In today's competitive environment, well-established practices still have sales value... if the conditions are right. That's because it's much easier for physicians to buy a practice and grow it to fit than it is to build one up from a dirt floor. But an unexpected and unplanned practice sale is likely to produce disappointing results.

One of the main advantages of having partners is the ability to pre-arrange an orderly buy-out. At normal retirement, partners can provide a smooth transition for a replacement physician, paying the exiting colleague his reasonable value in the practice assets including accounts receivable, supplies on hand, furniture and equipment, and goodwill. But the group without a firm buy-sell agreement places an exiting colleague at the mercy of their current collegiality and spirit of generosity. And the solo physician is without even this protection.

Of course, when the solo retires, it's often possible to plan for the sale of the practice and complete the transaction in an orderly way. But if something unexpected occurs, the solo physician has much less chance of realizing this asset for himself or his family.
The reason, of course, is that the most logical buyers for a solo practice are existing practices in the same region. It's a lot easier for established physicians or groups to acquire a solo practice and meld it into their own than for someone new to the area. But, when a physician dies or becomes disabled, patients begin making other arrangements immediately. If the physicians in the area begin getting their fair share of the patients without paying for them, they're going to be hard to convince that buying the practice represents a good investment.

Play on Greed as Motivator
Why should physicians be interested in purchasing a practice in these circumstances? After all, the patients of the practice will have to find new physicians and will drift to one practice or another. It's simple: by taking the initiative a physician may get more than his or her 'fair share' of the practice. That can happen if he or she has the cooperation of the seller. But this needs to be arranged in advance in an unpressured atmosphere on both sides.

One arrangement we've seen successfully implemented in solo settings is the pre-need cross purchase agreement. The plan calls for solo physicians in the same specialty and region to pledge to protect each other from unexpected disaster. Often, the logical candidates for such an arrangement are the members of a call group.
In the agreement, each physician agrees to share, in combination with the others, the obligation of covering a temporarily vacant practice or to purchase the practice of an exiting member. The agreement lays out, in a formula, the method of valuing the practice and how the remaining members will share that responsibility. It also lays out how the patients' records will be divided among the members.

It helps if these physicians are of similar ages and circumstances, but it's not a requirement. If one is much older than the others, he obviously benefits more from these protections. But accidents being what they are, all members of the collective should gain peace of mind. Of course, if someone retires normally, the agreement is off in his case and he's free to sell the practice to any of the coverage group members or a stranger on separate terms and conditions.

Other Problems for Solos
Of course, premature death or disability are only two of the reasons a practice might need to be sold quickly. Accepting a faculty position or a job with a clinic is another reason the pre-arranged practice sale would be useful. If the job is in the same community, it may be possible to transport the practice to the new employer, perhaps receiving payment for it. If that's not feasible, the practice will need to be sold and we've had pretty good results raising interest in these situations.

Another situation is the unplanned break-up of a group. Absent a fair and reliable buy-sell agreement, there's endless opportunity for wrangling -- and even litigation -- in this situation. We've been involved as mediators and expert witnesses in several cases of this type. If there's no firm agreement as to what the values are, there's plenty of grist for a lawyer's mill here.

Sell to a resident or fellow?
If you're forced to sell your practice, the logical buyers are, in this order: existing colleagues, friendly competitors in the region, unfriendly competitors in the region, practices in related or symbiotic specialties, or a university such as a hospital or a residency program. Last on the list are residents and fellows looking for their first practice opportunity. They're the least desirable because they have no money. And, they are often hard to negotiate with because they are inexperienced and hypersensitive to being victimized.

We negotiated the sale of a practice for a physician who had accepted a faculty position. Unfortunately, in his euphoria at the prospect of landing the job (and getting out of family practice), he had celebrated with everyone in the medical community prior to calling us. It made it much more difficult to sell the practice since everyone knew he was leaving and what his deadline was.

Still, we were able to accomplish it, with the help of the hospital serving as guarantor of the bank financing for the buyer. In fact, we were able to generate a bidding war between rival practices and we actually settled for more than the asking price.

In another case, we were unable to spark any interest among competing dermatologists in a solo practice and, as a last resort, took the offer to the head of the university teaching program for that specialty. The transaction was concluded in a matter of days and the practice was used as a private practice laboratory for the residents. It provided an excellent teaching environment and earned substantial revenue for the department. Everybody won.

Get a Dispassionate Ally
In the event of death or disability before retirement, you should, at a minimum, leave instructions for your CPA or management consultant as to their responsibilities as custodians of your practice. He or she should be charged with responsibility for preserving the value in your assets including accounts receivable and goodwill of your practice.

The custodian should be instructed to move rapidly to supervise the operation of your office if you are unable to do so. Those initial steps should include terminating unnecessary employees and supervising the collection of outstanding accounts and paying the bills.

Collecting accounts receivable is always more difficult when a physician is incapacitated. For some reason, patients regard this situation as license not to pay. Your staff may be grieving right along with your family in the event of some tragedy and, momentarily at least, incapacitated. It's also a good excuse for employees to get lazy. That's why we think the CPA or management consultant should supervise the collection of accounts receivable and the reduction of overhead at once.

These instructions should go to your CPA or consultant in a certified letter with a return receipt requested. The letter and the receipt should be filed with your will or other important papers as documentation of your appointment of them for this purpose. Then, if they don't do it, you or your successors will have better grounds to get even.

If you don't use a medical practice management consultant for this purpose, it's a good idea to use a CPA with lots of other physician clients. He or she will be more likely to have experience in this situation and be in a better position to do it well. They should also move quickly to find a buyer for the practice if that's indicated. It may be done by selecting a broker to list the practice, or by representing you or your estate as an agent. Either way, this will involve valuing the practice, creating a sale strategy and offering document, and doing the appropriate marketing to attract logical buyers.

Alternate Strategy: Don't Die
If you're healthy, you probably think you're never going to die or become disabled. But your disability insurance premiums should tell you that other people think you will. Take the hint. Plan ahead.