Why do you want to sell your anesthesia practice?
Recently I received a mailer from a national anesthesia company and the opening paragraph was a quote from an anesthesiologist whose practice they had just purchased. “Our metrics were good. We were operationally sound. We had enormous value. We knew it was time to sell”. My initial thought was why? You just described a successful business that has many more years of profitability ahead. But I quickly stopped myself and remembered why my group had decided to pursue selling the company, we too had enormous value. The reality is everyone sells for different reasons. Many groups have sold or are considering selling and their reasons are their own. The world is more complicated. Reimbursement is decreasing. We don’t have the infrastructure to compete. ACOs and bundled payments are complicated. The list goes on. The why is important because once you start the process you open a Pandora’s Box. The purpose of this article is not to discourage you from selling your anesthesia practice but to impart my experience with selling an anesthesia practice, (more appropriately attempting to sell a practice), and to draw attention to the not so obvious challenges you will face along the way.
Check Your By-Laws
Selling your practice is a big decision; so, before you start the process, familiarize yourself with your company documents to determine just what has to happen in order to sell the practice. Most groups have this as a super majority vote issue in their By-Laws (i.e. 75% of shareholders must vote in favor to pass the vote). That is a large percentage. More important is understanding what the temperature of the group is for selling. If you don’t have significant buy in, more like 90%, I would not go any further.
How it all works
There is a standard operating procedure employed when selling your practice. It starts with valuing your company and ends with the day after the sale. In between, there is a lot of work! You choose a suitable buyer. You and the potential buyer exchange a lot of information about your companies, you set a price, and you agree to the post-sale relationship, you inform your hospital that you are selling. The deal is consummated. Life changes!
Let me say that again. Life changes! Anyone who believes that a company is going to spend millions of dollars to buy you and not be involved in the running of the business is naïve, at best.
Valuing your company
This is the process by which you determine what your company is worth. There are companies who can do this for you and it is an optional step but I do recommend you have it done. By knowing upfront what you can expect from the sale, you can decide early on whether to pursue selling. It sets the expectation and may cause you to rethink moving forward. There is an expense associated with having this done professionally but it is valuable. A word of caution here leave emotion at the door. If you have ever sold a house you know what I am talking about. You look at your house and you’re so proud of how it looks and you know what you spent to get it in that shape so in your mind you set a price; but, at the end of the day, the price will be determined by what comparable homes in your area have sold for. Similarly, there is a formula for valuing your anesthesia practice and no matter what you think you’re worth, the formula will determine what a buyer will pay. Many groups have walked away from deals because they were insulted by the price they were offered; but, the reality is, their practice was not worth as much as they thought, even if they upgraded the kitchen…
Finding the right buyer
There are a lot of companies out there looking to purchase your anesthesia practice. It is critical that you find the right company! You want to partner with a company that shares your group’s values and that understands what you do for a living. For all intents and purposes, this is a marriage; and, like a marriage, the expectation is that you will be together forever. You also want to make sure that the group you choose is financially sound. If they are not financially sound, you will pay the price. As an aside, do not attempt this on your own! Engage your legal counsel from the very beginning. There are a lot of issues from a legal perspective that need to be considered.
Merger and Acquisition Advisory Services
Merger and Acquisition Advisory Companies will help you sell your company. Similar to the real estate industry where a realtor will “stage” your home to make the best presentation possible these M and A Advisors will get your company ready for sale. They will prepare your “Book” and present it to prospective buyers. What does this mean? Your “Book” is the tale of your company including key facts and figures with regards to profitability, contract longevity, legal issues, etc. What they do is write the “Book” in such a way so as to present your company in the most positive light possible – ultimately increasing the purchase price of your company.
The issue becomes the blurring of the facts. These advisors will analyze your operations and the associated revenue and expenses and make suggestions on how to make them look more appealing. For instance they may suggest that if you have vacant positions you keep them vacant while the due diligence process is in place. This will decrease expenses, increasing profitability, and therefore increase your sale price. What they don’t tell you is that you will have to maintain that level of staffing after the sale is complete. If you can live with that change in staffing, then by all means present it that way; but, if you can’t, then don’t.
Also, keep in mind that these companies are paid a percentage of the sale price. So, the higher the sale price the higher their fee.
Due diligence is the process by which you share all of your company data, (financial, legal, etc.) with the buyer and they determine an acceptable price for purchasing your anesthesia practice. In addition, they also are looking to see if your company is a good fit with theirs from a corporate philosophy perspective. The formal definition of due diligence is “a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.” Before you start sending over your data you will sign a letter of intent, which obligates you to negotiate in good faith and exclusively with this potential buyer. A note of caution – the due diligence process allows the buyer (a potential competitor if the sale doesn’t go through) access to all of your private data. So, once again, be very sure this is what you want to do because once you start… the due diligence process is tedious, detail oriented and intrusive. If you choose to use an advisor they will assist in this task.
The Sale Price
The sale price is a function of how much of your salary you wish to “monetize” and how much the buyer believes you can afford to monetize (to monetize = convert into or express in the form of currency.)
For example, if your annual compensation is $450,000 and you wish to monetize $75,000, then what you are saying is that post the sale of the company, you are willing to accept an annual salary of $375,000 and that you wish to be paid up front some multiple of $75,000.
Each shareholder in Group X earned $450,000 in 2016. They are negotiating selling their practice and wish to monetize $75,000 of their salary. Therefore the sale price will be:
The number of shareholders in the group X multiplied by $75,000 multiplied by the Valuation Multiple, (Valuation Multiple = A value, typically expressed as a factor, used to multiply a business economic benefit to arrive at the business value) = Sale Price.
Group X has 5 shareholders. The Valuation Multiple is 6. The formula is:
5 x $75,000 x 6 = $2,250,000 or $450,000 per shareholder.
So, each shareholder will be paid $450,000 in a lump sum. Keep in mind that your salary is now fixed at $375,000 per year.
Remember, I also said that the buyer will determine if the amount you wish to monetize is appropriate. If the buyer thinks that the salary will be too low to be competitive, then they will adjust the amount they will monetize. So in the example they would not allow you to monetize more than $100,000 because the salary would be too low to be competitive.
The sale price is only part of the discussion. Next, you have to structure the deal for going forward. You know your salary, but what about benefits, paid time off, post call days, etc? More importantly, who has the authority to make decisions? Again, you are now an employee. This is the most important aspect of the transaction because if this is not done correctly or to your satisfaction, you will not be happy going forward. The purchase price is what you receive; your independence is what you give.
Informing your Institution(s) that You are Selling Your Practice
This is the trickiest part of the whole endeavor. Most anesthesia service agreements are not assignable or not assignable without the consent of the institution. You now have to explain to your hospital and/or ASC that you are selling and why you believe becoming part of this new larger entity will be advantageous to them. Needless to say, this will cause questions to be asked and concerns to be raised by your institution and surgeons. This is why you must have a good answer for when they ask WHY.
If your relationship with your institution is not strong or if the institution is looking for an opportunity to restructure your contract this will be the perfect opportunity to do so.
Life Post the Sale Date
Your company is sold. You have received a significant amount of money (hopefully). What happens next? Most groups will tell you that it is life as usual. That is true for a while but not forever. Benefits will change, schedules may change, etc.
You are now an employee of the corporation that purchased your anesthesia practice. You may have some authority to determine local decisions, but at the end, of the day you do report to a larger company. You live within their rules. You need to maintain profitability. What does that mean?
It means they get theirs first and always. They expect profits to, at a minimum, remain the same as when they purchased the company and if profits decline you will be asked to figure out how to make up the difference. How can you make up the difference? Fire a physician, fire a nurse anesthetist, work post call, work on your vacation for no pay.
The bottom line is things change. There is now a financial expectation that you must meet. If you are unable to manage your anesthesia practice, then it will be managed for you.
You might be saying to yourself what if it’s something happens that’s beyond my control? The hospital loses a surgeon. A new surgery center opens up and takes business away. These are all things beyond my control. It doesn’t matter! You are responsible.
Some have argued regardless of whether you are purchased or independent you will have to make hard decisions with regards to services offered and not offered if profitability declines. This is true. However if you are an independent anesthesia practice you decide how you will address the issue. The same is not always true if you are an employee.
What if you decide to resign after the sale? You signed an employment agreement with your new employer that has a Restrictive Covenant paragraph. The RC will keep you from working at your current location for at least 1 year post any separation with your new employer and it may actually preclude you from working within a certain radius of your current anesthesia practice. If you do nothing else, read the RC!
So, back to the opening line of that mailer “Our metrics were good, operationally stable, and never more valuable. Why sell?”
What Are your Alternatives?
No doubt, the world is a scarier place and there is something to be said for being part of a larger entity, but at what cost? There are alternatives. Hire a skilled Practice Manger, utilize the consultants who are skilled in the various aspects of Practice Management necessary to survive. Form an MSO with other likeminded groups.
I can tell you why my former group decided to look at being purchased because we felt that the large anesthesia groups had some advantage over us and that we couldn’t compete. The reality was that the large anesthesia groups had capital resources. Not to minimize the importance of money, but it is not the end-all be-all.