How to Maximize the Value of Your Practice

As the owner of a physician practice, it’s critical that you understand how to maximize the value of your business while still providing high levels of patient care.

After all, your practice is likely your most valuable asset. Working to maximize its value sets you up for success if you’re planning to sell or merge your practice in the future. It also provides important insights into the overall financial health of your business.

This guide provides actionable strategies to help you increase your practice’s value, ensuring you get the best possible return on your years of hard work when it comes time to sell your practice.

Basic Valuation Methods

Either separately or in combination, three main approaches are typically used to value medical practices:

• Market-based approach: Compares your practice to comparable businesses that have recently sold.
• Income-based approach: Calculates the present value of expected future cash flows.
• Asset-based approach: Tallies up the value of all tangible and intangible assets.

Each method has its advantages and limitations. For a more detailed explanation of these valuation methods, check out “How Much is Your Medical Practice Worth? A Guide to Valuation Methods.”

Long-Term Planning: The Five-Year Rule

The key to maximizing your practice’s value ahead of a potential exit is to start planning early. Improving its value takes time, and you’ll want to have two or three years of strong financial performance before you start talking to potential buyers.

Ideally, you should begin preparing at least five years before a potential sale. Breaking those five years down further:

1. Years 1-2: Focus on optimizing revenue and minimizing expenses. This period is crucial for implementing changes that will significantly impact your practice’s value.
2. Years 3-5: Maintain improved performance to demonstrate consistent growth. Buyers want to see a track record of sustained success.

This long-term approach allows you to make incremental improvements that can significantly enhance your practice’s value over time. It also gives you the opportunity to address any issues that might negatively impact your valuation.

Key Strategies to Maximize Practice Value

Maximizing your practice’s value requires a comprehensive approach that addresses multiple aspects of your business. These strategies focus on improving financial performance, operational efficiency and market position. Implementing them can significantly enhance your practice’s worth, whether you’re planning for a future sale or aiming to improve your financial health.

1. Optimize Revenue Cycle Management

Efficient revenue cycle management is crucial for maximizing your practice’s profitability. To improve your revenue cycle management, there are several steps that you can take:

• Perform a walkthrough of your revenue cycle process, from scheduling through collection of the last dollar earned, to identify opportunities for improvement
• Streamline billing processes to reduce errors and delays
• Implement strategies to reduce claim denials
• Ensure timely collections to improve cash flow
• Consider implementing advanced revenue cycle management software to automate these processes

Additionally, clean up your financials by ensuring your statements are accurate, up to date and professionally prepared. Having them reviewed or audited by a CPA can instill confidence in potential buyers and may lead to a higher valuation.

One group practice that the James Moore Revenue Cycle Management team worked with saw a 900% increase in profits after an engagement — a game-changing result for the value of the practice. This level of improvement in profit can occur because every incremental dollar collected in the revenue cycle goes straight to the bottom line.

2. Control Costs

Reducing unnecessary expenses and improving cost efficiency can significantly enhance your practice’s profitability. Focus on:

• Conducting regular internal audits to identify areas for cost reduction
• Renegotiating supplier contracts
• Eliminating wasteful practices
• Investing strategically in up-to-date technology, including modern EHR systems and diagnostic equipment

Remember, the goal is to cut costs without compromising the quality of care. Strategic investments in technology can lead to long-term savings and increased practice value.

3. Enhance Operational Efficiency

Streamline your practice’s operations to achieve cost savings and improved patient satisfaction. Key areas to address include:

• Implementing improved electronic health records (EHR) technologies
• Adopting digital tools to automate routine tasks
• Optimizing patient scheduling and flow
• Documenting operational processes, including clinical protocols and administrative procedures
• Provide regular staff training to ensure that employees are working as efficiently as possible

Efficient operations can lead to better patient outcomes, enhancing your practice’s reputation and value. Well-documented processes demonstrate a well-run practice and show potential buyers that the practice can continue to run smoothly after acquisition.

4. Improve Patient Satisfaction and Diversify Your Base

A practice with high levels of patient satisfaction tends to be more attractive to potential buyers. Focus on providing excellent patient care, reducing wait times and improving the overall patient experience. Implement a system for regularly surveying patients and addressing their concerns.

Work on diversifying your patient base to reduce risk and increase value. Avoid over-reliance on a small number of referral sources or payers. A diverse patient base demonstrates stability and growth potential, which can significantly increase your practice’s value.

5. Secure Long-Term Agreements

Lock in long-term leases and contracts to provide stability and predictability for potential buyers. If you rent your practice’s building, consider signing a long-term lease agreement at favorable rates.

You may also consider securing long-term contracts with key staff members and agreements with your vendors.

6. Adjust for Discretionary Expenses

Remove or normalize personal expenses run through the practice to present a more accurate picture of financial health. Some example discretionary expenses to address include:

• Excessive travel for “continuing education”
• Luxury vehicles depreciated through the practice
• Above-market rent paid to a related entity

This process, often referred to as add-backs, can significantly increase your practice’s apparent profitability and, consequently, its value.

7. Understand and Optimize Your EBITDA

EBITDA (earnings before interest, taxes, depreciation, and amortization) is a crucial metric for practice valuation. However, it’s important to understand that EBITDA doesn’t necessarily reflect the true cash flow of your practice.

For a more thorough understanding of your practice’s overall health:

• Familiarize yourself with how EBITDA is calculated
• Understand the difference between EBITDA and actual cash flow
• Consider debt and capital expenditures when assessing your practice’s financial health

In healthcare practices, EBITDA can sometimes be misleading due to significant capital expenditures that aren’t reflected in this metric. Make sure to provide potential buyers with a clear picture of both EBITDA and actual cash flow to present a more accurate valuation of your practice.

8. Address Legal and Regulatory Issues

Resolve any outstanding legal or regulatory issues before performing a valuation. This includes ensuring compliance with all relevant healthcare laws and regulations. It’s important to make sure there aren’t any skeletons in your closet (save for anatomical models) before you start the process of selling your practice.

Conduct regular compliance audits and address any issues promptly. This proactive approach not only protects your practice but also demonstrates to potential buyers that you’ve maintained a well-run, compliant operation.

Additional Factors Affecting Practice Value

While the strategies outlined above form the foundation for maximizing your practice’s value, several other factors can significantly impact your valuation. Understanding and leveraging these factors can help you further enhance your practice’s worth:

Strategic Value

Sometimes a practice’s value extends beyond its financial metrics. Buyers may pay a premium if your practice offers strategic advantages such as:

• Entry into a new market
• Complementary services to their existing portfolio
• Strong reputation in a specialized field
• Potential for future growth or expansion

To capitalize on strategic value:

• Identify and highlight your practice’s unique strengths
• Consider how your practice might synergistically fit into a larger healthcare organization
• Develop and document growth strategies that a potential buyer could implement

Creating Value

In physician practices, value often needs to be “created” because doctors typically withdraw most of the income.

To create demonstrable value for your practice:

• Adjust compensation structures to show consistent profitability
• Implement strategies to improve efficiency and reduce costs
• Develop and document scalable processes
• Invest in technologies that can drive future growth

Real Estate Considerations

If your practice owns its real estate, this can add substantial value (though it’s often considered separately from the practice valuation).

To maximize the value of your medical practice:

• Consider signing a long-term lease agreement at market rate
• Evaluate whether to sell the real estate separately or include it in the practice sale
• Ensure the property is well-maintained and up-to-date
• Document any recent improvements or renovations

By considering these additional factors and taking proactive steps to address them, you can further enhance your practice’s attractiveness to potential buyers and maximize its overall value.

James Moore: Strategic Insights on Practice Health

Maximizing the value of your medical practice requires a strategic approach and careful planning. By focusing on revenue cycle management, cost control, operational efficiency, patient satisfaction and long-term planning, you can enhance your practice’s value and ensure a successful future.

Remember, the process of maximizing value should start well before you’re considering a sale. Implementing these strategies over time can significantly increase the worth of your practice, whether you’re planning to sell or simply want to improve its financial health.

Healthcare CPAs from James Moore understand the nuances of healthcare valuations, and can help you navigate this complex process. For strategic guidance on building your practice’s value, contact your advisor today.

 

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.