How do you know what to look for when choosing a practice to buy? Here are some items you might want to check when selecting a practice to buy

Do you prefer any specialties or want to avoid any specialties?

First decide whether you want to specialize or have a general practice. Do you prefer more medical or more of a retail setting?  Consider the type of patients: are they lower income or high income type patients? The style of practice is the first key to developing a plan. Remember that an older “fixer-upper” practice may not be what you want today, but might have the potential to create your dream practice in the future.

What style of practice do you want?

Retail verses the medical model.  There are pros and cons to both. It is simply a matter of personal preference.  Some people prefer high volume, others prefer high income. Some prefer specialties such as ortho-k or vision therapy, others prefer general practices. Regardless, you can be successful in any mode.  Determine upfront your “gotta have’s” and absolute “don’t wants”.  Write it down on two columns and carry it with you as a reference point every time you consider buying a practice

What is the minimum immediate income you need?

This is the magic, million dollar question.  The purpose of buying an existing practice over starting one cold is simply cash flow and timing.  Purchasing an existing office will produce cash flow faster than a startup.  It’s simply a matter of timing and whether or not you have enough savings to spend before it becomes profitable.  First determine your absolute minimum income needed from day one, after your spouse’s income or other secondary income. To do this add up all you monthly expenses (i.e. cars, mortgage, food, school loans, etc), then calculate any secondary income from your spouse or a second job (if it’s retained after you purchase the practice).  Subtract your expenses from this total income.  This is your minimum income needed after debt service when purchasing a practice.  Savings will allow you to reduce that minimum (until your savings are gone of course).   This will now help you narrow your search based on your needs and the adjusted net/gross of the office.  For example, if you need $100,000 to live on as a minimum after any secondary income, then you should be seeking practices with reported “nets” higher than $100,000.  Knowing the average practice “nets” 1/3 of gross, then you should seek practices with gross revenues of more than $350,000, which allows extra room for debt service to pay for the practice. 

Narrow your search

Stick to your criteria. Write it down.  Update it as new information is obtained.  Style of practice, minimum income/ gross revenue.  Don’t waste your time looking at a young startup practice unless you have secondary income or have a rich relative willing to give you money.  Your criteria can always change in the future as circumstances or goals change.

Fixer-upper or turn-key?

Just like buying a house you can buy a fixer-upper, builder-upper, or turn-key office.  Your style will determine the preference.  Remember that smaller grossing offices will not have the same bells and whistles as larger grossing offices. Of course the price will also be lower.  If you can’t see through the dust and old equipment then buy a turn-key office.  Be aware that larger grossing turn-key offices usually demand much higher asking prices.  You might be more comfortable with less employees and a smaller grossing office that you can build over time. (i.e. fewer employees, ability to create your own vision, etc)

Determine the area or geographic region you want

The general area or region is important.  While the practice itself might be in a lower income area, you can still live in an alternate city nearby.  Higher income areas will of course demand higher landlord rents, whereas lower income areas may provide higher net profits and the opportunity to purchase the real estate.  Considerations in the overall population of the region, demographic and economic conditions as well as lifestyle considerations should be reviewed.  While you don't have to live in the same town as the practice itself you'll need to live close enough to commute --and it's important to enjoy the area you live in.  Of course the more flexibility you have the faster you'll find a practice to buy.

Rent or buy the building?

Your premises expense will be one of your largest expenses as a practice owner.  Purchasing the real estate offers the chance for long term retirement savings.  Real estate in general will always appreciate more than a practice in the long term.  As someone once said, "They are just not making any more dirt". 

How important is the equipment?

Immediate cash flow from returning patients is the primary reason for buying an office. In the scope of the purchase for most practices the equipment has the lowest value.  A complete lane, for example, could be replaced for under $15,000.  Many smaller offices have older equipment.  While new equipment is terrific, it will not always translate to more revenue.  You are purchasing a "used" office based on its existing cash flow and revenue. -- Would you rather have a startup with new equipment and zero revenue or older equipment that works with a few hundred thousand dollars of revenue?  Remember you are buying cash flow.

What types of insurance panels are accepted?

Determine the insurance panels accepted at the seller's office.  Many times current owners do not bill for medical services or do not accept many major plans.  This could uncover hidden opportunities for growth.  Also look at a sample of an insurance payer's explanation of benefits ("EOB"). This will provide a great insight in the billing codes, reimbursement schedule and mix of common services provided.  Again look for missed opportunities.  Understanding billing codes and rules for each insurance panel will put you leaps ahead.  Often doctors may bill incorrectly or not at all because of a lack of understanding.  While this is a conservative and safe approach, it does not maximize your billing reimbursements. 

What is the Current Fee Schedule?

Get a copy of the current fee schedule.  Are there certain fees that can be increased?  Are they services that are not offered? Often times older doctors may not be as aggressive in billing insurance companies.  This may be an excellent opportunity for growth.  (key: this could increase per patient revenue and overall gross revenue without adding patients)

Are there services that I can add?

Look for opportunities where particular services are not offered.  Does the current doctor offer ortho-k, low vision services. Do they provide medical services for dry eyes, foreign body removals, etc?  These can be excellent areas for further revenue growth.

Will the seller stay on after the closing to help with a transition?

This can be a plus or minus.  We've seen successful transitions with or without the prior owner.  Generally the more specialized a practice, the more important it is to retain the seller for a transition period.  For general practices transitions average 3- 6 months.  It's not critical, though. If you get along with the seller it works. If your practice style is much different then eliminate any transition.  Don't be afraid of losing all the patients.  Often they will try you first because of habit, same location, same staff -- it's human nature.  It's a door opener. The key is to make sure they have an excellent first impression when they meet you. 

For more tips on choosing the right practice, making an offer, the due diligence process, and financing options, give us a call and we'll guide you on the path the success.