Many decades ago, retiring physicians could seamlessly sell their practice to a young physician. While that is occasionally the case today, shifts within the business of medicine have significantly affected the buying and selling of medical practices.
According to New Jersey-based physician Dr. Joseph Eastern, MD, most physicians who are first starting their careers are less interested in being solo practitioners when compared to their colleagues from a generation back. As such, today’s young physicians are not the typical buyers of a medical practice. Rather, this role is largely filled by hospitals, HMOs, or sizable practice groups. Another contributing factor to this trend is the growing complexity of rules governing medical practice sales, which require the hefty price of paying for a third-party expert.
Hire a Professional Financial Consultant to Handle the Appraisal
Nonetheless, Dr. Eastern urges medical-practice sellers not to be discouraged. One strategy for finding the most desirable buyer and structuring the best deal is to ensure accurate valuation of a practice. This can be accomplished by hiring a seasoned, unbiased financial consultant to handle the appraisal. Furthermore, the financial consultant should reveal and explain all techniques used in the valuation, offering documentation to support findings. Dr. Eastern stresses the importance of bearing in mind that the valuation may not equal the purchase price, which may be affected by factors like legal constraints.
Upon reaching a valuation agreement, sellers need to think about the transaction’s structure. The three most common structures are purchase of assets, purchase of corporate stock, and merger. According to Dr. Eastern, many buyers are partial to purchasing assets, as this affords them the opportunity to solely pick and choose items with value. However, most sellers are partial to selling stock. This lets owners sell the whole practice, which is more valuable than the sum of its parts. Additionally, selling the whole practice often gives sellers tax advantages. Merger, while not as popular as the aforementioned structures, is gaining in popularity.
Sellers of Medical Practices Should Be Mindful of Tax Issues
It is imperative that sellers consider tax issues. Dr. Eastern points out that the majority of private practices are corporations whose stock sales will yield a taxable long-term capital gain, at a rate of 15%-20%. Therefore, he advises sellers to accept a slightly lower price if the structure of the sale would impactfully lower tax payments. Sellers can also defer taxes via payment installments. However, they must make ensure the IRS does not mistake these payments for referrals, as this is illegal.
Some sellers may stay employed by the practice for a set amount of time, which may benefit the buyer as well. Doing so can help to ease improve patient retention during the transition. It also provides patients with the time to get used to changes at the practice.