Success Factors in Selling A Dermatology Practice

For the past several years, there has been significant consolidation in the dermatology space, with practices being merged into larger groups, often with private equity firms investing in these acquisitions. Perhaps you have participated in this endeavor or know a colleague who has. Many dermatologists are presently considering this trend and wondering if they should be part of it, while others are being actively recruited by financial firms.

In this short article, we will examine four success factors that any dermatologist should implement if they are considering a sale or merger.

1. Prepare Your Practice Financially

Preparing the practice financially not only means having the books and records organized and in order but can be more broadly defined as maximizing the value of the practice to a potential acquirer. This objective can be achieved by creating processes and procedures for everything in the practice that is not clinical—from an initial patient intake and checkout to post-appointment follow up and marketing.

As an example of this hyper focus on processes, one consultant uses the example of a 35-point checklist for cleaning the bathroom that a successful dermatology practice has put in place. Apply that focus to every internal process and patient interaction, and the “systematizing” of a practice becomes clear.

Not only do such systems add value to an acquirer (as they know that this practice is regimented and can thrive through systems rather than by any one person running the show), they also add significant value to the practice even if you ultimately decide not to sell. By implementing procedures throughout the practice, it will run more efficiently on a day-to-day basis, be able to thrive even through employee turnover, and will likely be more profitable—even if a sale never occurs.

Preparing the practice financially also includes maximizing EBITDA: earnings before interest expense, income taxes, depreciation and amortization expense. Nonrecurring expenses, owner-related expenses and excess owner compensation are often added back in the equation. This calculation allows the potential buyer to determine what the practice’s profit would be if the buyer owned the practice and had to pay reasonable compensation to physician employees to run it. Once again, getting a good handle on your practice’s EBITDA today and looking for ways to improve it may prove very valuable, whether one sells the practice or not.

2. Determine the Right Type of Transaction

When it comes to mergers and acquisitions, one size does not fit all. One practice owner might be looking to sell 100 percent and consider the transaction to be a type of “exit” from their current practice. Another may be exploring the sale of a majority ownership or minority stake, while others may consider a combination of equity (ownership) and debt. The choice depends on whether the owners plan to relinquish control of the practice, want to add a financial partner to help them grow but stay in control, or hope to achieve some other objective.

Larger practices, especially those with great systems and EBITDA, as previously described, may consider becoming a platform practice, one that brings on an investment partner and acquires a host of smaller practices in a geographic region.

For smaller practices, the most realistic option is to be acquired/merged into a larger practice. Many of these deals are extremely lucrative; this scenario should not be seen as a negative.

3. Find the Right Advisor Team

This may be the most important factor because the right advisor team will provide the expertise to make sure the other factors are in place; they will help to properly prepare the practice, maximize EBITDA, and secure the right type of transaction.

Who is on the advisor team? The team should start with the personal financial advisor(s) for the partners who can advise the doctors on the ramifications of a transaction on their personal finances and life goals. If a potential deal doesn’t fit with the physician’s personal life and financial goals, why even consider it? The team will always include a certified public accountant (CPA), often from the practice’s CPA firm, and will sometimes involve a special transaction CPA with experience in these types of deals.

A mergers and acquisitions attorney, ideally with experience in medical practice transactions, is essential. He or she will be the person ultimately responsible for representing the practice to make sure that the agreements reflect the best possible deal for the practice and its owners.

Finally, the team ideally includes an investment banker who represents the practice. Unfortunately, many dermatologists do not consider this type of advisor. This is often a mistake, as the investment banker can often add many multiples of their fee in value to the deal, especially those with experience in medical, and even dermatology, deals.

An investment banker we know, with experience in dermatology practice sales, makes clear that their knowledge of the industry (what deals have transpired at what values) and competitive process (bringing in other potential buyers to create bidding activity) typically put the practice in a much better position than if the banker had never been involved. In fact, many bankers work primarily on a “success fee,” which ensures that they do well only if the practice does well.

4. Prepare Mentally for the “Why” Behind the Deal

When a transaction occurs, things may change dramatically, including practice operations, physician compensation, and employee management. So that everyone feels positive on the other side of the transaction, each participant should understand his or her personal goals and motivations for the deal from the outset.

For example, if you will remain in the practice post-sale, which is quite common, you should understand your motivation going into the transaction, and think through what your practice and life will look like years after. This will force you to consider the following questions: Why are you doing the deal? Is it because you want to give up administrative headaches and let somebody run the business part of the practice? If so, will you be comfortable taking direction from others and not being in control? If the motivation is more financial, will you be okay with lower ongoing income after the deal is complete?”

Plan for Success

As mergers and acquisitions continue in the specialty, many dermatologists will eventually consider becoming part of the trend. This article lays out a few success factors to implement if a merger or sale becomes a real possibility for you and your practice.

The authors have recently completed Wealth Planning for the Modern Physician. To receive free print copies or ebook downloads of this book or Wealth Management Made Simple, text PRDERM to 844-418-1212, or visit www.ojmbookstore.com and enter promotional code PRDERM at checkout.

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