesn't mean you lose all autonomy, but you should be prepared for some changes. Find out what your new boundaries are and learn to work with the leadership of the organization.
Hire an expert — or two. It pays to have an experienced team representing you throughout the sale of your practice. Your team could include a health care attorney, an accountant and a practice consultant.
With my knowledge of payers, players and politics around Philadelphia — and after long introspective thought and consideration — I believe that success in my particular geographic area required my being part of a fairly large corporate system. I hope I have found a health care organization not only committed to success in an evolving industry, but also committed to my practice and my personal needs and values. I do not consider this a venture to turn myself into a “business,” as critics would imply. Instead, I believe I have formed a plan that will allow the business of my practice to be successful without consuming me. I hope I can now get back to focusing on being a physician.
The following articles from the archives of Family Practice Management provide additional information related to practice sales: