If you are a shareholder or owner in a medical practice, it is vital to have an exit or succession plan. At some point you will either retire, or sell your share of the practice. To ensure you can hit your target exit date and cash out with an excellent valuation, a strategic approach is required.
As with all business exits there is always the possibility of bumps in the road. Too often, exit plans do not eventuate as intended. In this article, we explore the risks to a financially successful exit and four core considerations to start thinking about now to help you reach your exit planning goals.
Risks to your Exit or Succession plan
There are a number of risks to a successful exit plan. They include but are not limited to these issues:
- Illness or diminished capacity
- Decreased practice valuation
- Unforeseen practice liabilities
To effectively strategise your exit and ensure it can eventuate in the time frame intended, we wish to draw your attention to the key considerations many practice owners do not think about until they are too close to the point of exit.
Consideration 1: What could happen between now and your planned exit?
Do you currently have documented and legally binding guidelines to follow if:
- You or a business partner was to get sick and unable to fulfill their obligations?
- You or a business partner was to die?
- You or a business partner were impacted by a mental health issue?
- You or a business partner were to go through a divorce (or de facto relationship breakdown)?
What would happen in the event any of these issues were to arise between now and your exit? How could this impact on the businesses current operations, profitability and valuation?
It is not uncommon for a marriage breakdown to cause significant issues within a practice as the affected person or people go through this significant life event. If you do not have a formal agreement that details the processes to follow in the event someone is unable to continue to work in the practice or needs to sell their share in the practice to pay out a divorce settlement, this can significantly impact the business, including each of the owners. As people go through the process of divorce, business development or expansion plans for the practice may need to be put on hold.
Similarly, what would happen if one owner in your practice were to face a mental health issue, disability or illness that meant they could not fulfill their obligations as an owner? Most owners will want assurance that not just anyone can be sold a share of the practice. Therefore, comprehensive detailed steps and processes should be established between practice owners in a Partnership or Shareholder Agreement to ensure there are control measures in place, in situations where there might otherwise be no control.
The Agreement should also specify how decisions are made to help reduce the risk of disputes (e.g. whether majority, special or unanimous approval is required). It should also include mechanisms for how disputes are to be managed. Generally these agreements also include restrictions on the transfer of shares or units (pre-emption rights), which can prevent ownership being transferred to an undesired third-party.
Consideration 2: Is your current structure suitable for your plan?
The business structure you have in place currently may not be beneficial to realise your exit goals.
Effective succession planning may require a change in business structure. It may be beneficial for you to move from your current structure to a company structure, unit trust, hybrid trust or other partnership structure in the future to mitigate risk and maintain, or increase, the valuation of your practice.
In our work and in collaboration with accountants, we often see that when a unit trust or a company structure is used, succession can be far easier, as doctors buy in and sell out of practices. However, ultimately, it is your accountant that will provide you with advice and guidance as to which structure you and your business partners should consider.
Consideration 3: A smooth transition to sale
While the idea of a practice's valuation decreasing might seem unlikely, be warned that there are a number of ways in which practices can lose market share or their profitability can be severely impacted.
In previous articles, we have explored unforeseen financially crippling payroll and legal issues that practices have found themselves facing. We also highlighted the legal and financial consequences that have arisen for practices that, despite their best intentions, as a result of hiring doctors as independent contractors, have been found to be in breach of the Fair Work Act or the Corporations Act, resulting in significant fines and/or a requirement to back pay superannuation and other costs.
The financial implications for a practice, and the fallout that can occur as a result, both internally and publicly, is often significant. It is not uncommon for avoidable issues like these to cause fractures between business partners, impacting owners personally and having an effect on patient retention, particularly where these issues have appeared in local media.
As part of the transition towards an exit and to ensure that a practice's value can be maintained, risk must be mitigated. This is hard to identify which is why it is important to engage an advisor to review your risk with regularity.
For our clients, amongst other mitigation activities, it routinely involves reviewing all existing employee and contractor agreements to ensure consequences like those detailed above do not need to be managed.
While this is only one way in which a practice's valuation could be negatively impacted, risk mitigation reviews and strategic exit planning go hand in hand and result in better financial outcomes overall.
Consideration 4: Planning now for an optimal future valuation
To maximise the valuation of your practice in time for your intended exit date, you must first be aware of the current valuation so you know what is to be maintained (at the very least) and whether you are happy for that to be the valuation when you exit. Knowing the current valuation is also important for borrowing capacity, wealth planning and investment decisions.
Once you know your current valuation and if you want to take action to help it reach a specific figure, you will need to engage an advisor to devise a strategy to help you get there.
If there are a number of owners in your practice, any strategy will need to be made in consultation with them, which can take time. Not everyone in business together has the same goals, or the same sense of urgency to discover opportunities and put plans into action. For this reason, it is imperative you commence discussions with your partners and an advisor that has a deep understanding of the obligations and requirements specific to medical practices, as early as you can.
Whether you intend to sell a share of your practice, or sell the practice as a whole to a corporation, there are many elements they will consider. While we have explored these elements with depth in another article - How to sell a medical practice: Key steps to prepare for a successful sale - essentially, there are a number of key components that buyers look at that either add value or reduce it. By creating a plan to progressively tick these key elements off over time, there is genuine potential for a practice's valuation to be truly optimal and attract not just one, but a number of interested buyers.
The early bird catches the worm!
Proper preparation to exit your medical practice is vital. As with most things in this world, the beginning is usually more exciting than the end. For example, we focus a lot of time and energy on the birth of a business but when do we stop to consider what happens at the end? An exit can be as complex and multi-faceted an endeavour as starting a practice.
It is important that your exit or succession plan is established early. This will allow you to negotiate on your own terms. Start having conversations now with your key advisors - your accountant, financial advisor and lawyers like us who specialise in working with medical practice owners.
While talking about death, disability, divorce or retirement may not be pleasant, these topics cannot be ignored and comprehensive exit planning is what protects the best interests of you and your family.
Life throws us all types of curve balls so while we want to ensure you can mitigate your risk on that front, we also want to ensure you have your eye on the prize now so you achieve a financially successful valuation and a smooth transition out of practice ownership. Meeting with us early about your plans to exit is not a commitment to proceed. Instead, early discussions provide clarity about what needs to be considered specific to your circumstances to ensure you can experience your financially successful exit, without any delay to your timeline.