Key points covered in this article:
- Selling a medical practice requires early preparation, including clean financials, updated documentation, and risk assessment to maximize value and attract buyers.
- Valuation is based on normalized earnings and growth potential, with buyers considering factors like consistent collections, scalable operations, and referral networks.
- The process involves multiple stages, from preparing the practice and identifying buyers to navigating due diligence, structuring the deal, and managing the transition.
A growing number of physicians are thinking about selling their medical practices. Many are nearing retirement, and health systems and private equity-backed groups are actively pursuing transactions. That means physicians considering a sale are entering a more active and competitive market than previous generations faced.
So, what can owners expect? Selling a medical practice requires preparation and often begins several years ahead of any anticipated exit. The process unfolds in stages, each with its own considerations. Starting early and understanding what to expect can greatly influence the outcome.
Preparing the Practice
Preparing for a sale is the most effective way to influence the value of the practice. That’s because buyers are looking for medical practices that have clean financials, efficient operations, and lower risk profile. Ideally, the owner of the healthcare practice starts preparing two to three years before a sale; this allows time to assemble an experienced team of advisors and resolve any issues.
From there, most practices start with financial reporting. The goal is to organize three to five years of financial statements, including profit and loss statements, balance sheets, and tax returns. Buyers use this information to evaluate performance, identify trends, and assess sustainability.
Buyers also scrutinize operations and how the practice functions from day to day. The owner will want to be able to demonstrate clear processes for scheduling, billing, and workflows. Practices that invest in updated technology and modern facilities are also more attractive because they require less immediate investment.
It’s important to independently assess risk. Risk includes any factor that could disrupt business operations and revenue streams. Common areas of concern include billing and compliance issues or concentration within a specific payer or service line. It’s best to identify and address these issues ahead of any formal valuation.
Practices will also want to ensure that documentation and records are up-to-date. This may include vendor contracts, equipment inventories, policies and procedures, licenses, and certifications.
Understanding Value
The fair market value of a medical practice is usually determined using several valuation methods, including the income approach, which focuses on earnings and future cash flow. A valuation specialist generally begins by reviewing financial statements before looking at the other areas of the practice.
To get an accurate valuation, the specialist may need to adjust certain items, such as bringing physician compensation in line with current market levels and removing expenses that won’t continue after a sale. The goal is to get to a level of income that reflects the ongoing business, not just the way it has been run historically.
Once that number is established, value is typically based on a multiple of those earnings. For example, a practice with $1 million in normalized earnings valued at a three-times multiple may be valued at $3 million. However, two practices with similar revenue can produce very different outcomes. A practice with consistent collections, multiple providers, and a referral base is likely to be valued higher than one that struggles to collect outstanding bills or depends on a single physician. This is because buyers are also looking for growth opportunities; if they see signs that the practice can expand without major changes, it may be worth a higher valuation.
A formal valuation can help establish a reasonable range, but it does not set the final price. Buyers will work through the same information and apply their own assumptions about risk and growth. As buyers complete due diligence, those assumptions are tested, and pricing or terms may adjust.
Going to Market
This stage is about identifying the right buyers. In most cases, outreach is targeted, with a focus on confidentiality. The goal is to engage a small group of qualified buyers and understand how each one approaches a transaction.
The mix of buyers can shape both the process and the outcome. Health systems often focus on strategic fit. In other words, how does the practice expand services or strengthen referral networks? Private equity-backed groups look closely at growth potential and operations, particularly whether the model can be scaled. Other independent practices may be interested in adding providers or entering a new geographic area. Each group looks at the same practice through a different lens, which means there may be trade-offs between price, structure, and any number of other considerations.
These early discussions help determine what the market is willing to support and how buyers view the practice. This creates a more informed position when evaluating offers.
Navigating Due Diligence
Once a buyer expresses interest, the process moves into due diligence. Due diligence is a detailed review of the practice’s financial and operational information. But before information is shared, both sides typically enter into a confidentiality agreement. This allows the buyer to closely review the practice, with the understanding that the information is used only to evaluate the transaction.
During this process, buyers compare tax returns and financial statements to what was initially presented, review assets and liabilities, and examine contracts and other obligations. They may also review patient and employee data to understand how the practice operates. In many cases, buyers will perform their own valuation as part of this process.
The buyer may provide a letter of intent outlining a purchase price and structure. From there, both sides work through any open items and refine terms before moving to a final agreement.
Structuring the Deal
This part of the process involves significant financial and tax implications. Note that the purchase price is the headline number, not the financial outcome. The outcome depends on the structure, tax treatment, and timing of the sale. Legal and financial advisors for both parties are generally heavily involved in outlining the details and modeling scenarios.
For example, in an asset sale, the buyer acquires assets such as equipment and patient lists, and liabilities stay with the seller. In an entity sale, the buyer acquires the entire practice, including any liabilities. Each type of sale has its own next steps and tax consequences.
Another important factor is timing. The year of the sale can affect tax liability. In some cases, the timing of the sale may trigger additional tax planning decisions or opportunities.
These details are all negotiated and have a direct impact on the after-tax result. A tax advisor can identify the approach that produces the most favorable result based on the seller’s situation.
Managing the Transition
Once terms are agreed upon and the deal closes, the transition begins. This period focuses on stability for staff members and patients. Proactive communication helps maintain trust and avoid disruption. Additionally, patient records must comply with HIPAA and state laws during transfer.
Other considerations include transferring billing and scheduling systems, coordinating vendor relationships, and assigning contracts, licenses, and other operational details to the new owner.
Moving Forward
Selling a medical practice involves more than reaching an agreement on price. Starting early, particularly with valuation and financial preparation, gives physicians more flexibility in the process. Working with experienced advisors can help produce a more favorable long-term outcome. For more information, contact the PBMares’ Healthcare team, led by Partner Jonny Rosch, Senior Manager Reid Peterson, and Business Valuation Partner Dwight Buracker.
