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PHYSICIAN
RETIREMENT

Pricing pital’s appraiser values the “hard” assets and possibly the value of a re-
There is no formula that will define your selling price. Gone are the duction in physician compensation, but there is no value attached to
per chart or multiple of revenue models. The best predictor of price is the goodwill of the practice—the recurring net revenue associated
EBITDA. This number shows the income that the practice can pro- with it. Other non-physician buyers do not have the Stark Law con-
duce. In large part, this cash flow is the “goodwill” of the practice, cerns of a hospital system.
meaning it represents the reliable income stream associated with the
Payment Terms
practice as a business. From this amount, a buyer can subtract the cost
to replace you and possibly the cost to convert to electronic records, Of course, you would like to receive the purchase in a lump sum at
which gives a net EBITDA. The net EBITDA will represent the re- closing. On the other hand, the buyer will want to temper the risk as-
turn on the buyer’s investment. If your practice produces $100,000 net sociated with the possible future loss of recurring revenue by paying
EBITDA annually, asking a purchase price of $1 million, means the the purchase price in installments over three to five years. The deferred
buyer must wait five years before showing a return on its investment, payments may also be contingent on the practice sustaining a level of
ignoring possible economies of scale the buyer can add to the practice. annual revenue to earn the deferred payment, i.e., a milestone.

Beware of hospital system buyers Management Companies
Unless your practice is in high demand, the hospital buyer will often Management companies offer more complex payment terms de-
offer the least amount for your practice. This shortfall is attributable signed to leverage the purchase price and to tie the practice to the man-
to their penchant to hide behind the Stark Law and erroneously con- agement company. In this purchase arrangement, a portion of the
clude the hospital cannot offer a payment for your practice’s goodwill. purchase price, twenty percent is not uncommon, is reinvested into
It is true that the hospital cannot legally offer a purchase price based shares of the management company. The reinvestment leverages the
on your prior referrals to the hospital, but it is entirely legal to pay for purchase price since it is not paid and the risk of eventually monetizing
the goodwill of your practice, as explained above, the recurring net the investment is deferred. These offers can be facially attractive with
EBITDA. Unfortunately, a history of sales to hospitals shows the hos- the promise of a potential IPO, but the details of the agreements gov-

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