Buying a practice can be a complicated procedure, from finding the right one to working out all the details required for a smooth transfer of ownership.
Do you dream of owning your own practice?
While there is no such thing as the “perfect” practice, a practice broker knows the importance of finding one that fits your needs, talents, skills and lifestyle.
A practice broker has many different types of practices for you to consider and the knowledge and experience to walk you through the entire process.
Below you will find some helpful information as you consider whether buying a practice is right for you.
What to look for?
A practice with a long track record means there are good reasons to be operating. It will be well known in the area, and people in the area will be used to going to that practice. The longer it has been in operation, generally, the better the practice.
The financial records are a good indication of how well the practice has been doing over the years. Tax records are not designed to show the practice in the best light; no one likes to pay more taxes than they have to, and practice owners are no different. Generally, tax returns are a worst-case scenario. Your broker or advisers will help you look at the expenses and discover which ones are non-cash items, such as depreciation and business use of home and vehicles. How important was that business trip to Las Vegas? A professional practice broker has the knowledge and experience to point these items out to you.
Practice management reports tell the story of who has been producing in the practice, what procedures are being done and other statistical information. These are typically provided by the seller. An aging of the accounts receivable is also provided to find out how well the office manager or front desk is collecting the receivables.
The patient charts and x-rays are the third set of documents that are important to review. Most practices these days having charting within the practice management system. However, there are still paper charts out there. Going through charts and x-rays will show you a number of things about the practice and the doctor. These include how conservative or aggressive the doctor has been with patient treatment plans. If there are a lot of “watches” on patient charts. How well the doctor has provided detailed notes on the patients treatment and other items.
Keep in mind that these records are only past history. There are no guarantees that they will or can be duplicated or repeated. All of your profits are future. In the final analysis, the financial records of the practice are an indicator of what the practice has done; what you do with its future is up to you.
The bottom line
Being in business for yourself can be a daunting prospect. There are no guarantees. At some point, after all of your investigation is completed, you will still have to make that “leap of faith” that is necessary to proceed with the purchase of the practice.
You will have to work hard, perhaps even “tighten your belt” a little, and perform many different jobs to be successful in your own practice. But, if running your own show, making your own decisions, not having to worry about job security (remember, no one can fire you from your own practice), and just being on your own are important – then owning a practice is for you.
After taking this leap of faith, almost all practice owners will tell you that they would never go back to being an employee.
What should you look for when considering a practice to purchase?
Unfortunately, too many prospective buyers want to know how much a practice is collecting and what is the price of the practice.
What they should be asking is what is the cash flow of the practice and how much will I take home after debt service. If a practice is bringing in $400,000 in cash flow and you’ll be taking home $300,000 after debt service, the purchase price is a tertiary question.
Knowing the steps to buying a practice is important in order to make the transition smooth and to keep all parties happy during the process. Always keep in mind that you are not only buying the sellers’ practice. You are acquiring their legacy -something the seller has worked incredibly hard to build. They are leaving their staff and patients who have become a part of their family. It’s an emotional experience and the smoother you can make the transition, the more readily the seller will be to help you out and even give in on some negotiation items.
HERE ARE THE STEPS TO BUYING A PRACTICE THAT OVER THE YEARS HAVE BECOME THE MOST EFFICIENT AND PRACTICAL:
Get preliminary information on the practice. These items include the tax returns, profit and loss statements, practice management reports and other information. Getting these will give you a good preliminary view of the practice. There is no point in continuing the buying process if the amount of cash necessary to buy the practice is more than you are willing to invest. At this point, don’t worry about the full price. The cash flow of the practice and the potential to grow the practice are the two most important factors.
Also, the practice has to be able to meet your basic financial needs. You always expect a practice to improve under your ownership, but you have to be able to meet your living expenses as well as meet the debt service of the practice.
Visit the practice to see if you like the location and the looks of the practice itself – both inside and outside. This is a visual inspection. Pretend you are a potential patient. It’s not time yet to talk to the owner. You’re still making sure this is a viable practice for you, both financially as well as a good fit for what your goals and vision is for a practice.
If you like the practice so far, it’s time to get your questions answered. For example: What is the rent? How long is the lease? Who is the staff and what benefits do they get? Now is not the time to have the seller’s books and records completely checked. There will be plenty of time to do that and review other important issues during the due diligence phase. This is the time to get those questions answered that have a bearing on whether you may want to own and operate this particular practice.
If you now have your basic questions answered and you want to proceed with purchasing this practice, it is time to make an offer, subject, of course, to verification of all the information you have received. The offer is made with a document called a Letter of Intent. The main purpose in making an offer is to see if the seller will accept your terms, price, and structure of the sale itself. Remember, you will have the offer subject to your verification of the important information. It doesn’t make sense to employ outside advisors and go through the time and expense of due diligence unless you can come to financial terms with the seller.
At this point, you hopefully have arrived at a meeting of minds with the seller, and you are ready to begin removing the contingencies, performing what is commonly called due diligence.
Unless you are completely familiar with the practice, it is beneficial to include as part of the agreement that the seller will stay with you a sufficient length of time to learn the ropes in running the practice – at no additional charge (30 days is fair, with perhaps another 30 to 60 days of telephone consultation). If you want the seller to stay longer, it may be best to offer to pay him or her a consulting fee of some type.