As the financial and emotional stress caused by the Covid-19 pandemic drags on, many physician-owners are taking a hard look at their professional — and personal — priorities. For some, that means finally moving forward on plans to exit their practice. Despite the turmoil and uncertainty, now may be an opportune time to make a move.
Independent practices are grappling with increasing technology costs, regulatory requirements, and tighter margins. And now more than half of independent health care professionals worry their businesses may not be able to financially navigate the pandemic, according to a McKinsey & Co report. According to a Bain & Co. analysis in September, 70 percent of all practitioner-owned practices say they are open to a buyout.
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At the same time, demand for independent health care practices is strong and rising. Half of surveyed hospital administrators say they are likely to make one or two acquisitions in the next two years, according to Bain. These deals allow hospitals to increase their specialty offerings, boost market share and cut costs.
Hospitals are not the only parties interested in acquiring these businesses; private equity investors see the sector as an excellent diversification strategy, especially since the coronavirus crisis has amplified the need for evolution and consolidation within the industry. Private equity funds face pressure to deploy capital by year-end, making for eager buyers. Of course, deals generally take longer than three months to close, but there is impetus for buyers to start the process now.
Expected higher tax rates are another reason owners may want to make a move now. Local, state and federal governments will likely seek to fill budget holes caused by the massive Covid-19 stimulus plan. Practitioners seeking to optimize earnings on the sale of their practices may wish to close their deal before new, higher tax rates go into effect.
All this comes at a time when profitability for practices is increasingly being squeezed. In recent years, technology costs have soared as offices rush to meet the Affordable Care Act’s (ACA) new reporting requirements and other demands. And just as the ACA increased costs, non-elective procedures plummeted amid worries about Covid-19 transmission. Smaller organizations were hit hard and practitioners are facing emotional and financial burnout.
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Ready to move on?
Despite all the checks in the “sell” column, it is impossible to overlook the emotional aspect of moving on from a well-established practice. As it finally begins to run smoothly after two, three or even more decades, it is only natural for the owner to say, “I worked hard for this and I want to enjoy it.”
On the other hand, it is also important to remember this is a business — a currently in-demand business. For providers looking to slow down, enjoy the fruits of their years of labor, create a financial or charitable legacy, it may be an opportune time to consider exiting.
Remember, too, this is not an all-or-nothing proposition. It is not unusual and is usually preferred often, for the owner-clinician to stay on with their practices in different capacities after a transaction. This allows them to gradually transition to retirement or their next life goals. An employment agreement can be part of the deal for the owners, key employed providers and even staff, if mutually agreeable with the buyer and seller.
This sector is attractive to buyers. The money is available, valuations are strong — and even rising post-Covid (In fact we have a client who saw the valuation of their practice rise about 25 percent between March and October), and tax rates may not stay this low for long. For practitioner-owned practices considering a sale, the time may be now.
Photo from Flickr user C.P.Storm
Yusuf A. Hai is a managing director at CIG Capital Advisors where he founded and runs the firm's business advisory services division. Hai holds FINRA Series 7, 63, 65, and 79 licenses. He is a board member for the Whitestone Foundation and co-founded the American Learning Institute for Muslims.
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