Should you sell your dermatology practice?

 

There are about 16 existing dermatology groups, with about 700 dermatologists employed, backed by private equity money, that are eager to buy dermatology practices. They figure the market is highly fragmented, and they can bring efficiency and savings to make a profit. This is a highly complex topic, so bear with me; this may take a few columns. Entrepreneurial dermatologists initially set these groups up for practical reasons, such as bargaining power and cost efficiencies. Now, with low-cost money (look at interest rates) flooding the equity markets, large firms are looking to make a better, safe return on their money by buying these groups, and commoditizing them.

So who may this be a good deal for? Older physicians, say 5 years from retirement, may be able to capitalize on the value – usually calculated by EBITDA (a company’s earnings before interest, tax, depreciation, and amortization) – and sell their practices over time. EBITDA is a rough estimate of a practice’s profitability. Recall that a few years ago, some dermatologists were simply begging to find a buyer to get out or shuttering their offices and walking away into retirement.

One of the biggest advantages is receiving a lump sum payment for most of the practice (usually five to seven times greater than EBITDA), which is treated as a capital gain for tax purposes. That means a 20% tax rate instead of 39.6%. Typically, sellers receive 60% of the five to seven times EBITDA value upfront, and the remaining 40% is the equity stake in the group. This stake may be worth more down the road if the practice is repurchased by a larger fish, as usually occurs.

Younger physicians usually have less to gain, since they may not have an equity stake in the practice being sold. Even the ones who do will be employed physicians for a longer time. Employees may have the opportunity to buy or bonus into an equity position later.

The buyout money is not a gift, and you will pay most of it back over the typical 5 years or more of minimum employment time specified in the sell contract. The equity firms estimate your salary at 40%, the overhead at 40%, and their profit at 20%.

What are the obvious disadvantages? You will not make as much in salary as you did before (recall that 20% profit above), you become an employee, and you lose control and flexibility. You must work as many days on average as you did in the 3-year period before your buyout, and you do not get to manage your employees as before. They will be managed by the buying company’s human resources department, which may make some things better.

You may have new employees assigned to you that you normally would not, and it is important in your negotiations that you spell out what kind and how many employees you are willing to supervise.

You will be strongly encouraged to send your pathology and Mohs cases to other members of the group, if available. You must justify major purchases (such as new lasers). The group will buy your existing equipment, hopefully for fair market value.

So is selling your practice a good deal for you? Obviously, it depends on many variables, which we will discuss further in future columns.

Dr. Coldiron is in private practice but maintains a clinical assistant professorship at the University of Cincinnati. He cares for patients, teaches medical students and residents, and has several active clinical research projects. Dr. Coldiron is the author of more than 80 scientific letters, papers, and several book chapters, and he speaks frequently on a variety of topics. He is a past president of the American Academy of Dermatology. Write to him at dermnews@frontlinemedcom.com.

 

There are about 16 existing dermatology groups, with about 700 dermatologists employed, backed by private equity money, that are eager to buy dermatology practices. They figure the market is highly fragmented, and they can bring efficiency and savings to make a profit. This is a highly complex topic, so bear with me; this may take a few columns. Entrepreneurial dermatologists initially set these groups up for practical reasons, such as bargaining power and cost efficiencies. Now, with low-cost money (look at interest rates) flooding the equity markets, large firms are looking to make a better, safe return on their money by buying these groups, and commoditizing them.

So who may this be a good deal for? Older physicians, say 5 years from retirement, may be able to capitalize on the value – usually calculated by EBITDA (a company’s earnings before interest, tax, depreciation, and amortization) – and sell their practices over time. EBITDA is a rough estimate of a practice’s profitability. Recall that a few years ago, some dermatologists were simply begging to find a buyer to get out or shuttering their offices and walking away into retirement.

One of the biggest advantages is receiving a lump sum payment for most of the practice (usually five to seven times greater than EBITDA), which is treated as a capital gain for tax purposes. That means a 20% tax rate instead of 39.6%. Typically, sellers receive 60% of the five to seven times EBITDA value upfront, and the remaining 40% is the equity stake in the group. This stake may be worth more down the road if the practice is repurchased by a larger fish, as usually occurs.

Younger physicians usually have less to gain, since they may not have an equity stake in the practice being sold. Even the ones who do will be employed physicians for a longer time. Employees may have the opportunity to buy or bonus into an equity position later.

The buyout money is not a gift, and you will pay most of it back over the typical 5 years or more of minimum employment time specified in the sell contract. The equity firms estimate your salary at 40%, the overhead at 40%, and their profit at 20%.

What are the obvious disadvantages? You will not make as much in salary as you did before (recall that 20% profit above), you become an employee, and you lose control and flexibility. You must work as many days on average as you did in the 3-year period before your buyout, and you do not get to manage your employees as before. They will be managed by the buying company’s human resources department, which may make some things better.

You may have new employees assigned to you that you normally would not, and it is important in your negotiations that you spell out what kind and how many employees you are willing to supervise.

You will be strongly encouraged to send your pathology and Mohs cases to other members of the group, if available. You must justify major purchases (such as new lasers). The group will buy your existing equipment, hopefully for fair market value.

So is selling your practice a good deal for you? Obviously, it depends on many variables, which we will discuss further in future columns.

Dr. Coldiron is in private practice but maintains a clinical assistant professorship at the University of Cincinnati. He cares for patients, teaches medical students and residents, and has several active clinical research projects. Dr. Coldiron is the author of more than 80 scientific letters, papers, and several book chapters, and he speaks frequently on a variety of topics. He is a past president of the American Academy of Dermatology. Write to him at dermnews@frontlinemedcom.com.

 

There are about 16 existing dermatology groups, with about 700 dermatologists employed, backed by private equity money, that are eager to buy dermatology practices. They figure the market is highly fragmented, and they can bring efficiency and savings to make a profit. This is a highly complex topic, so bear with me; this may take a few columns. Entrepreneurial dermatologists initially set these groups up for practical reasons, such as bargaining power and cost efficiencies. Now, with low-cost money (look at interest rates) flooding the equity markets, large firms are looking to make a better, safe return on their money by buying these groups, and commoditizing them.

So who may this be a good deal for? Older physicians, say 5 years from retirement, may be able to capitalize on the value – usually calculated by EBITDA (a company’s earnings before interest, tax, depreciation, and amortization) – and sell their practices over time. EBITDA is a rough estimate of a practice’s profitability. Recall that a few years ago, some dermatologists were simply begging to find a buyer to get out or shuttering their offices and walking away into retirement.

One of the biggest advantages is receiving a lump sum payment for most of the practice (usually five to seven times greater than EBITDA), which is treated as a capital gain for tax purposes. That means a 20% tax rate instead of 39.6%. Typically, sellers receive 60% of the five to seven times EBITDA value upfront, and the remaining 40% is the equity stake in the group. This stake may be worth more down the road if the practice is repurchased by a larger fish, as usually occurs.

Younger physicians usually have less to gain, since they may not have an equity stake in the practice being sold. Even the ones who do will be employed physicians for a longer time. Employees may have the opportunity to buy or bonus into an equity position later.

The buyout money is not a gift, and you will pay most of it back over the typical 5 years or more of minimum employment time specified in the sell contract. The equity firms estimate your salary at 40%, the overhead at 40%, and their profit at 20%.

What are the obvious disadvantages? You will not make as much in salary as you did before (recall that 20% profit above), you become an employee, and you lose control and flexibility. You must work as many days on average as you did in the 3-year period before your buyout, and you do not get to manage your employees as before. They will be managed by the buying company’s human resources department, which may make some things better.

You may have new employees assigned to you that you normally would not, and it is important in your negotiations that you spell out what kind and how many employees you are willing to supervise.

You will be strongly encouraged to send your pathology and Mohs cases to other members of the group, if available. You must justify major purchases (such as new lasers). The group will buy your existing equipment, hopefully for fair market value.

So is selling your practice a good deal for you? Obviously, it depends on many variables, which we will discuss further in future columns.

Dr. Coldiron is in private practice but maintains a clinical assistant professorship at the University of Cincinnati. He cares for patients, teaches medical students and residents, and has several active clinical research projects. Dr. Coldiron is the author of more than 80 scientific letters, papers, and several book chapters, and he speaks frequently on a variety of topics. He is a past president of the American Academy of Dermatology. Write to him at dermnews@frontlinemedcom.com.