The “Amazon effect” is finally being felt in health care. With this phenomenon, more emphasis is placed on data, which means more money on technology and systems, and bigger investments in infrastructure. Not every practice will have the resources to manage this seismic disruption, and those that fail to keep up may find themselves at a competitve disadvantage. More than 500 hospitals have merged into larger health systems in the past 10 years. In the last six years, $100 billion has been spent on hospital consolidation. Thinking about a sale or strategic partnership? Below are 10 factors to consider:
When structuring a transaction, maximizing tax efficiency while meeting the legal and tax structuring requirements of the buyer/investor is paramount. Normally, the purchase price is paid at closing and, if structured properly, the majority of proceeds can potentially be treated as long-term capital gains which are taxed lower than ordinary income. This is especially important in states with higher state and local taxes, which are capped at $10,000.
Are accounts receivable factored into the valuation? Does the buyer or seller get the accounts receivable and other working capital assets and liabilities? There are sizeable tax ramifications as it relates to accounts receivable.
Method of accounting
Method of accounting can make a difference in how earnings are calculated, impacting the valuation. Consider revenue timing and capital expenditures, especially since cash basis accounting is prevelant in the industry.
How much is your practice worth? The payment received is generally reflective of expected earnings over time. That figure is then given a multiple — x times earnings — to arrive at a practice value. Several factors make up that multiple: type/scope of practice, rate of revenue/ industry growth, and needs of the investor. Deals may be structured with incentives and milestones (earn-outs) included.
Payment received may come in many forms such as: cash, rollover stock, ongoing profit participation and earnouts. As a deal may include a mix of all of the above, it is important to consider how these factors change the value of the transaction and what income is guaranteed and what income and potential tax liability is deferred.
Sharing the proceeds from the sale
In some practices there may be non-owners that have been instrumental in the success of the practice or that have been with you for many years that you want to reward in the event of a sale. The terms of these types of arrangements should be agreed upon up front as part of the negotiations with the investor/buyer.
Do you own any real estate? Will the real estate be included in the transaction?
How do you make sure you are making the most of post-closing value? Does the buyer have plans to invest in the practice? Is there potential to increase revenues through investment in ancillaries or with add-ons and new office openings?
Potential tail insurance costs need to be taken into consideration, this often requires a conversion from a claims-made policy to an occurrence policy. Both parties need to agree upon who will bear the cost of the insurance policy.
Sellers need to be aware of clinical and practice leadership responsibilities that may be required after the deal is closed.
You're Invited! Annual Not-For-Profit Accounting Update
Thursday, September 26, 2019
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Wednesday, October 23
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