Even in times of economic uncertainty, there may still be opportunities for growth. While some medical practices are struggling, others are doing well and may even want to expand their operations. If you are considering acquiring a practice, you will first need to know its value. In addition, a buyer needs to take several specific items into consideration when evaluating whether to make the leap.
Here are some areas to be sure you understand when considering buying a medical practice:
Trend of Revenue
Over a two- or three-year period, has the practice’s revenue been going up or down? Where did the revenue originate? Can the buyer replicate that revenue stream? Note that this may be more difficult to evaluate in the age of COVID-19. The pandemic may have had effects on revenue that you will need to consider when projecting the practice’s revenue going forward, including into a post-pandemic period.
An important intangible aspect of a practice is goodwill, which falls broadly into corporate goodwill and personal goodwill. The biggest problem with goodwill is that nobody has the same definition of it or knows how to value it.
If a hospital, for example, wanted to buy a medical practice, it generally would not be willing to pay for goodwill — it would be more interested in acquiring the physician, with his or her experience, expertise and patient list. But, if a younger physician wanted to buy a retiring physician’s practice, he or she would not only be seeking the patient list (understanding there may be some attrition when the owner retires), but also be looking to preserve and build on the practice’s well-established professional reputation and good standing in the community.
Corporate goodwill can easily transfer to a new owner and includes practice location, setting, number of treatment rooms and other tangible characteristics. Personal goodwill is harder to transfer because it is, in large part, based on the previous owner’s personality and charisma, as well as the length of time he or she stays in the practice. You should also consider your ability to maintain and build on the previous owner’s personal goodwill.
The concept of goodwill leads naturally into the transition and how to set it up. The best way to maximize goodwill, assuming the seller has personal goodwill, is for the seller to remain during the transition and introduce the buyer to the existing patient base. This will ensure both the corporate and some personal goodwill transfers to the new owner. In order to maximize the opportunity to transfer the goodwill, you should have a clear understanding by the time transaction will close on what his or her role will be and what their obligations are to help transfer the goodwill.
Does the seller offer services that cannot be duplicated? Perhaps the seller was a residency director or a sub-specialist, and the buyer is neither of those things. The seller might have specialized skills that the buyer does not (yet). Alternatively, do you have the ability to offer new services within this practice that the seller has not offered? These factors must be taken into consideration before buying a practice.
Are the costs of the practice comparable to those of similar practices? A negative response may affect fair market value. Similar to revenue, you will want to consider whether the practices’ costs have been impacted, both short-term and long-term, by COVID-19.
Another reason for the seller to stay on for some period of time is to provide an opportunity to introduce the new owner to the seller’s current referring sources. As the buyer, you would want the seller to help you continue the practice’s revenue streams.
This has a direct impact on the revenue stream. If you, as the buyer, cannot replicate the revenue stream because you lack the necessary technical skills or are not part of the current payer mix, this directly impacts the revenue stream. Can you participate with the existing insurance carriers?
Related Read: A Good Business Plan Can Help Your Practice Thrive
Due diligence matters
Whether you should buy a practice depends on your ability to replicate (or improve) the seller’s operation — ranging from unquantifiable factors, such as physician charisma and subjective goodwill, to personnel costs, facility costs, patients, payers and referring sources. As the adage goes: Let the buyer beware! If you conduct proper due diligence, you will more likely be rewarded with a practice that will succeed over the long term.
Related Read: How Can You Avoid “Paralysis” When Making Key Decisions?
For more information, contact Larry Sophian at 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.