Why planning is critical to a successful practice exit

We are currently seeing a lot of activity in the mergers and acquisitions area within the healthcare industry, with many owners jumping at the first opportunity to sell their practice. In most instances the offers appear to be very attractive with high multiples (capitalisation rates) offered, but the devil is in the detail. Plunging into a practice sale may not always maximise your value upon exit, hence planning your exit is vital to ensuring you get the highest return and value out of the sale.

Why are you exiting the practice?

What is driving your decision? The drivers behind why you are selling the practice are essential to consider as they will impact the type and timing of the sale.

If you are selling to maximise your return, transition to retirement, and enjoy your lifestyle, you will need to consider what cashflow you need to be able to live in the years ahead.

Retaining talent within the practice is important to sustaining a good culture within the practice. Depending on the appetite of your staff, transitioning your ownership to an associate may be part of your exit planning strategy. Ensuring you are on the same page and involving them in the discussions early on is essential for a smooth transition.

Depending on the type of sale, you may still be required to work in the practice and meet specific KPIs to receive your final proceeds of the sale. Consider the differences between a private buyer and corporate buyer. Do you need to consider how long you would be willing to work transitionally under new ownership? How much are you ready to sacrifice in sale proceeds to be able to walk away when you hand the keys over? It can be a hard bargain to balance between the buyers and sellers to negotiate this point, so be prepared.

A corporate buyer is a buyer that is considered to be an aggregator of practices and are usually interested in practices that are self-sustaining and fit their respective practice characteristics e.g. size of practice, profit margins, etc. Many corporate buyers have additional ‘in-house’ resources to assist with supporting the practice and reducing overhead costs e.g. accounting and legal teams, pre-agreed purchase agreements and favourable pricing, etc.

Corporates will likely attach more conditions to the sale in order to justify paying higher multiples. These may be restrictive and also impact the overall proceeds you receive if these conditions are not met.

Corporates will be most concerned with the key person risk associated with the main practitioner leaving the practice as this will impact the maintainable earnings in the practice if these billings cannot be replaced. Given the relationship continuation, it is important to ensure the practice culture aligns with that of the corporate buyer. 

Provided these risks are mitigated, corporates are commonly offering higher multiples to maximise the sale proceeds.

A sale to a private third party will likely include some version of the above conditions but likely to be less onerous. For example:

  • A requirement for the main practitioner(s) to stay for a period of time post transactions is reduced to usually 1-2 years
  • Lesser requirements to maintain billings or profit targets, although there still may be some depending on the agreed purchase price
  • Likely more of the purchase price to be paid up-front rather than contingent on future billings.

Private third-party purchasers will heavily consider the tenure and billings of the other practitioners at the practice. Additionally it is common for third party purchasers to also be practitioners.

The selling of the practice to ‘known persons’ may be an attractive proposition as it assists to maintain the legacy of the practice post transaction. However, the multiple offered by the associates may not be as high as the offers that may be received by third party private buyers or corporates.

In addition to the items previously highlighted above, there are additional considerations that also pertain to this option. These include:

  • Do the practitioners actually wish to buy-out the shareholders and become owners of the practice
  • Do the practitioners have the funds and/or borrowing capacity to purchase the practice at an equitable price.

This may require external funding by the practitioners or potentially push you down the path of a staged sale or vendor finance. There are a number of options available dependent on the specifics of the situation.

In any instance, planning ahead of time is critical. We suggest three years is the ideal timing as it provides adequate time to plan, and allows for market turns and rising costs.

In the process of selling your practice, the buyers will undertake due diligence to ensure the practice valuation put forward by the seller is reasonable. Planning allows you to present the best possible financial position of the practice, assist with tax effectiveness, and maximise the return.

Do you know the value of your practice?

It is crucial to understand the elements of what you are selling and provide confidence to the buyer that these elements make up the value of the practice. Selling the practice will include the obvious physical items - such as equipment, fitout, lease for premises, and practice staff. Keep in mind certain types of equipment can be sold before the practice sale if you can find a higher price on high-value items. You may also consider the discounting required if the buyer needs to replace specific equipment over time due to the age of your practice equipment.

Buyers also need confidence in the value of your practice from a non-financial perspective. An astute buyer will review key indicators including new and active patient numbers and reliance on certain staff members as fee earners.

Planning ahead of time allows you to consider aspects you can improve to increase revenue and reduce costs. For example, better recall rates, late night trading hours, bulk purchasing stock, review rostering and bringing in-house some of the procedures which are currently being outsourced.

What about capital gains tax?

The value of the practice can be held in different ways and understanding your overall group structure is critical and depends on:

  • If you purchased the business of the practice initially
  • If you purchased the entity (e.g. shares in the company or units in a Unit Trust) which held the practice, or
  • If you started up the practice from scratch.

Your structure will determine how you want to structure the sale of your practice to maximise your cash proceeds after tax.

Capital gains tax concessions may be available which could, in some circumstances, reduce your tax bill to nil.

When considering the exit from your practice planning is essential. Although you can exit your practice tomorrow, planning can ensure you maximise your return by maximising the value of your practice and minimising any capital gains tax.

If you want to make the most out of your practice exit or to ensure your practice is set-up for long-term success, please contact your local BDO adviser today.