The Physicians Start-Up Guide: Buying an Existing Practice

May 22, 2012

Here's a simple checklist of common issues to consider when you are thinking of buying an existing medical practice or buying out a retiring partner / practice owner.

Our first installment dealt with issues to consider regarding the debt often associated with starting a practice and how it should ideally be structured. Our discussion covered both start-up capital and real estate financing and the liabilities associated with each. In some cases however, the right choice is to buy an existing practice or buy out a retiring partner or practice owner.

While this alternative has many benefits it can also be a maze of liability and a process of negotiating the seller down to the actual value of the practice as opposed to their largely subjective “dream number” promised by a practice broker. In a previous article we covered the basics of why medical practice buyers need independent representation. This week, I turned to healthcare attorney Trisha Lotzer of Lotzer Law Group in Scottsdale Ariz., and CEO of Physis Inc. for some specific guidance. I asked Trisha to share some of the common issues she has identified and help clients adress in helping execute over 200 practice transitions. This simple checklist is what came from that detailed conversation and touches on many vital basics.

Make sure the practice is a fit for your lifestyle and personality, not jut your medical specialty. Some key questions:
• Are the patients from a sustainable demographic you are comfortable with in the long term?
• Are the services and procedures most commonly executed at this practice within your skill set and part of the practice you wish to build?
• Are you happy with the location, neighborhood, and physical facility? Will you feel good coming to work here every day?
• Are the changes required in the business model, facility, staff, and other issues noted above so substantial that it makes sense to consider other practices closer to your vision?

Does the math make sense?
• You must invest in an expert appraisal or a Uniform Standards of Professional Appraisal Practice (USPAP) valuation. Don't rely on the seller’s estimated “potential value” to tell you how much the practice is really worth, there is a hard number for every business.
• Don’t rely on the seller's broker valuation. Most brokers are paid on commission and have an incentive to increase the price because it increases their commission.
• Confirm value, but don’t shop “just” on price: The $900,000 practice where cash flows today is a better deal than the $600,000 one next door that doesn't "yet."
• Hire experts to do your due diligence thoroughly and completely including on details like building inspections and environmental reports if the purchase involves real estate.

Are you staying objective?
• Stay objective and focused on getting the deal you want over the practice itself; be willing to walk and keep looking if the terms are vastly different from what your advisors helped you decide on.
• Base your decision on facts and numbers; use the same objectivity you would in solving a medical issue.
• Maintain a professional relationship with the seller and treat this like an arm's length business transaction with a stranger, not a deal between friends.
• Find out the seller's reputation in the community from patients and other doctors.
• Know who you are dealing with, consider ordering credit, criminal background, and civil lawsuit background checks on the seller as part of your due diligence. You don’t want to be surprised, by debt, taxes, litigation, or their financial issues,

Get (your own) professional help.
• A team of advisors with experience specific to your endeavor greatly increases the chance of your success and helps avoid being blindsided, this is an investment you cannot afford not making.
• If money is tight in some cases, legal fees and similar costs can be rolled into commercial financing and many good advisors will wait until escrow to be paid with specific agreement and terms defined in advance.
• The seller's broker (or attorney or CPA) is not your advisor. Don't rely on any of their advice or representations. Their job is to get their client, not you, the best deal.
• Find an attorney who is personally well versed in both healthcare law and practice purchase and sales. The qualifications of their law firm partner you never see won't help your deal.
• Make tax planning part of the business plan from day one. Get a top CPA involved early including on the corporate structure you choose
• Include asset protection and estate planning in the structure of your new practice; it’s potentially the most important investment you will ever make.

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