Practice for Sale
How to get your practice in order to consider a sale.
By Bridgit A. Finley, PT, DPT, OCS, FAAOMPT
Have you ever noticed that most people live in their house and never go to the trouble of fixing it up until they put it on the market? My neighbors did this. They put in a new fence, landscaped the front yard, and put in new outdoor lighting and copper guttering. The very next day, a For Sale sign went up in the front yard. The same thing happens in business. We do not get our house or business in order until we consider the possibility of a sale. When I ask private practice owners if they plan to sell their practice, 95 percent of them say yes. When I ask them their plan, only 5 percent have a plan. Unless you plan to never retire, this is an eventual step in any business.
“The nicest thing about not planning is that failure comes as a complete surprise.” John Harvey Jones
As I began considering what the next phase of my life might look like (someone like me does not really ever “retire”), I knew that I would need to get a few things in order to attract a buyer. I started this process about five years before the sale. Some of these changes just make sense as your business grows. Others are necessary to attract the right buyer. To put your practice in the best possible position for sale, I would encourage you to examine these six areas: (1) succession planning, (2) technology, (3) compliance, (4) legal agreements, (5) accounting, and (6) outcome tracking. Potential buyers invariably want to see your financials (profit and loss statements and balance sheets), metrics (ie, visits, new patients, charges, units, etc.). You will want to sign a nondisclosure agreement prior to initiating the due diligence process.
Your business is your people. A prospective buyer will only be interested to the extent that your best people are enthusiastic about the transition and will stay on board after the close! I determined early on that the best way to success was to invest in developing ownership opportunities for my employees. I wanted to make sure that I kept the key people in the organization. This enhanced the short- and long- term value and what prospective owners desire. They do not want to buy a practice where all the goodwill just walks out the door when the owner retires. That leads me to the next consideration. The current owner will need to be willing to stay on for at least one to three years and run the business through a transition. I love my job so I wanted to partner with someone who would value my ongoing role and desire that I stay on and run the business. You need to consider what role you will want after the sale.
Technology: Electronic Medical Records/Billing
One of the biggest decisions a practice will make is in the selection of a robust electronic medical records (EMR) and revenue cycle management (RCM) partner. The integration of a “real-time enterprise” consisting of electronic scheduling, documentation, billing, outcomes, and management reporting are essential for a growing practice to address the burdensome regulatory environment as well as to create operating efficiencies to streamline the organization. Paper charts or claims submission should now be remnants of our past. This necessary transition will automatically enhance the value of your business and facilitate your ability to provide timely and accurate information to a prospective buyer. A program that allows you to track and document visits, evaluations, referral sources, billings, payments, and collections is imperative to valuing the practice.
A major concern of prospective buyers (after valuing the practice) is to know what problems they may be acquiring. The contract will generally require the seller to make representations that the company and therapists are in compliance with all federal and state laws including adherence to practice acts, and ethical and practice standards. Are there any current or pending lawsuits? I engaged an outside consultant and formed an internal compliance committee. I wanted to make sure that everything in terms of coding, billing, and documentation was spot on and would not be a potential risk for the prospective buyer. You will need to be able to provide copies of compliance policies, documentation of audits, internal training programs, and evidence of remediation in cases where minor findings may have been found.
Selling will also require you get your legal house in order. The buyer will want to see documentation of your leases, corporate authority (good standing), and documentation of any benefit programs you offer your employees. In addition, a buyer will also consider the effect a departing employee will have on your business. I hired an attorney to draft employment agreements that contained noncompete clauses, nonsolicitation provisions, and confidentiality clauses for all of my employees. It may be controversial to use restrictive covenants; however, if you have ever mentored a key employee only to have them open shop across the street, you will readily understand that this strategy is very fair and is in alignment with all parties. It also allows me to share key business trade secrets openly and hold nothing back from my partners, including their financial results. You will need to provide a list of all employees and their compensation and benefits.
Improving our financial reporting and implementing “best accounting practices” was the area for us that needed the most work. Frankly, many of these items had to be addressed after the sale. With hindsight, I regret not investing more resources into getting my financial reporting to a more enterprise-level scale as doing so would have made the due diligence process go more smoothly and perhaps increased the value of my practice. Given the high level of merger and acquisition activity in the physical therapy industry, most companies will have to upgrade their financial reporting. For example, we had to move to generally accepted accounting principles (GAAP). Some of the other items we needed to improve were tracking receipts, submitting expense reports, establishing policies for use of credit cards, and cleaning up the financial chart of accounts for each of the 16 clinics. We were operating like 16 small businesses and needed to consolidate financials, payroll, and accounts payable. Last year, we also moved from cash to accrual accounting, which was painful but necessary because this optimizes the ability for sophisticated businesses to best manage their practices. Until last year, I thought EBITDA (earnings before interest, taxes, depreciation, and amortization) was a new sushi dish. Potential buyers will want to see at least two to three years of tax returns, profit and loss (P&L) statements, and balance sheets.
The last key component is clinical excellence and documenting your clinical success or outcome tracking. As we move from a predominantly fee-for-service to a value-based payment system, successful practices will learn to provide evidence-based clinical pathways and to collect outcomes to demonstrate the effectiveness of the care. With our new partner we are able to provide residency training, which ultimately leads to board certification and highly motivated physical therapists. Without clinical excellence, it is hard to differentiate and build a successful physical therapy practice. Perhaps more importantly, I have found this leads to a happy and engaged team because the best therapists want to be engaged in lifelong learning and professional development. In addition to clinical outcomes, patient loyalty, and mystery shopping scores, preferably from independent third parties, will further demonstrate the value of your practice.
Cleaning or shoring up your practice in these six areas will help you build a great company and improve your value whether selling to an internal partner or taking on a new one.
As a final note, I caution sellers to choose wisely. With ever-increasing regulations, declining reimbursement, and eroding profit margins, consolidation may be the only way to counter the market forces. Physical therapy clinic acquisitions are on the rise. The last big consolidation happened about 20 years ago, and we saw large corporations and private equity firms hungry for big profit margins swoop in and gobble up many privately owned clinics. This time around it feels and looks different to me as many of the big players are physical therapy businesses that are run by physical therapists (PTs). This is what I was looking for when I was looking for someone to partner with. I wanted to be proud of my partners, be part of something bigger, and be in the same room with business-minded physical therapists. Even if a sale is not on your radar, I would recommend that you enhance and elevate your business by establishing enterprise systems and best practices. Doing so now will improve the effectiveness and efficiency of your existing business while also preparing you for a sale at the same time. You will be able to enjoy your new landscaping and fence, and the investments will add value to your home and business.
Bridgit Finley, PT, DPT, is a Private Practice Section (PPS) member and owner of PT Central in Norman, Oklahoma. She can be reached at BFinley@ptcentral.org.