At some point, nearly every practice owner considers the prospect of exiting their practice. Whether you're looking forward to retirement, seeking relief from burnout, or simply craving a change of pace, your practice represents one of your most significant assets. Selling it with a strategic, well-thought-out plan can ensure you maximize your return. Successfully preparing to exit your practice involves meticulous planning and a clear understanding of your practice's value, as well as the steps involved in the sale process. In this blog post, we'll explore these crucial areas to help you achieve a smooth and profitable transition.
Understanding the Value of Your Practice
When it comes to selling your practice, one of the first questions you'll likely ask is, "What is my practice worth?" The value of a practice is typically determined by a multiple of its EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. For most private practices, EBITDA is very similar to net income or profit. EBITDA provides a clear picture of your practice's profitability by focusing on its core operations, excluding the effects of financing and accounting decisions.
What is my practice worth?
EBITDA is a financial metric that shows the earnings generated by your practice before accounting for interest, taxes, depreciation, and amortization. It is often used by buyers to assess the profitability of a business.
A potential buyer will use a formula to determine what your practice is worth to them:
EBITDA x multiple = valuation
Factors Affecting Multiples
In our experience, the multiple applied to your practice's EBITDA will typically range from 3x to 8x. Obviously, there are exceptions to every rule and we’ll occasionally see a multiple that is much higher or much lower. Multiples depend on several factors, including:
Market Risks: The overall stability and growth potential of the market in which your practice operates can significantly impact its value.
Artificial Intelligence: The adoption of AI in healthcare can either enhance your practice's value or pose risks, depending on how integrated and beneficial these technologies are.
Health Insurance Companies: Relationships with insurance companies and reimbursement rates can affect profitability and thus the value. If your biggest payer decides to slash rates for telehealth, multiples could be negatively impacted.
Economy: Economic conditions play a crucial role in the valuation process. Specifically interest rates can have a significant impact on multiples, since a higher interest rate means it’s more expensive for a buyer to borrow money to buy your practice.
Key People: The presence of key personnel who are critical to the practice's success can increase value. Conversely, reliance on these individuals can be a risk.
Owner Dependence: If the practice heavily depends on the current owner, it may be less attractive to buyers who fear a loss of clientele after the sale.
Compliance/Legal: A practice with active issues like an employment lawsuit or under tax audit is more risky and less valuable than a practice with no current disputes.
Type of Buyer: Different buyers value practices differently. For instance, a hospital center might pay more than an employee looking to take over.
What to Expect During the Sale Process
Selling your practice involves several steps, each with its own set of expectations and challenges.
Key Professionals to Have on Your Side
The buyer's professionals are not looking out for you, so it's crucial to have your own team, which typically includes:
Attorney: An experienced attorney will help you navigate the legal complexities of the sale.
Accountant: An accountant ensures your financials are in order and can provide valuable tax advice.
Financial Planner: They help you understand the long-term financial implications of the sale.
Business Broker: In many cases, a broker can help find potential buyers and negotiate the best terms.
Understanding common terms and the importance of having the right professionals on your side can make the process smoother.
Common Terms
LOI (Letter of Intent): This is a non-binding offer to purchase your business, outlining initial terms. It's important to note that everything in the LOI is subject to change.
NDA (Non-Disclosure Agreement): This agreement ensures that any sensitive information shared during the sale process remains confidential.
The Due Diligence Process
Before you start the due diligence process, you should have a non-disclosure agreement in place to make sure that your practice’s confidential information is protected. The potential buyer will typically present you with a non-binding letter of intent (LOI) which is an offer to purchase the business. While the LOI will contain initial terms, everything is subject to change based on information gathered during the due diligence project.
Due diligence is the thorough investigation a potential buyer conducts to verify the details of your practice. It can be a lengthy and intrusive process, often described as a stranger looking under the hood of your business. During due diligence, you will need to provide various documents, such as:
Tax returns
Payroll reports
Clinician census
Insurance contracts
Revenue sources
And much more
Due diligence is crucial because it allows the buyer to assess risks and confirm the value of your practice. However, it's also a stage where deals can fall apart if issues are uncovered.
Factors That Can Kill a Deal During Due Diligence
Owner Dependence: If the practice cannot operate without the current owner, it may scare buyers away.
High Debt Levels: A practice heavily leveraged with debt can be a red flag.
Lack of Documentation: Incomplete or disorganized records and policies can undermine buyer confidence.
Lack of Transferable Systems and Processes: If your practice lacks standardized procedures that can be easily transferred to a new owner, it might lower its attractiveness.
It's Never Over Until It's Over
Selling a practice is a complex process with many potential pitfalls along the way. Even after you find a buyer and agree on terms, various factors can still derail the deal. It's essential to remain vigilant and prepared until the sale is finalized.
If you're considering exiting your practice, take our quiz to evaluate if your practice is ready to sell: Is Your Practice Ready to Sell?.
GreenOak Accounting offers comprehensive exit planning services to help you navigate this journey with confidence. Learn more about our services here: Exit Planning Services.
By understanding the value of your practice and knowing what to expect during the sale process, you can position yourself for a successful exit. Good luck!
This blog post does not constitute tax or legal advice.
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This article is designed to provide information only and should not be considered legal or tax advice. Because of the complexity of the law and the variables in your own personal tax situation, you can’t rely on our advice specifically related to your unique circumstances. In order to get the best tax savings and legal advice available to you, you should consult with your own accountant, attorney or advisor regarding your particular facts and circumstances. GreenOak Accounting is an accounting firm that specializes in working with counselors and therapists in private practice. We provide monthly accounting & bookkeeping services, 1-time services and online courses. For more information on our specialized services for therapists please visit www.greenoakaccounting.com
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