WHAT SHOULD YOU LOOK FOR WHEN CONSIDERING A PRACTICE TO PURCHASE?
Unfortunately, too many prospective buyers only want to know how much a practice is collecting and what the price of the practice is.
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 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 and even give in on some negotiation items.
Steps to Buying a Practice:
Based on years of experience, we've compiled a list of efficient and practical steps to consider when buying a medical practice.
1. Get preliminary information on the practice.
This includes the tax returns, profit and loss statements, practice management reports and other information. This provides a good preliminary view of the practice. Ensure the amount of cash necessary to buy the practice is not 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 must 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.
2. Visit the practice.
Visit the practice to see if you like the location and 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. Make sure this is a viable practice for you financially and aligns with your goals and vision for a practice.
3. Get questions answered.
If you like the practice, 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.
4. Make an offer.
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. 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.
5. Due diligence.
At this point, you hopefully have arrived at a meeting of minds with the seller, and you are ready to begin removing the contingencies, and performing what is commonly called due diligence.
Insider Tip
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 for 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.
Unfortunately, too many prospective buyers only want to know how much a practice is collecting and what the price of the practice is.
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 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 and even give in on some negotiation items.
Steps to Buying a Practice:
Based on years of experience, we've compiled a list of efficient and practical steps to consider when buying a medical practice.
1. Get preliminary information on the practice.
This includes the tax returns, profit and loss statements, practice management reports and other information. This provides a good preliminary view of the practice. Ensure the amount of cash necessary to buy the practice is not 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 must 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.
2. Visit the practice.
Visit the practice to see if you like the location and 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. Make sure this is a viable practice for you financially and aligns with your goals and vision for a practice.
3. Get questions answered.
If you like the practice, 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.
4. Make an offer.
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. 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.
5. Due diligence.
At this point, you hopefully have arrived at a meeting of minds with the seller, and you are ready to begin removing the contingencies, and performing what is commonly called due diligence.
Insider Tip
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 for 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.