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Physician Acquisitions - Nothing Will Come of Nothing

 "Nothing will come of nothing."
—Shakespeare, King Lear (1.1.90)

Physician acquisitions and mergers continue to dominate the healthcare sector during 2011. Hospitals, in an effort to bolster their shrinking bottom lines, strive to replace volume decreases and continued expected reductions in reimbursements by partnering with physicians. Similarly, many physicians anxiously seek to remove the uncertainty facing their own reimbursements and volumes by aligning with hospitals. Partnering can mean many things, but most often a sale of a practice is involved.

One of the best ways for physicians to be prepared, even if a sale or merger is not imminent, is to make sure the practice’s finances and business procedures are in order. Make some changes and consider these few steps as a starting point for getting ready:

1. Focus on improving internal controls 
2. Prepare accrual-basis financial statements and a three-to-five-year practice business plan 
3. Stop running any personal expenses through the company 
4. Get all your contracts (leases, loans, payer, articles of incorporation, bylaws, employment, retirement, deferred compensation, tax items, operating agreements, stock purchases, options, etc.) organized and in one place
5. Hire a healthcare acquisition advisor to help you find purchasers

The above steps convey to any potential purchaser that the practice is run like a business. Such preparations may also increase the price of the practice. 

"Implementing these changes over an extended period of time will save the practice a great deal of money."

Take Time and Do It On Your Schedule

Process changes take time to implement, so the sooner a practice starts the better. If the practice starts today, a couple of positive things occur. Primarily, the practice implements many of these improvements to operations on its own schedule, as opposed to someone else’s schedule. Implementing these changes over an extended period of time will save the practice a great deal of money. Further, any costs associated with the changes will be distributed over a longer time period instead of compressed to two or three months.

Protect the Practice’s Assets First by Improving Internal Controls

Implementing new internal controls can be intimidating, which is why the management team should divide projects into smaller pieces. Start with implementing improved cash-management controls, then work into billing, payroll, etc. Take each cycle one at a time so it doesn’t feel so overwhelming.

Develop Accrual-Basis Financial Statements and a Practice Business Plan

The practice should implement accrual-basis financial statements. For tax purposes the practice will remain a cash-basis entity; however, for book purposes, accrual-based statements with supporting footnotes should be developed. This is actually much easier than it sounds. Currently, every practice’s billing system provides revenue and receivable reporting that aids in this process. Additionally, taking bills due to be paid and setting up related accrual entries captures the practice’s major current liabilities. Finally, a review of the prior month’s transactions assists in identifying further accruals or deferrals that require disclosure in the accrual financials. Again, doing this demonstrates to a potential buyer that the practice is serious about running a business. In addition, Patrick McNally, a partner in Blackman Kallick’s valuation practice, notes that generally a purchaser will want the previous three to five years of financial statements reflecting all the changes made above. Starting sooner as opposed to later may avoid the practice having to go back into the past to create this process. 

The practice should develop a three-to-five-year business plan. Adding a business plan achieves two things. First, you and your management team create a road map to assist in driving future growth, management, and strategies. Second, in order to create a business plan, the practice will need to ensure existing partner buy-in regarding the future goals of the practice. McNally notes in a recent article that the partners need to know each other’s plans regarding retirement goals and the direction of the business. A discussion of these and other important issues will also reveal whether it is the right time to sell the business. Remember, the business plan is a work in progress and should be revisited on a regular basis. The practice can decide if it wants to make this plan available to a potential purchaser; the most important thing is to have this plan in place to guide the organization.

Make Your Accounting Team’s Life Easier and Save the Practice Some Money

Next, avoid running personal expenses through the corporation. We all know that auto leases and entertainment expenses, just to name a couple, sometimes get handled through the corporation. This creates considerable work for the practice’s current accountants who must segregate all of these items prior to tax time. Cutting out these types of expenses by processing them personally actually saves the practice money long term. How, you ask? On average, a practice’s management or CPA spends at least 10–15 hours semi-annually identifying these expenses and getting the bookkeeping updated to appropriately handle these items from a tax and reporting perspective. This translates to $2,000–$3,000 a year per physician just to manage these costs. If the corporation doesn’t have to deal with these issues, the bookkeeping and accounting become much easier — especially around tax-planning season. Avoiding these items increases the overall profitability of the practice to a purchaser. 

Don’t Do This Alone — Get Someone On Your Side

Getting your practice ready for a possible merger or sale is just as important as the decision whether or not to sell. It is a far easier and less pressure-filled process if the practice has already taken these steps and whatever others it deems necessary to prepare for the sale Once the items discussed above are in place, it takes much less time to keep current the documents a potential investor or partner would be interested in seeing.

"This is your company that you and your partners have spent your heart and soul building; you should get the most you can from this process."

Finally, the practice should hire an advisor to assist through the sales process. John Warrillow, in his book Built to Sell, adds that relying upon a specialist who knows your industry is also a must (77). Getting people involved who have participated in these types of transactions previously increases the pool of buyers and generally the sales price. This is your company that you and your partners have spent your heart and soul building; you should get the most you can from this process

If you and your partners decide not to sell, the practice will then have stronger controls in place protecting the organization, up-to-date accrual-based financial information available every month for better business decision making, a short-term and long-term business plan to help guide the practice’s decisions, contractual and other pertinent information right at the practice’s fingertips if modifications need to be made or other terms of contracts require updating. Running the practice more efficiently ultimately saves the organization money and makes the organization more sustainable. If you decide to do nothing, as Shakespeare noted 400+ years ago, you should expect nothing greater in return.

If you have any questions on physician acquisitions and mergers or best practices for your healthcare practice, please contact Paul D Smith, Jr. at psmith@BlackmanKallick.com or 312-980-2901 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.