By MAS Team | 13 December 2017
Too often, health professionals delay succession planning until they are nearing retirement. A change in mindset should lead to smoother transitions and more successful exits.
If you own or manage a practice, our MAS HealthyPractice® online business support service has been designed especially for you. It provides information and templates on all areas of business risk management and compliance, ownership, employment and practice management – all backed by advice and support during business hours. Visit healthypractice.co.nz to find out more or call our HealthyPractice® team on 0800 800 627 for a free trial and website tutorial.
Shaun Phelan, National Manager of MAS Business Advisory Services, suggests that practice ownership and succession planning should go hand in hand. “We see succession planning as a continuous process that starts pretty much the day you become a business owner and is part of your strategic planning process. It’s part of the process to keep the practice current, and improve business performance and value.”
Think of succession planning as being about nurturing business wealth and you can see how it complements retirement planning, in which one plans to draw on that wealth. “By contrast, an exit strategy is formulated much closer to the time of selling and retiring and involves scrutinising potential buyers, for example. We always suggest starting early with succession planning and building in an ability to cope with a sudden health issue, or even death of an owner – key person insurance. If one of the partners dies, you tend not to want the estate being part of that practice and decision-making.”
All business owners should put aside time for defining objectives, accounting for the wealth in the business, consulting professional advisers and planning for retirement, usually in conjunction with a financial adviser.
“A lot of Members just don’t get around to business planning until it’s late in the piece. A motivating factor in some sectors is compliance programmes. In general practice, for instance, there is an accreditation programme which has practices undertake a strategic plan and business plan every three to five year period. However, dentistry practices or solo specialists don’t tend to have the time or management capability to undertake regular business planning.”
A good succession plan can be viewed as a form of insurance in the sense that it protects and can enhance the value of the business. It means a practice owner is always prepared for an early exit, whether it’s due to a desire for a lifestyle change, unexpected incapacity or even untimely death. The Royal New Zealand College of General Practitioners’ 2014 workforce survey indicated that 86% of respondents who had retired before the age of 60 had done so because of ill health.
More than half of the current GP workforce is over 50, and half of all GPs who retire do so aged 70 or older, according to the college’s August 2015 report. It concluded that early planning can make the transition out of practice easier, and potentially safer, for patients.
“While the college has done a lot of work around studying its GP workforce, it’s harder to gauge the age stages and career stages of other practitioners, such as dentists, because the workforce surveys are not as current. We do think the age bands might be similar, with a large group of older dentists also looking to retire in the next 10 years.”
Once a buyer has found a practice to buy, or shares in an existing practice, there are many issues to consider before making any formal purchase offer. These include assessing all negative aspects that may have influenced the vendor’s decision to sell, such as future business viability, competitive threats, or an expiring lease.
When the seller and buyer have worked together for some time, have similar core values and share a sense of business direction, the seller is usually very comfortable because the business that they’ve worked hard to build is being transitioned with a desire to keep the legacy intact. Knowing each other well can simplify the pre-purchase due diligence process of investigating all information associated with the transaction.
“You might have a group practice with four owners and one associate or employed doctor within the group, and if one owner retires, the employed doctor looks to come in. They have already worked in the business and know the management structure and the processes, but perhaps lack knowledge of the financial side of things. They will require a full analysis of the practice’s financial information with profits ‘normalised’ and discretionary expenditure removed, and should also consider a legal compliance and risk review.
“It’s a matter of looking at all those factors of the business before determining whether you want to start talking around the price and assessing the likely return on investment. With most of the practices we deal with, the value proposition is around the future earnings for the owner and that’s over and above what they would earn working as a professional. There are other factors, such as giving a new owner a say in how services are provided, and enhancing their workforce flexibility and security.”
In general practice, the patient base is a major contributor to the goodwill value and there will be an expectation of retaining a significant proportion of the existing patient base. This may define the type of practice that the buyer will operate for the next few years. So it’s important that the buyer is comfortable with the size and accuracy of the patient register, the enrolment process, and the suitability of the medical service for their practising requirements.
“The hardest thing when valuing some practices is how much value you attribute to personal goodwill that is not transferable. Significant goodwill is seldom paid in specialist practice, for example, where revenue streams are mainly related to the personal efforts of the specialist.”
“The reason why a specialist or surgeon might be earning a lot of money is down to their experience, skills and abilities, and their referral network. It’s a challenge to evaluate, especially in smaller or specialist practices, whereas we know that in a large group practice if a doctor leaves and a new one takes over, there is little loss of patients. Movement tends to be within the group practice, if at all.”
Positive goodwill factors that will bolster the value of a specialist practice include good management structures, modern facilities with good lease terms and the availability of a good specialist workforce in the area, and benefiting from being part of a large, vertically integrated specialist facility in a tertiary hospital centre.
Valuation methods for practices may assess the value of tangible assets and goodwill separately, or employ an earnings-related method that considers the value of the business in its entirety, including all assets.
Achieving a good return when selling a practice can be assisted by allowing a long lead-in time and by effective marketing, recommends The Royal New Zealand College of General Practitioners. Becoming a teaching practice, for example, is a good way to develop links with younger doctors who may later be interested in buying into a practice. It also allows them to develop an affinity for the practice and the community. Selling the practice in stages over time is another good way to bring in a successor who might not otherwise be able to afford to buy a practice outright. Other alternatives include selling to a corporate body, amalgamating with other local practices, closing the practice, or transitioning ownership to a community-owned trust.
MAS can provide excellent guidance and advice on various options.
Decide when to leave – Have this worked out well in advance, taking into account things like family, finances, your health and the state of the industry. The duration of this phase might be several years.
Preparation – Consider who your potential buyers are most likely to be, and take steps to make the practice an attractive proposition for them.
Talk to the experts – Make sure you’ve got your accountant and lawyer fully involved in the process, and ascertain what sale price range would be acceptable.
Checklists – Document all the tasks that need to be completed, and get the experts to run through them systematically with you.
Transfer control – Maintain open communication with your transition team/successors. The more people who understand how the practice operates, the more likely the core values and mission will endure.
Plan for retirement – Make sure that you have a retirement plan in place, and seek advice from a trusted adviser.
Aside from patients, what service contracts are held (e.g. general practice PHO back-to-back contract), and do these transfer to the purchaser?
What are the relationships, expectations and responsibilities of working owners or shareholders operating in a group practice framework, and will these change?
What practice/shareholder agreements are in place?
What management structures/systems are in the practice, and who has what responsibilities and decision-making authorities?
Is the practice accredited? This will give an idea of the business’s systems, competence and quality.
Who are the other principals/directors and do I think I can work well with them in the future?
Do I wish to retain all existing staff and what employment agreements apply? Are there outstanding employee liabilities?
Does the building, its contents or the information system need upgrading?
If the building isn’t owned outright or in part, is purchase an option? What are the current lease terms and is the lease transferable/assignable?
Does growing the practice, making it more profitable and introducing new services require someone else to take up the reins and inject extra energy, skills or capital?
If you own or manage a practice, our MAS HealthyPractice® online business support service has been designed especially for you. It provides information and templates on all areas of business risk management and compliance, ownership, employment and practice management – all backed by advice and support during business hours.
Visit healthypractice.co.nz to find out more or call our HealthyPractice® team on 0800 800 627 for a free trial and website tutorial.
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