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 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.
BUYER BEWARE
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 you will need to consider when projecting
the practice's revenue going forward, including into a
post-pandemic period.
Goodwill
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.
Transition Details
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.
Revenue Adjustments
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.
Costs
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.
Referring Sources
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.
Payer Mix
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?
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?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.