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February 1, 2018

Succession Planning and Unlocking Value in Your Practice

MHT Partners  | Healthcare Investment Bank

It is never too early to lay the groundwork for unlocking the value in your medical practice.  Whether the ultimate goal is liquidity, business continuity or exploring the role of consolidator, there are many advantages of planning for an ownership change three to five years before your desired transaction date. The main benefits include maximizing the ultimate sale value of the practice and preserving your legacy for yourself, your employees and your patients. By preparing appropriately, you can optimize the strategic alternatives for your practice.

A vital part of the planning process is the transition over time to new, younger physicians and extenders. This process serves two purposes: 1) potential investors must be confident that clinical partners and patients remain with the practice through the ownership change, and 2) patients continue to receive the same level of high-quality care. Among the assets that the buyer is obtaining during an acquisition, established providers and loyal patients are some of the most valuable. Further, most private practice owners are very proud of the goodwill they have built and strive to preserve this goodwill by ensuring that patients will continue to receive a high standard of care. By planning for the transition in advance, the practice ownership has time to evaluate and implement an appropriate long-term patient care model, even if it means transitioning patients to new providers over time.

Another important factor to consider for succession planning is the financial structure of the practice. Until recently, there were few options for physicians seeking to retire other than to completely sell their practice to another physician (often requiring a buyer who could pay 100% cash upfront), or to close doors and lose the goodwill that was created over the years. Multiple solutions and alternatives for physicians are more readily available today, especially as private equity groups have shown a renewed interest in investing in specialty physician practices.

The leading alternative is the establishment of a managed services organization (MSO), which allows the physicians to maintain total control of the clinical aspects of their practice while relinquishing control of the non-clinical aspects.  Under this construct, the selling physicians can monetize a portion of their practice and can transition from a true partner-physician model to a hybrid one, where physicians remain employed by the clinical practice while retaining an equity stake in the MSO. This also enhances the ability to attract younger physicians, as MSO shares can be offered as a sweetener to a traditional productivity-based compensation package.  This model has gained substantial momentum over the last few years, as it can be structured to benefit the buyer, the selling physicians, and the physicians who will join the practice in the future.

As with any large business decision, it is wise to seek advice from transactional and industry experts prior to making any permanent decisions. A healthcare investment bank can inform you of your options for succession planning and can help to craft customized solutions that strive to maximize your practice’s value, even if you are several years away from contemplating a potential sale.

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