Thinking of selling your urology practice? Read this first

December 1, 2010

This article will help you understand the dynamics of selling your practice and explain how to accomplish this once-in-a-lifetime transaction.

Key Points

In either case, it may be time to consider joining the growing ranks of urologists who have sold their practice to a hospital or large group practice. For this article, we interviewed Randy Bauman, president of Delta Health Care ( http://www.deltahealthcare.com/), a consulting company whose services include advising physicians on selling medical practices. The article will help you understand the dynamics of selling your practice and explain how to accomplish this once-in-a-lifetime transaction.

Declining revenue, higher costs drive trend

The sale of practices is, unfortunately, a buyers' market. Many hospitals have learned the lessons of the 1990s and have no intention of paying for goodwill. As a matter of fact, most doctors aren't expecting to be compensated for their reputation and the thousands of patients' charts that they have on file in their offices.

Bauman states that the value of a practice consists of the value of the hard assets, the furniture, the equipment, and the accounts receivables (ARs). In almost every instance, the ARs are not purchased by the hospital but are collected and distributed to the physicians after the sale. Therefore, the value of the practice includes the ARs, which are usually collected by the practice for 6 to 12 months after the practice is sold. The physician receives this payment separate from the sale of the practice.

Bauman notes that the valuation of the practice is somewhere between the true cost of the assets and the depreciated book value of the assets. The final component is payment for the practice's inventory and supplies, although this usually represents a small amount.

The sales process

Discussion is initiated by the hospital or by the physicians in the practice. This discussion leads to a valuation of the practice by an independent firm hired by and paid for by the hospital. This independent firm will request copies of the tax returns from the past 2 to 3 years, physician income, a list of assets, and an employee list that includes salaries. This report is submitted to the hospital, which then decides whether to make an offer on the practice.

If the hospital makes an offer, the hospital management and the physicians will discuss the offer and negotiations will take place. At this stage, the negotiations usually do not include lawyers on either side. Most practices will engage an accountant or consultant to represent the doctors and the practice. At the initial discussion, the consultant does not need to be present but can participate via conference call. Most consultants charge an hourly rate, which tends to be higher for large practices with complicated sales. Usually, a consultant can save many multiples of the fee by identifying areas of omission from the hospital offer.

According to Bauman, too many doctors focus on the price they will be paid for their practice when the focus should be on their post-sale compensation and the "fit" between the practice and the hospital. Physicians, he says, are not making a deal with an individual but with an entity. Hospital management turnover is common, and your new "best friend" may be gone a few years later. Therefore, make sure the hospital is the right fit for your practice.

Bauman, who has dozens of years of experience with these transactions, notes that once the decision has been made to sell, both the hospital and the doctors are usually in a hurry to get the deal done. He advises the opposite: "Go slowly, and make sure you allow enough time to complete the numerous actions that are necessary to get the new relationship off to a sound start." These actions include obtaining new provider numbers, taking care of credentialing issues, training staff, adopting a new billing system and accounting system, and addressing cultural issues. Cultural changes consist primarily of a loss of autonomy and independence. You can expect that the entire process will take 6 to 9 months from the start of discussions to the transfer of the practice to the hospital.