Although the census of private practices has contracted, practice buyers – including physicians, medical groups and private equity groups – are driving continued deal activity in this space. These are players in existing markets or entrants into new markets who are seeking improved position and negotiating power. Here’s what you need to know if you are considering a purchase or a sale:

The market’s impact on practice value

A misperception of health reform is that it has contributed to declining practice values across the board. It has actually served to rebalance practice values based on the perceived risk and reward for different specialties. Specialties that are historically prone to overutilization and may be susceptible to future reimbursement risk have experienced some declines in value. Conversely, specialties that are primary- and preventive-care oriented and are key components to future care delivery models have experienced increases in value. Primary care and outpatient acute care clinics are examples of areas that have seen an uptick in activity. At any given time the practice market is determined by the activities of potential buyers and their forward-looking determination of economic return. When practice buyers see pockets of opportunity they will invest their dollars accordingly.

Payment for goodwill and intangibles

A difficulty in understanding the market is the debate regarding payment for goodwill and other intangibles. Goodwill and intangibles do have value but their monetization in a deal will depend on the acquiring entity and deal structure offered. Hospital deals generally do not involve payment for intangibles. This is not to say that a payment for intangibles constitutes a commercially unreasonable arrangement, but rather payment is avoided as not to draw regulatory scrutiny. This is in contrast to deals involving buyers like physicians, medical groups and private equity groups where intangibles are commonly considered in the purchase price. Practice sellers may not understand this when bringing their clinics to market.

Intangible value is generally present when there is an economic earnings stream that constitutes a return on equity. For a physician-owned and -operated practice, one must adjust for the fair market compensation in order to arrive at an equity cashflow. However, the marketability of the resulting intangibles will depend on the degree to which they are tied to the enterprise goodwill of the clinic or to the personal goodwill of the providers. Both components of goodwill can be transferred in a properly structured deal but this is dependent on the terms of the transition assistance. Well-executed transition assistance is critical in today’s market where retention of important payer contracts, patients and staff depends on the willingness of the buyer and seller to cooperate closely with one another. Goodwill and other intangibles are frequently the most valuable assets in medical practices.

Optimizing the deal

There are a myriad of potential deal-related complexities that require a practice seller to tread carefully. It is important to focus less on price alone and more on the totality of a deal. It is easy to get fixated on a particular dollar amount instead of the broader implications of a potential transaction. There is a saying in the deal-making business: “You name the price; I’ll name the terms.” This means that the price of an asset does not necessarily reflect the full realizable value of that asset in a transaction or the true assumption of risk to achieve that value.

For instance, a $5 million selling price with 100 percent cash down has different implications than 50 percent cash and 50 percent taken in a seller carryback. What are the terms and risk of that carryback? What if the selling price is now $8 million with 35 percent cash, 55 percent carryback and 10 percent equity in the new group? The difficulty is comparing multiple prices with different terms and assessing their relative financial risk. Deal terms have the potential to change the entire value proposition altogether, to where the ultimate price may give little indication of the potential outcome.

Though the health services market is shifting constantly, there will be ample opportunity for market participants who are positioned correctly and can capitalize on change. Part of this involves understanding the true marketplace risks and rewards and not being driven by fear and uncertainty. It is possible to negotiate an optimal deal in any market with the proper information and guidance.