I commonly get questions from private practice owners tossing around the idea of selling their business in the next two to five years.
I know what you’re thinking…
“Why in the world would I consider selling my business after I’ve put so much work into it?” As is the case with most topics, my interest in this concept started with a conversation; specifically, a conversation about rates. We’re all familiar with rates in real estate or the concept of price per earning for stocks. This is essentially the amount of money you need to invest in order to receive a dollar of a company’s earnings.
Out of personal interest and curiosity from Breakthrough owners, I wanted to learn what the “rate” of selling a private PT practice was. A great book, Built to Sell by John Warrillow, taught me that there is both a beginning AND end to every business. If this is true, shouldn’t you have a plan for HOW it will end and how to receive the HIGHEST rate for the time you’ve invested?
I certainly think so.
I interviewed five industry leading experts on selling a private PT practice to bring the best advice to you all in one place. Each of these experts represents a different level of the transaction involved in selling your private practice. Today we’ll cover advice from three of those experts:
Paul Welk –
- Physical Therapist
- An attorney with Tucker/Arensberg
- Founder of Legal Impact
Greg Wappett and Eric Major –
- Director and Senior Associate at Provident Healthcare Partners, LLC
Advice From Paul Welk
Paul Welk is a physical therapist turned attorney, who advises owners going through the process of selling their private practices.
When we asked Paul how to determine the rate for a private PT practice, his reply was as follows: Earnings Before Interest, Taxes, Depreciation, and Amortization — AKA EBITDA.
The purchase price for your practice is based on a multiple of EBITDA. In short, the buyer is purchasing your earnings (calculated by EBITDA), and this is the main thing they are focused on when setting up a deal structure. This is a reflection of profitability. It is usually calculated on a trailing 12 months and does not include the salary you are taking for yourself.
For example: If your company brings in $500,000 in revenue, is profiting $120,000 which you take as salary, you cannot expect to sell your company for 2 million dollars. It just isn’t going to happen.
It is pivotal that you understand what EBITDA is and how to calculate it, in order to get a realistic value of your practice.
According to Paul, selling your private practice is a two-step process:
- Get a reasonable idea of the value of your practice (see above)
- Determine where to find potential buyers
When looking for buyers, there are a few options…
- Consider the local market. These might be friendly competitors interested in purchasing or merging, friends, colleagues, or mutual acquaintances
- Sell internally to key staff members
- Use the open market
How to Survive the Open Market
If you choose to find buyers on the open market, there are some key factors you need to consider. The first thing to decide is if you’re going to hire a broker to help with the process, or if you’re going to do it on your own.
It’s important to recognize, most private practice owners are only going to make this type of transaction once in their lives. This means if you decide to go it alone, you MUST know your numbers. Putting together this information is a lot of work and with a lack of experience, it will likely be pretty time-consuming. While it can be done, if a deal falls through, you’ll likely be left without any other options.
A broker, on the other hand, deals with this type of transaction all the time, bringing experience and efficiency to the table. They will offer multiple options from the start, so you’ll never be stuck back at square one if a potential deal falls through. According to our expert, Paul, a broker brings good value to the transaction. Typically, broker fees are 6-10%, which, in the grand scheme of things, is a small price to pay to save you a lot of time and headaches.
14 Variables That Affect The Multiple
To pull it together, here is a comprehensive list of variables that will affect the overall value of your practice:
We ’ve explained the meaning of EBITDA, but here are some examples of how earnings translate into the multiple values of your clinic (data from 2016).
If based on the trailing 12 months, your company has $250,000 in earnings, you can expect around three times that amount, $750,000, as your practice’s value. Similarly, if you have $1 million in earnings, you can expect a multiple of five times that amount or $5 million in value.
- Profitability/Revenue Trending
- Payer Mix
- Opportunity for growth in your area
- EMR Platform
This becomes particularly important if merging with a company that has an already established EMR system. Who is going to switch systems?
- Willingness to remain the owner and for how long
- Number of locations
- Desirability of locations
- Diversified referral sources
- High Accounts Receivable
- Owner Reputation
- Staff Longevity or high turnover rate
- Number of years in business
Advice From Greg Wappett and Eric Major
Greg Wappett and Eric Major are the Director and Senior associate, respectively, of Provident Healthcare Providers, LLC.
Factors to Consider First
According to these two, before considering selling your private practice, there are 3 things you need to evaluate:
- Size of your operation
- Goal of the Shareholder (owner)
- Financial statements
If you have a good understanding of these factors, you’ll be far better prepared to begin the process of selling your business. Let’s discuss preparing your finances first.
First and foremost, you must have a good sense of your earnings. This goes back to our discussion on EBITDA from above, and how this ultimately determines what your practice will sell for. In order to do this, it’s important to complete monthly, quarterly, and annual financial statements; and more specifically the trailing 12 months.
A trailing 12 months financial statement is often abbreviated to TTM throughout the merger and acquisition process and is critically important to remember, as it’s the statement used to calculate your EBITDA. As you can see, keeping track of these statements along the way will allow for a more timely transaction when selling your business. However, it’s important to keep in mind that there’s a lot of labor that goes into this transaction.
It will be roughly a three to six-month process, so even if you’ve done all your financial homework, you have to have a reasonable timeline in mind.
Other Factors to Consider
While financial earnings are key, it’s also important to consider other factors that will make your business more attractive to potential buyers.
Some of these factors are:
- Showing that your business can control growth versus needing to cut staff.
This can be done by opening new locations or hiring new PTs.
- Continuing to grow and expand.
Invest in marketing and recruiting. Having marketing systems already in place makes your business an appealing option.
Advice For Smaller Physical Therapy Practices
According to Greg and Eric, smaller PT practices have some additional considerations that need to be made. Their top piece of advice is to focus on cleaning up shop.
A smaller practice means lower revenue, and this means it will be more difficult to keep up with compliance. More focus needs to be placed on making sure that:
- Corporate structure is in order
- Taxes and legal matters are lined up
- Real estate can legally and ethically be transferred to the buyer
Additionally, payer mix is a consideration for businesses small and large alike. Unfortunately, there is not much that can be done about this, as it is more of a geographical issue.
The following is a list of questions buyers will want to know, therefore preparing for them in advance will be of great benefit.
- What does the corporate infrastructure look like?
- What’s the company strategy?
- What’s the platform?
- What’s the brand, name recognition, and awareness of the company?
- What’s the referral base look like?
- Is there an intangible benefit that passes the test of being real?
An example of this might be a sports team connection where you have ATCs from your locations who are contracted to local high schools, introducing a stable source of new patients.
Nuggets on Finding the Right Buyer
When you’re looking to sell, remember there are many different types of buyers. For example, over the past five years, people buying businesses with private equity dollars have increased substantially. There are now one to two-dozen groups who are private equity backed, so consider this as a legitimate option on the market.
For smaller Physical Therapy practices and clinics, it will be difficult to find relative comparable practices in your area. This means you may have to think outside logical buyers. This could include a friendly transaction with a competitor or even a partial sale where you still have a little skin in the game with a buyout over a few years. If you own between 1-10 clinics, you may want to consider a tuck-in or platform acquisition. An example of this might be a company in your area who owns 10 clinics. This company may buy your one clinic as a tuck-in, expanding their market share and filling a geographical gap.
Benefits of an Advisor
The last bit of advice from Greg and Eric is that there are several benefits to using an advisor during this process. Using an advisor one to two years out from actually completing this transaction allows you time to select a buyer and the ability to explore options you might otherwise be unfamiliar with.
Another benefit of using an advisor is that they can help connect you to an extensive network of buyers and merger partners whom they’ve acquired through past transactions. Additionally, they can introduce you to other business owners who have sold their businesses, which can offer valuable insight into the process. An advisor will know which groups are actively buying and what the current pulse of the market looks like. This means they will be able to help you lay out the groundwork for an optimal deal structure based on the current market.
Finally, due to their experience working with many different practices, an advisor will be able to help tease out what sets you apart from your competitors and use it in the market to your benefit.
In today’s post, we’ve discussed understanding the value of your practice, and how planning for the end of your business is in your best interest. We’ve gotten great advice on the topic from industry leading experts, Paul Welk, Greg Wappett, and Eric Major that should have you feeling more at ease about when and how to sell your practice. Check back soon for the second part in this series, where we’ll have tips from three more experts to help you round out your plans for selling your private practice.
In the meantime, check out some other free PT resources on our website.