Mergers and Acquisitions: What Physicians Need to Know

Medical practices are being acquired at a rapid rate as doctors seek haven from the challenges of today’s healthcare business environment. Equity, Inc. sat down with Reid Haney, a transactional and healthcare lawyer at Hill Ward Henderson, to discuss what trends he is seeing in the Tampa Bay Healthcare market and his advice for physicians considering selling their practice. His healthcare resume spans a variety of specialties from primary care physicians to radiologists.

Physicians are seeking to sell their practice for many reasons, including increasing regulatory requirements such as HIPPA and Stark laws, as well as the push to electronic health records.  Selling the practice allows the physician to focus solely on practicing medicine; as opposed to managing the cumbersome administrative and compliance processes.

Haney recommends that physicians plan ahead to increase the value of their practice. “Get your ducks in a row, before speaking with sellers.” This involves sitting down with a lawyer and an accountant one to two years prior to selling a practice to review financial statements, account receivables (A/R), and contracts. Physicians should make sure that the practice’s financial statements truly reflect the business operations. This includes reviewing non-essential business expenses closely. Otherwise, these items will be removed during due diligence and will inevitably delay the process.  Additionally, reducing the life cycle of your receivables will help in your valuation. Finally, it’s important to have a good handle on your contracts.  Know what you have and what is in them.

Additionally, Reid suggests that physicians should be willing to continue to practice for the acquiring company for at least a few years post acquisition. If a physician is looking to retire right away, he/she may not maximize their value of the practice.  Most employment contracts with hospitals or large private entities last for only two to three years, and due to Stark and Anti-Kickback regulations, the compensation is closely scrutinized.  Long-term job security is very difficult to obtain in these transactions. Due to tight regulatory controls on purchase price and compensation, many physicians use the real estate as a cash flow source or retirement cushion.

That is where Equity Healthcare Real Estate comes in to help with consulting on the real estate assets.  It is important not to forget your real estate when selling your practice as it can play a vital role in your financial stability. There are essentially two options: keep the asset for a long term cash flow or sell the asset as an investment property.  Either path involves a great deal of planning and preparation to maximize the value of the asset’s return.

Maximizing real estate values in a medical practice acquisition

For physicians who own the real estate they occupy, practice acquisition can open the door to economic success.  But physicians must understand some key negotiation points. It’s very important to act early and decisively in order to capture these gains.

Property owners and tenants are allowed to renegotiate an existing lease at any time.  Physicians should present a proposed lease structure to a potential practice buyer early in the sale process. Don’t wait until after the transaction agreement has matured. It’s necessary that the physicians determine whether they want to sell their real estate as an investment or hang on for the cash flow. Either way, a longer lease (7-10 years) is preferable, at market rate with 2-3% annual escalations.

The opportunity that comes from the acquisition pertains to the investment sale value of the real estate asset after the practice is acquired.  A boost in investment value can be expected through the acquisition. However, it takes strategic action by the seller to benefit from the increased gains.  Selling of a real estate asset is better in the near term then during the end of the lease term. So, it is recommended to begin positioning the real estate for a sale very early in the practice sale process.

The first part of the value increase relates to tenant credit-worthiness.  A higher-credit tenant means less risk for an investor. Asset values should increase immediately when a hospital system or larger organization assumes the practice’s lease. Also, a lease that is tied to a personal guarantee (when applicable) helps increase the investment sale valuation.

The proper lease structure can vary across product types, so it is advised to elicit an expert to assist in the process.  The best resource is a commercial real estate specialist who specializes in healthcare, has experience in leasing, and is currently active in the investment market.  Such a specialist can guide you through the evaluation and lease restructuring process.

For more information on this process, please contact Carleton Compton with Equity Healthcare Real Estate or Reid Haney with Hill Ward Henderson.