Jerry Kelsheimer May 22, 2023 7:11:09 PM 6 min read

External Factors Affecting Practice Valuations

Are you leading an independent practice and considering your options and alternatives for ownership transition? If so, you should be aware of the external factors which might affect your valuation. Although there are many, below we talk about three areas that are crucial to understand.    

1. The relevance of interest rates and lender appetite to a financial buyer’s modeling. 

Yes, private equity firms still have liquidity. They are active and aggressively looking to put their capital to work. In many – if not most – scenarios, PE remains the most aggressive check-writer in the market.  This stated, sellers must recognize that PE buyers are motivated by their ability to satisfy fund investors (physicians included) with adequate return for capital put at risk. Leverage, or borrowing, has always been a contributing factor to the return calculation. Simple math tells us that the more debt in transactions relative to capital contributed, the higher potential return on that invested capital.  Likewise, the lower the cost of borrowed capital, the higher the return. As rates increase and lenders tighten credit parameters, it is logical to expect that valuation multiples may be negatively affected.

2. The tempered appetite of hospital system buyers.

The hospital system business model is challenged, if not permanently compromised. For system entities with leverage, the focus on liquidity levels, capital structure, and public debt ratings has perhaps never been greater. With a premium placed on liquidity and capital, both are being protected, or even restricted. Historical views on distribution models are being questioned and highly scrutinized. The days of hospital systems executing haphazard and incidental practice acquisition strategies may actually have come to a permanent end. Given pressures on margins, capital, and liquidity, systems are more likely than ever to limit appetite for acquisition, and practice M&A may be limited to responsibly-priced capacity fill-ins and strategically-placed defensive buys.    

3. The increasing supply of practices on the market.

Demographic data points do not lie. Independent practice leaders and providers are aging. Baby boomer physicians are increasingly looking to exit their practices and move on to next chapter. As such, more and more practices will be forced to decide between structured internal succession planning or sale.  We’ve seen that incoming generations of physicians have less appetite for entrepreneurial risk than those who preceded them. They are also more inclined to protect both personal balance sheets and life balance. This means that more and more seasoned practice leaders are looking for exit strategies that extend beyond sale to younger practitioners within their groups, thus increasing the supply of practices on the market. 

Given the points above and a broad range of other external factors, downward pressure on independent practice valuations is likely to persist. This doesn’t mean that independent practice leaders don’t have choices. Nor does it mean that they can’t or shouldn’t pursue the sale of their practices. What it does mean is that owners must be incredibly thoughtful, prepared, and strategic if taking their practice to market in the current environment.  

If you are struggling to figure out how to best monetize the years of investment in your independent physician practice, we’d welcome the opportunity to assist you. Determining how to realize the value in your practice may very well be the most important professional choice you’ve made since deciding to go into medicine in the first place, and you don’t have to navigate it alone. Reach out to Holly Bristoll at hbristoll@medicmgt.com or Jerry Kelsheimer at jkelsheimer@medicmgmt.com if you’d like to discuss the options available to you as you plan for a personally rewarding and enjoyable post-practice future!

 

Jerry L. Kelsheimer is President of Medic Management Group and MMG Healthcare Solutions.  His background includes extensive work in areas including leadership development, strategic planning, process improvement, and capital markets / financial management.  MMG is a national provider of advisory and consulting competencies, transaction support services, and back office administrative support to independent and system owned physician practice groups.