By Paul Martin, MPT, CBI
Have you ever considered selling your practice? If so, how would you do it? It is not as simple as deciding that you want or need to sell your business and then finding a buyer. Key financial and operational factors can significantly add or detract from the value of your business and ultimately your personal post-tax return in the event of a sale. Following are seven steps to optimally prepare your business for a potential sale, which will help maximize the value of your business and make you more profitable. Step 1: Clean up Your Books and Records A clean set of books and records can pay big dividends in the valuation of your business by a buyer, particularly your financials, tax returns, and operation reports. These documents are the first impression that a buyer has of your business. Remember, you get only one chance to make a good first impression. You want a buyer to view your practice as a well-run business that has a high level of sophistication, not a mom-and-pop operation. To create that positive impression, review your statements. Have your most recent full year financial statement and thereafter reviewed by your accountant. A full audit is not necessary, but a buyer will have more confidence in a higher purchase price if your statements have been reviewed. The cost should be around $1,000 depending on the size and complexity of your business. Be sure you are reporting for tax purposes on a cash basis and not on an accrual one. A new regulation was passed in December 1999 called Public Law 106-107, which states that if you are paying taxes based on an accrual method of accounting and you sell the assets of your company, you will not receive the tax benefit of an installment sale. For example: Sale price = $620,000 Terms = $200,000 cash at closing, the balance of $420,000 paid over 3 years Transaction type = asset deal Tax paid by owner at closing = $215,000 Essentially, the seller of this business will be bringing his/her checkbook to closing because the tax is due on all of the proceeds, including the note of $420,000. There are ways of avoiding this problem; the simplest is to be sure you are paying taxes based on the cash method of accounting. Additionally, if you are a general business corporation (C-corp), you will be taxed at the corporate and personal level for the gain on a sale. As a sub chapter corporation (S-corp), you have what is termed a pass-through entity, meaning the tax implication is mainly at the personal level. Due to this major difference in taxation as a C-corp, you should consider a stock deal as opposed to an asset deal. A stock transaction will greatly reduce the corporate tax and will maximize your personal proceeds. The downside of a stock deal is that it is not as advantageous to the buyer from a tax and legal perspective. The example at left illustrates the major difference in owner proceeds in an asset versus a stock purchase of a C-corp. Essentially a stock deal provides the owner with a personal return of 82% of the total proceeds as opposed to a 49% return in an asset deal. It is not uncommon in a small business for an owner to run certain expenses through the business for a tax benefit. If you are considering selling your business, it is in your own best interest to cease these activities because a buyer will value your business based on reconstructed financials, which essentially gives you credit toward your profit line for personal expenses. Unfortunately, if the buyer is getting a Small Business Administration (SBA) loan to purchase your business, you do not want those perks revealed to an SBA lender because of legal implications. Therefore, your value will be decreased in the eyes of the lender and the buyer may not be able to adequately finance your deal. Additionally, it shows a buyer that you have a higher level of sophistication if your books are clean. Step 2: Consider Viable New Programs/Technology Ask yourself the question, what can I do in my business that a large strategic buyer cannot? This is when you need to get your creative juices flowing. Companies will pay for innovative programs or systems that are in place and have a proven track record. You may even get a share in the profits of your ingenious program on a go forward basis (with the new owner absorbing all of the cost, of course!). This idea can be a new program, a new use of technology, or an innovative operating strategy, or maybe a new location that will have minimal start-up costs. Use a phrase like “We are the only practice in the state performing this program.” This is a significant value to a buyer as well as a practice-enhancing strategy for you. Step 3: Improve Operations Reporting and Productivity Put in place a simple operations report that tracks key indicators of the volume and levels of productivity in your business. A weekly report that can roll up to a monthly and annual report is the best option. A buyer will gain confidence in your knowledge and the reporting systems of your operations through this report. Following is an example of a weekly/monthly report: You can add many more indicators to the report. Initially, however, keep it simple while you and your staff get used to the discipline of reviewing the report each week and quickly looking for productivity and growth activity action steps. Take the time to work with all members of your staff to understand and use the reports. This discipline will absolutely improve the operations of your practice by making you and your staff immediately aware of trends and variations in the business. Step 4: Maximize The Payor Mix Start this step by gaining a complete understanding of the different payor classes supporting your business. Then, closely study the reimbursement that the business is receiving by each main payor class. This should provide you with a list of payor classes and an average reimbursement per visit for each of the represented payor classes. In most states, workers’ compensation, private insurance or indemnity plans, and motor vehicle insurance are still the best payor sources. By increasing volume in a strong payor class of your business, you will see significant increases in revenue and the profitability of your business. The next step is to identify the referral sources that are sending your best payor class patients. Consider any and all marketing opportunities to these referral sources: routine marketing visits, in-services, seminar or breakfast education programs, or simply education to the physician on special or unique services for the specific payor class. STEP 5: Clean up Your Accounts Receivable Management A buyer will scrutinize the effectiveness of your billing and collections system. The first step is to analyze. Carefully study the aging of your accounts receivable. Generally speaking, if you have a significant amount of accounts receivable over 120 days (30%-50% of total), you should consider a plan to collect or write off the old accounts, which can be accomplished in a variety of ways. Outsourcing the old accounts to a collection agency is an effective strategy. Check references on the agency you choose and expect to pay somewhere in the range of 10%-20% of collections based on the age and quality of the accounts. In most cases, a buyer will buy your accounts receivable in the purchase of your practice. You also will be asked to warranty or guarantee a percentage of future collectibles of your accounts receivable. STEP 6: Broaden Your Referral Base The derivation of your stated revenue is particularly important to the buyer. A referral base that is narrow in number of unique referral sources will be seen as a major risk. Conversely, a broad referral base will provide a buyer with security regarding the future referral and income stream. Here are some strategies to consider:
