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How to Approach Purchasing an Existing Private Practice

  • 6 days ago
  • 8 min read

Updated: 4 days ago

So many physicians in our online communities for doctors are thinking about making the switch to private practice these days, secondary to a desire for autonomy and greater financial upside potential than employed positions. While many physicians choose to start their own private practices from scratch, there is also a market for existing private practices, whether you’re looking to buy an existing practice to kick off your private practice journey, or because you’re looking to expand your practice or invest in other private practices. Below, we’ll cover the primary things to think about when negotiating the purchase of an existing private practice, including how to value the practice, what things to consider when assessing whether it’s a good idea, and how to negotiate terms depending on the situation.


Disclosure/Disclaimer: Our content is for generalized educational purposes.  While we try to ensure it is accurate and updated, we cannot guarantee it. We are not formal financial, legal, or tax professionals and do not provide individualized advice specific to your situation. You should consult these as appropriate and/or do your own due diligence before making decisions based on this page. To learn more, visit our disclaimers and disclosures.


8 deal terms that can be more valuable than a lower headline price when negotiating the purchase of an existing private medical practice


Why purchase an existing private practice?


We assume you’re reading this article because you’re already considering buying an existing practice, but read this article if you’re on the fence about whether you should start your own practice from scratch or purchase an existing private practice.


At-a-glance comparison of buying vs building a private medical practice


How do I determine how much an existing private practice is worth?


There are many different ways to value a medical practice, and it’s very confusing to know where to start. One obvious place to start is asking the private practice that’s for sale to tell you their asking price, but what their asking price is and what they’re actually worth on the market may be very different.


If you’re the owner of a private practice, you know that you’ve invested many years of blood, sweat, and tears to get the practice to where it is today, but the fact is that a buyer of your practice will be thinking about the future earning potential of the practice. While they may pay a premium to not have the startup period that you did, it may not be as much as you think - the vast majority of the valuation of a practice is actually based on the performance of the practice as well as the hard assets.




Start with the Financial Performance of the Practice


The very first thing you’re going to want to do when you think about buying a private practice is to review its books. You’ll want to strongly review the financial performance of the practice over not just the past year, but over the recent history of the practice (usually at least 3-5 years, if possible). You’ll want to review:


  • Gross revenue with annual collections and ancillary revenue streams

  • Net income after all overhead and expenses

  • Sources of overhead and operating expenses

  • Salaries being paid out to physicians, other clinicians, and staff

  • Year over year (YOY) growth or decline in revenue, and other trends in profits and what’s contributing to them

  • Accounts receivable 

  • The payer mix of the practice and local demographics, as well as related trends

  • How competition is affecting the practice

  • Which codes are being used most frequently and related trends in both use and compensation


Remember, revenue means nothing until you see what the net profit is, and which direction things are going in.



Normalize the revenue to account for things that would change or not apply if you acquired the practice


Many practices are run like small businesses, or even family businesses. Make sure that you adjust the books to account for things like: 


  • Retirement or pension plans that wouldn’t continue

  • Owner compensation structures that are weighted towards extra compensation for the owner

  • Personal automobile expenses

  • Any family members that may be on payroll (and related benefits)

  • Personal travel or other expenses

  • One-time legal or consulting fees that may be related to heading towards sale

  • Non-recurring equipment or other major purchases


The goal here is to account for things that will change the overall financial picture of the practice, because you want to know what it will look like under your ownership, not theirs. Sometimes practices will do things for tax efficiency, such as intentionally reduce their salary or compensate with other benefits, and you want to know what it would be like to have a normal employed physician (or substitute yourself into the mix).



Project future earnings and cash flow of the practice


This is the heart of the valuation in most valuation methods, as it focuses not on the history of the practice, but what you foresee happening with the practice in the future. You’ll have to find a way to account for:


  • What percentage of the patients that you think will stay with the practice when the existing physician leaves the practice

  • How many of the referral sources to the practice will stay yours, versus go elsewhere, and what you can do to retain them

  • Trends in growth or decline of patient volume

  • Trends in growth or decline in collections

  • Future opportunities to expand services

  • Future opportunities to optimize operations for more profit



Understand Tangible vs Intangible Assets


One of the hardest things about getting a uniform valuation for a practice is how much the person valuing the practice values intangible assets and tangible assets.



Tangible Assets


These are the actual assets of the practice, including:


  • Real estate

  • Medical equipment

  • Furniture

  • Inventory and supplies

  • Computers and technology

  • Other hard assets owned by the practice


It’s important to value these at their current market value, not at the price you would buy them new for. Remember, you’ll probably have to replace or maintain these at some point.



Intangible assets / ‘Goodwill’


While many physicians selling their practice will put a lot of emphasis on this (often referred to as goodwill), you have to be careful about how much it’s actually worth. The more transferable and guaranteed those assets are, the more value you can put into them, but it’s important to talk to a consultant or practice valuation expert to see where this shakes out. Intangible assets often include:


  • Existing patient base and charts

  • Established reputation in the community and referral relationships/networks

  • Experienced staff who understand the practice

  • Efficient and optimized operational systems

  • Brand recognition within the community

  • Existing contracts with insurance carriers


While all of these things can be immensely important and critical to the success of the practice (as well as eliminate hassles of start up), understand that they can also go away. A practice that has been in the community for a long time may really be built upon the physician's long-standing personal relationships and good will that they’ve built, and once they leave, many patients may no longer feel a connection with the practice. Your practice could feel the same to them as the one down the street that started up last year.


Alternatively, if the practice has a lot of physicians, strong online reviews, consistent referral patterns, and a patient base that identifies with the practice name and brand rather than one physician, you’re more likely to retain patients. Therefore, this type of practice typically gets more in goodwill valuation than the solo practitioner. 


Buying an existing private medical practice: what are you really buying? Four factors, both tangible and intangible


Perform thorough due diligence


This cannot be overstated. Before signing anything or even finalizing your offer, make sure that you review every aspect of the practice. Most physicians will choose to engage a healthcare attorney, a consultant, and/or a CPA who are experienced in medical practice acquisitions. They’re going to want to identify potential issues involving:


  • Prior tax returns

  • Three to five years of tax returns

  • Profit and loss statements

  • Balance sheets

  • Production reports

  • Accounts receivable aging

  • Employee contracts

  • Insurance contracts

  • Office lease

  • Equipment inventory

  • Compliance documentation

  • Outstanding liabilities


On your side, you should secret shop your potential practice - ask around about any rumors, ask members of the community and other physicians about the reputation, look at Google reviews, talk to past and present employees, etc. Find out everything you can that the current owner may not be telling you.



Negotiating the purchase price of a practice from another doctor


Again, the seller of the physician practice has an emotional attachment to the practice and may feel strongly about its value. Therefore, their asking price is likely to be above market price. Your job is to negotiate this - ideally in a fair and objective manner, as this is a fellow physician, but it’s also business.


You’ll want to consult expertise to come up with a realistic market value based on the financial performance of the practice, industry benchmarks, independent valuations, appraisals of the hard assets, revenue trends, needs for capital improvements, and any existing liabilities that the practice may carry.


Things that can be used to negotiate a lower price include:


  • Declining patient volumes or revenue

  • Heavy reliance on one referral source, especially if there’s concern that referral source isn’t stable

  • Outdated medical equipment needing maintenance or replacement

  • Large upcoming capital expenditures

  • Expiring office lease which may result in an increase

  • Staffing shortages or lots of promised bonuses/incentives/benefits for existing staff

  • Poor collections or aging accounts receivable

  • High amounts of employee turnover


These are all risks that come with the practice purchase that should be factored into the sales price.



Realize that negotiations are about more than the purchase price, but also the terms of the sale


Many practices don’t transact totally cleanly. There may be strings attached to the sale. Common examples include:


  • Owners that want to sell the practice but retain ownership of the real estate (and have you lease from them)

  • Owners that want to stay on as employed physicians

  • Staff that they want you to retain, such as family members or long time loyal staff



Think about different ways to structure the sale to bridge the divide between asking price and the desired price


Many times, you can get creative with how you structure the price to mitigate risk or make the practice more affordable. This includes:


  • Seller financing to have lower interest rates

  • Making payments over several years instead of in a lump sum

  • Mitigating the risk of patients leaving with earn-outs tied to patient retention

  • Transition consulting agreements to ensure that the leaving physician sets you up for success

  • Gradual ownership buy-ins if you are an existing physician employee looking to buy the practice

  • Retention bonuses tied to key staff remaining to ease risk on that side



Think carefully about the transition period


The successful transfer of the practice with the highest likelihood of maintaining the status quo will depend on a smooth transition. You’ll want to think about ways to keep the existing practice going while you slowly take over - many recommend a 6 to 12 month transition period or overlap while the practice changes hands to allow time for the retiring or leaving physician to introduce the new physician to patients and get referring physicians comfortable with the new physician in hopes of retaining these relationships, as well as navigating any staff concerns with the transition. This also allows time for the community to build confidence in the new ownership:



Conclusion


Buying an existing private practice is a big decision, both from a financial and career standpoint. Make sure you do as much due diligence as you can, engage appropriate expertise, and think creatively to come up with the best possible outcome.



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