By Genhee So, WCI Columnist

There are a lot of moving parts to consider when you decide to sell your clinic or practice, and there is certainly much more information than a column like this could cover comprehensively. However, recognizing some overarching considerations before you begin will help achieve a smooth transition during this multistep process.

In 2017, my husband and I purchased an ultrasound license/practice within a small community in Ontario, Canada. We owned and operated this clinic for five years before an opportunity presented itself in 2021, at which time we sold the practice. We weren’t looking to sell, but the X-ray license (which we did not own) was being sold for a good price, so I made it known that we would be interested in selling the ultrasound license if the buyer was willing to take it over. After some back and forth, we arrived at a mutually agreeable price, and so, we started a life lesson by handing over our business.

The most significant insight I gained from the selling process is acknowledging the importance of the timeline and its length throughout this process, which holds true for North Americans alike. Allowing plenty of time before establishing a sale date allowed for proper planning, mental clarity, and space to avoid nasty surprises (like extra taxes), and it provided the opportunity for maximum profitability.

 

Before the Medical Practice Sale

 

How Much Can the Medical Practice Be Sold For?

One of the first items that comes to a seller’s mind is the value of the practice and setting a purchase price. Some actions are more intuitive, such as allowing time to conduct research into the landscape of the current market and to compare metrics. This will boost your confidence when negotiating a sale price and manage your expectations. But there may be other considerations that might not be as obvious and may require a longer preparation time to maximize the purchase price. Those that I underestimated are detailed below.

 

Review Practice Financials

When reviewing profit and loss statements, assessing the flow-through of income and expenses becomes important. The tax benefits realized by distributing income in one way (think bonuses, salaries, etc.) may detract from the valuation of a business if it’s considered an expense. You may want to change the flow-through of monies in your practice to help promote profitability on the books. That may, in turn, boost valuation, particularly if it's based on a multiples-on-earnings approach. Considering buyers typically ask for two or more years of financials, this could easily take a year or more to adjust appropriately.

 

Asset vs. Stock Sale

Selling your practice as a stock or asset will also dramatically affect where you set your purchase price. Generally speaking, there is a considerable tax advantage to selling your medical practice as a stock, given the difference in taxation of a capital gain vs. income. The potential tax savings here deserve ample time for reorganization and structuring to set up an entity sale.

In our circumstance, we sold the practice as an asset, partly because we didn’t anticipate the possibility of a sale in the near future. This left us handcuffed to sell within a higher tax environment, although understanding the difference between a stock and an asset sale helped justify our higher asking price to account for the extra tax hit.

 

Itemizing Operations

A review of all contracts and leases—including land, office, equipment leases, service contracts, etc.—proved to be useful for timing the sale and assessing if there were any penalties for terminating a contract early or any charges for changing ownership. State and federal terms and conditions unique to medical practices may also require more time than anticipated or more planned timing of transitions. Knowing the details of these agreements may help better determine a sale date to mitigate avoidable costs.

Creating a spreadsheet of these items beforehand helped us manage our expectations and helped to achieve our ideal net goal.

More information here:

Medical Practice Valuation: 5 Most Important Elements

 

Making the Medical Practice Sale Happen

Once you’re ready to offload, many moving parts come into play.

 

Transitioning Employees

Tackling the language, guidelines, and statutes of employment law on a federal, state, and local level can be a daunting task when applied to the sale of a business. Respected business owners balance a fine line between maintaining accepted business standards and etiquette while preserving the well-being and future of their employees’ careers.

Be prepared for the possibility that you may be restricted from making your staff aware of the sale at the time or during the process. Confidentiality and/or non-disclosure agreements are commonly used when buying or selling a business. For example, if the sale of a practice becomes public before the sale date, it can affect revenue generation and be disadvantageous or a deterrent for the buyer. Particularly if you have a long-standing relationship with your team, employees may be upset to have the information of a sale “sprung“ upon them without some kind of warning. They may feel like you’ve upended their career for your personal gain with no regard for their future.

We found that an open dialogue and being prepared with an explanation on hand helped soften the impact of the news. This could also quench reflexive litigious thoughts from your employees if they felt wronged by this process. In our case, we also crafted the terms of the sale to allow for additional time and options for our employees to make sound career decisions.

 

Communication with Your Wealth Team

Many of us will reflexively contact our accountants and lawyers when it comes to large business transactions, but we may be a little more reluctant with other key professionals who help manage our wealth.

Expanding this conversation to include our wealth management team saved us time and future headaches when gearing up for the sale. We encouraged real time group dialogue to establish an ideal sale date. This cut out time lost between reading and responding to emails, as well as delays in implementation due to the need for clarification on particular items. Having our accountant and wealth managers in one space discussing the best date to sell in tandem with our other investment holdings helped us navigate the tax implications of selling the clinic based on the distribution of our family income. We also could time any capital gains or losses that we crystallized or were planning to crystallize with our corporate and personal investments.

For example, we decreased our family income the year we sold, which placed us in a lower income tax bracket. We also went over the various payout structures that were on the table, some of which involved the distribution of profits over multiple years as an income source.

For this project, we worked closely with not only our financial advisors, accountant, and lawyer, but we also spoke with an employment lawyer, chatted with a business broker, and sought the advice of a couple of previous radiology clinic owners. Having these conversations helped us stay ahead of the curve and offered the reassurance that we didn’t have to struggle through this alone.

More information here:

How to Minimize Taxes When You Sell Your Medical Practice

Selling Your Medical Practice for an Early Retirement

 

After the Sale of Our Medical Practice

 

Continuity of Care

Acknowledging the importance of a multidisciplinary planning mindset, we also anticipated the ripple effect that a large lump sum of capital gains would have on the rest of our wealth architecture. This allowed us to deftly pivot and adjust other components for future optimal gain and wealth retention. This, of course, included the tax side; because our wealth managers were looped in on the sale of the clinic well in advance, there was a proactive redirection of new monies and rebalancing opportunities we took advantage of in anticipation of a large tax bill from the clinic sale.

We figured out where and which funds were going to be used to pay the tax man when he came knocking for his (big) cut. Dr. Jim Dahle has mentioned previously that he’s been faithfully practicing tax-loss harvesting for years because he knows he will sell WCI one day at a substantial capital gain. This technique to tax defer, tax arbitrage, and possibly not have to pay the tax highlights the take-home principle of planning your exit strategy well in advance of contemplating its execution so that you can also continue to enjoy its benefits well after the sale of a thriving business.

 

What About You?

When it comes to your career, allow enough time for consideration and reflection on how selling the practice will affect your daily work and your personal life. It can be easy to get caught up in the mechanics and technicalities of such a large business transaction that we forget the personal effects it may have on us afterward.

In a previous WCI podcast discussing tips for buying or selling a practice, Kyle Rudduck, a CFA and CFP, commented that one of the most commonly overlooked areas that doctors make in the buying and selling process is what their professional lives will look like after the transaction. During negotiations, I made sure to leave the terms of my practice as flexible and open as I could to see how the other moving parts of the sale unfolded and how that might affect my willingness to continue working at the clinic as a radiologist.

This ended up being a good move; I know that the way I felt about my participation post-sale changed considerably from more idyllic thoughts when entering this journey. I was thankful that I allowed myself space for meaningful deliberation of how my decision-making and practice autonomy would be affected by a change in ownership. Sensing that I would lose the ability to practice radiology on my own terms and standards, I settled on making a clean and complete separation from the clinic.

Depending on to whom you sell, there are also deal structures that may be appealing to you as an exit strategy from a career standpoint, but it can take a timeline of 3-5 years after the sale of the practice. This can be the case of private equity deals that may require the physician to commit to remaining an employee for several years following the closing. You may want to ask yourself if this fits within the parameters of your desired career lifespan.

More information here:

I Was a Doctor for 13 Years with an Eye Toward Luxury Before (Finally) Starting My Financial Education

 

The Bottom Line

Reflecting back on this experience, I’m grateful for it. It certainly underscored the importance of self-education. But if I were to do it again, I would have given myself at least two additional years to plan the sale, a number that my younger self would have scoffed at before this endeavor.

Ultimately, the earlier you start considering your exit strategy of selling your medical practice, the better prepared you’ll be to maximize profitability and to better position your medical practice on your own terms. Allow breathing room for predetermined deadlines and temporal obligations to take their course and land in the way that sees your benefit optimized. Build in a little extra to smooth out any unexpected bumps along the way. Handling the selling process as a microcosm of a larger financial journey and wealth framework with a plan will keep you steadfast on the road to success; let time be one of your best allies to achieve your goals.

Have you ever sold a practice or clinic? What was your experience like? Is there anything you'd do over again?