Selling your practice: Prepare for negotiation

Todd is the Chief Executive Officer of VitalSkin Dermatology, a world-class dermatology and aesthetics practice management firm., Mr. Petersen has over two decades of C-suite experience, including CEO, COO, CFO, and CHRO roles. He is a growth expert with a passion for new entrepreneurial challenges, revenue growth, improving operations, and building teams and partnerships.

In previous months’ articles on Selling Your Practice, we discussed why so many physicians are doing so. We also covered the importance of preparing early, assembling a team of experts, and continuing to run and grow your practice during the selling process. Educating yourself and learning the difference between the two most common type of transactions—a capital sale and an asset sale—was examined—as was the need for completion of an objective analysis of your practice, and development of a financial pro forma.

RELATED: Selling your practice: Grow, prepare early and assemble your team

The last two steps are key to preparing for future sale negotiations. Indeed, successful negotiators know early preparation is key to any such discussion. That’s because prior to entering a negotiation, it’s critical to understand your practice strengths and weaknesses. Given enough time, you may even be able to make adjustments in your practice to neutralize some of the weaknesses—or expand on your strengths. Understanding your strengths and weaknesses lets you put yourself into the shoes of a potential buyer to clarify the advantages your practice has that buyers would want, and the weaknesses or vulnerabilities you can either try to improve on, or prepare to address. Fortunately, you identified your practice strengths and weaknesses when you completed a thorough and objective analysis of your business.

The next two steps in the Selling Your Practice process are perhaps the most important; preparing to clearly understand what you desire from a sale of your practice, and understanding its true value on the open market.

Understand What You Want From the Sale of Your Practice

Stephen Covey is credited with saying, “To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.”

This philosophy should apply to preparing for the sale of your practice.Before you enter into the sales process, it’s critical to deeply understand the ideal end-point you hope to achieve. This will not only help you in the negotiation process, but also in identifying the right target buyers, and informing your marketing plan (which we’ll talk about in more depth next month).

First, we recommend you develop a list of minimum criteria that must be met before you are willing to consider a sales transaction. This list will serve as an initial screening tool, and represents the lower limit of requirements needed to consider would-be suitors. These benchmarks might include clinical philosophy, advanced practice provider philosophy, administrative capabilities, quality of care, patient satisfaction, chemistry with the practice leadership team, and others you’ll personally add.

Second, we recommend you make a list of the criteria that will be most important to you once buyers make it through the initial screening. As you make this list, it’s important to understand your short-term and long-term goals. This understanding will help you to recognize that not all criteria are equal, and to clarify which are more important than others. To help you weigh the importance of the issues, you can assign a number between 0 and 100 for each criterion, so that the total of all the numbers adds up to 100.

RELATED: Selling your practice: Understand the financial, legal implications

To help you identify potential sales criteria that may be important, following is a representative list.It is not meant to be exhaustive, and there likely will be additions you’ll make.

• Sale price: Often one of the most important factors, but it should not be the only one.
• Transaction structure: This was covered in an earlier article in this series titled Understanding the Implications of a Sales Structure and Related Tax Considerations, we talked about the three most common types of sales structures:capital sales, asset sales and mergers, and the tax considerations of a transaction.
• Transition period: One of the most important factors that will influence the sales price of your practice is the transition period. This is the amount of time an owner is willing to continue on as an active part of the practice. In general, the longer the transition period, the better the sales price. Many buyers will give maximum value if the seller commits to three to five years.
• Ownership: Do you have the option to “roll over” some of your sales price into an ownership stake in the buyer’s new practice?
• Compensation: Ongoing compensation can often be as critical as the sale price for your practice, if not more so. This is especially true if you have a long transition period and/or retirement is still far into the future.
• Benefits: Personal benefits can be an important and material part of the compensation package. The most common offerings include health insurance, dental insurance, vision insurance, life insurance, disability insurance, malpractice insurance, 401(k), etc. Consider how the benefits are structured, much the practice contributes to the cost, and how much will you contribute going forward?
• Time off/excused absences and financial support for CME: Will the buyer provide time off and a stipend for annual CME?
• Time off/excused absences: This is often one of the most important considerations in a sale. After all, many practice owners are selling so they can spend more time traveling, with family, and pursuing outside interests and activities.
• Holidays: Which holidays are observed by the buyer, and are these holidays in addition to or part of the time off/excused absences?
• Schedule: What will your ongoing practice schedule look like, in terms of which days and hours you want to work? Do you have the ability to influence your schedule and will you have flexibility in the future?
• Retirement age: What are the ramifications of an early retirement on your ownership investment? What is the retirement age or service requirement necessary to realize the full value of your ownership investment?
• Clinical trials: Do you want to be involved in, or continue to be involved in clinical trials? If so, how will you be compensated for your work?
• External speaking: Do you want to be involved in, or continue to be involved in external speaking engagements? If so, how will you be compensated for your speaking?
• Restrictive covenants: What are the non-compete, non-solicitation, and confidentiality requirements your buyer would expect in your sales contract, and in any new employment agreement?
• Capital investment in your practice: Perhaps your primary motivation is to find a partner who has the expertise and capital to help you grow your practice. Is the buyer willing to commit to an investment?
• Contingency: In order to gain the maximum financial consideration, a buyer will often propose a price that’s contingent on some future metric. Due to regulatory issues, the metric is often based on office visits or total RVUs, as opposed to revenue or actual profit. To get a maximum price, are you willing to accept a contingency arrangement?

Many of these criteria have an effect on other ones. For example, the purchase price is often impacted by your willingness to stay with the practice for an extended period of time, acceptance of restrictive covenants, and continuing with or increasing your work schedule.

Working through this exercise will help you to illuminate what is most important, and where you might be willing to compromise. It will also help you communicate your bargaining position to a would-be seller in an attempt to achieve a win-win solution.

Understand the Value of Your Practice

Most sellers do not have a solid understanding of the value of their practice. As a result, they often substantially overestimate or underestimate its value. This could result in you not getting full value for your practice, or scaring away would-be buyers. Indeed, overvaluing a practice is perhaps the single biggest reason a sale does not materialize.

RELATED: Why are so many physicians selling their practices?

Fortunately, there is an active market for physician practices, and practice sales happen regularly. As a result, it is easy to obtain a practice appraisal. Last month, we discussed the need to prepare a financial pro forma, which you and your team will put together in order to develop a practice appraisal, among other things. Most practice appraisals come with an expected range and a best estimate based on your unique practice metrics. The high end of the range becomes the aspirational value. Understanding this valuation range is important as you head into a sales negotiation, because the insights gained from the practice appraisal will become one of the key points of information used to justify your position.

In their book, “Getting to Yes: Negotiating Without Giving In”, Roger Fisher and William Ury coined the term BATNA—Best Alternative To a Negotiated Agreement. Simply put, a BATNA helps you understand your “reservation price”, or as some refer to it, your floor. This gives you tremendous leverage in a negotiation. For example, if you have a number of potential suitors for your practice, you can set your reservation floor above the low end of the practice appraisal.Your ability to get to the aspirational value will be dependent upon the number of alternatives you have, and your willingness to provide a buyer with some of the trade-offs.

Now that you know what you want from a sale of your practice, and you understand the value of it, you are ready to prepare to go to market. Next month we will discuss how to identify potential buyers. Remember, the more alternatives you have, the higher your BATNA. The higher your BATNA, the more likely you will achieve optimal sales terms!