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The Rules of the Game by Jay Geier

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Categories: Practice Management, HR and Accounting; Practice Transitions;
The Rules of the Game 

Part 2 of 2

by Jay Geier

Last month, I described the three types of independent practice owners: Working doctors, doctors who just want out, and business owners growing business value. No matter how many years you’ve been in business or how long before you might want to sell, you should always be working to increase business value. That puts you in a position to make the choice that’s right for you at the right time (i.e., either keep it for a lifetime of revenue or sell it for top dollar.)

The type of practice owner you are today dictates the game you are in and the rules being used by others trying to win at your expense. I’ll start with one rule used with great success against independent practice owners in recent years.

 Rule #1: Know the value of your practice.

Despite our constant coaching on this subject, it astonishes me how few practice owners have their businesses professionally appraised. It’s your single largest asset, your life’s work and your ongoing means of income, yet you don’t know what it’s worth. This lack of knowledge is the No. 1 weapon being used against you, especially if you are a doctor who just wants out.

Dental service organizations and other private equity companies have been able to buy scads of independent practices for pennies on the dollar because only they assessed the value of those practices. That’s why they want them. They want the equity that already exists in those businesses and the opportunity to grow them profitably for resale down the road. They want to do so not by attracting new patients and investing to improve the patient experience, mind you, but by cutting costs to the bone.

I’m highly critical of this trend, but at the same time, I have to appreciate the cunning business plan to maximize return on investment. Private equity companies prey on practice owners who haven’t bothered to find out the value of their business and are therefore willing to sell for whatever the buyer says it’s worth. Would you ever sell a house that way? An expensive vehicle? Anything of value to you? So why would you allow the buyer to set the price of your biggest asset, by far?

Almost as bad is getting a free or bargain-basement appraisal or one that’s done rather informally. Don’t bother. Shell out a few bucks and get it done right so you end up with a thorough and formal document that you can, literally, take to the bank. It also allows you to make informed decisions.

Chances are, you will be thrilled with the outcome, which will give you a renewed sense of appreciation and enthusiasm for your practice. And if you decide to go ahead and sell, you can confidently be the one selling, versus feeling later that you allowed it to be bought out from under you.

 Rule #2: Increase value by preparing the business for sale.

The second rule of the game against practice owners involves how unprepared their businesses are for sale. Even with a professional appraisal, if the business aspects aren’t up to standard, they’ll cost you at the negotiating table. And never underestimate the expertise of those across the table from you; they’re way better than you are at negotiating deals in their favor.

The third type of practice owner (the one who has stepped into the CEO role and is running the practice like a business focused on growing business value) begins to prepare for a sale well in advance. They follow an actual checklist, which lets them know what they need to be doing, and when they can exit most profitably. For example:
  • Have a professional appraisal done, based on a five-year history and a written five-year plan.
  • Calculate how much original capital you put in, excluding loans, then calculate the return on your capital (which is all the money you’ve taken out throughout your lifetime). You will realize it’s the best investment you ever made, right up there with the investment to earn your dental degree.
  • Set a timeline for when you want to sell.
  • Have an income replacement plan.
  • Calculate your personal net worth (assets minus liabilities).
  • Get all your business documentation in order:
    • A clean set of books
    • Up-to-date minutes of the legal entity you created when you first incorporated the business
    • Stock valuation (most people completely forget about the shares of stock that had to be established when incorporating the business).
The vast majority of sellers of businesses of all types are not ready. They sell because of personal crisis, debt, being overleveraged, etc. Consequently, the business hasn’t been prepared for sale, and the price reflects that.

Savvy buyers will do their due diligence, so you need to do yours, beginning well in advance. Decide what you need and want to sell the business for, then set about driving it to that price. The alternative is putting it up for sale and just getting what you can for it. As disappointing as that may be at the time, not getting what you need to, based on thoughtful forward-focused analysis, can later prove devastating to the long-term financial well-being of you and your family.

Rule #3: Increase value by being a category of one.

In contrast to the first two rules that are being used against practice owners, you should use this one against others who want you to lose at their game. Become a “category of one” as your best competitive advantage. That entails intentionally creating a high-performing, patient-centric, growth-oriented culture; training and developing your team to deliver a superior patient experience; retaining and recruiting top talent that shares your vision and goals; and becoming known for giving back to your community.

When you’re a category of one, your patients will love you and be quick to refer others, your people will love working there and you will enjoy going to your own office. Everything and everyone will be firing on all cylinders, and your bottom line will reflect that. Once you’re coming from that position of strength, the conversation will be very different when you’re contacted by someone trying to lure you into selling your practice. Instead of being suckered by money, you’ll want to know what they bring to the table that will benefit your patients and your people. They won’t be able to bait you with promises of handling “all those things you hate to do,” such as working with the staff, because of how much you value your team and how seriously you take your leadership role. The conversation will be very short because they will realize how much the practice is worth to you, regardless of whether you’ve ever had it appraised.

 Growth is invaluable

Almost every doctor thinks they will sell their practice at some point. Some ultimately end up keeping the business as a source of lifetime income after they retire, but many prefer to sell. In either case and regardless of your timeline, you should be working throughout the life of the practice to increase the value of the business by growing with new patients, increasing the value of your human capital through training and development, and making every decision with the patient experience in mind.

Skip the first level?

Don’t worry, it’s not game over for you. Click here to read part one, “What Game Are You Playing?”



Author Bio
Author Jay Geier is a world-renowned authority on growing independent practices. His passion is in turning practices into businesses, doctors into CEOs, and employees into high-performing individuals and teams. He is the founder and CEO of Scheduling Institute, a firm that specializes in training and development, and coaching doctors how to transform a private practice into a thriving business that they can keep for a lifetime of revenue or sell for maximum profit. The phenomenal growth of Scheduling Institute is a result of Jay practicing what he preaches and helping those around him live up to their full potential. To hear more from Geier, subscribe to his Private Practice Playbook podcast at podcastfordoctors.com/townie.

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