Thinking of Selling Your Practice? Read This First.
There’s a growing wave of regional networks buying up independent rehab practices. Today’s blog discusses the “good” and the “not good at all” of these transactions.
How Practice Value is Determined
Your practice’s value is calculated by multiplying EBITDA by 3-8 times.
- EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization
- The multiple is based on the quality and consistency of your practice as well as on potential
- Increasing patient referrals, increasing earnings, stable and experienced management, and potential for growth are all factors that will earn higher multiples
The practice is stable, but not fantastic. Beth, the practice owner, enjoys 5% EBITDA earnings ($50,000) on $1,000,000 of annual revenue. Beth worries about changes in healthcare, declining payments per visit, and increasing costs. She worries what would happen to patient referrals if the local doctors team up and launch their own rehab center.
Beth decides that selling is a good idea. She can keep her job, keep her salary, and let someone else deal with all the worries. And with the offer of 6 times EBITDA, she can put $300,000 in her pocket.
Thus, Beth sells the practice.
The new owner, A1 Rehab Network, takes over billing and collections, payroll, benefits, insurance, and accounts payable. They contact Beth and tell her that, because these administrative tasks have been outsourced, Beth needs to downsize by two administrative employees. In what are the first layoffs of her career, Beth terminates the biller and the assistant office manager, both of whom helped build her practice over the last 12 years.
Then comes another call from A1 Rehab: “Your therapists are treating an average of 9 patients per day. You need to be treating 11.2 patients per day per full-time equivalent (FTE). As such, you need to cut back 1.2 FTE therapists.” This is unacceptable to Beth and she tells them “This is a deal-breaker!” The new owner explains, “Cut 1.2 FTE therapists immediately, or you will be one of them.”
Beth then finds herself trapped. Her therapists are now treating a 25% larger caseload. Everyone is frustrated and angry. Because A1 Rehab required non-compete agreements prior to the sale, therapists have no options of leaving unless they move to another state.
Why Does This Happen?
A1 Rehab acquired Beth’s practice for one reason: To make money. Lots of money. By lowering administrative costs as well as reducing therapist headcount, A1 Rehab increased EBITDA from $50,000 annually to $265,000.
Translation: The practice that A1 Rehab paid Beth $300,000 for, is now worth $265,000 * 8 =$ 2,120,000. Yes, 2.1 million dollars. An astounding 700% return on investment in one year, derived from Beth (and her staff’s) ramped-up labor, toil, and frustration.
Analyzing What Happened
Let’s pull back to the 10,000-foot level and look at what happened to Beth. The new owner forced tough (some would say ruthless) changes on Beth’s practice. The culture of her practice changed from “close-knit family” to “what have you done for me ” job. Yes, Beth has a job, but her quality of life has deteriorated (more documentation homework) and her frustration and stress levels have skyrocketed. Beth realizes that this is her “new normal.”
A Better Solution
When considering selling your practice, you must realize the following:
- The buyer’s sole motivation is to increase practice earnings
- The buyer will be impersonal and ruthless in doing so, and
- You’ll be working harder than you want to and someone else will be making millions of dollars from your sweat
It’s vital that you understand that:
If you sell your practice, the new owner is going to squeeze efficiencies.
You will work harder and
The new owner will enjoy the reward
With this mindset, an entirely new set of options are available to you. Rather than lose control of the culture of your practice, rather than betraying the employees who helped build your life’s work, instead, make your own plan to improve efficiencies.
DON’T spend $20,000 on a consultant who will give you the same pre-made success formula that they give everyone else. Keep it simple. Start with a goal. Perhaps something like: “I want my practice to be worth $1,000,000.”
You don’t start with “what will I do?” Your plan should start with “What is my goal? Where do I want to end up?”
Applying This to Your Practice:
Systems 4PT will:
- Lower your documentation time by 50%
- Increase collections an average of 9%
- Provide a business model that yields 10% to 15% pretax profit
Practices who bill and collect using Systems 4PT need 20% less billing labor hours because of Systems 4PT’s efficiencies.
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