Private practice

[sinustarsi]

How does someone just buy private practice from the start? About How much do most of them cost on avg? I just need step by step plan from getting a loan to hiring etc. I know price is based on location but lets assume it's in a big or semi-big city. I am thinking way to ahead but I believe this is the way for me even if I struggle the 1st few yrs. Thanks for the info.

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[347932]

If you are considering buying someone's practice, you should take the average of the last three years of gross income, half it and consider that a reasonable buy out. If it is more than that, many consider the added amount "sweat equity" or the blood, sweat and tears associated with building the practice to what it is today. Although this does factor into the equation, it more depends if the person who you are buying the office from is going to stay throughout the transition and introduce you to the patients and the referral sources and help to boost their confidence as to you, the new doc. In this situation, it is especially nice is the seller is willing to finance your buy out at fair market (or less) interest rates and for a preset period of time. This allows you to avoid having to deal with a bank loan, and also to have cash flow somewhat to pay yourself and your staff.

Now if you're talking about setting up a brand new office, banks these days really need a lot of information before shelling out a few hundred thousand dollars to set up a new venture that may fail (sorry, but that's the way the bank looks at any upstart business). The idea is that they are looking for a demographic analysis of the population you will serve, as well as how much the office will cost you to set up and run. What you have to determine is the cost all the equipment you will need (radiograph equipment, chairs, computers, instruments, supplies...etc) and itemize this for the bank to look at and also determine how much your lease will be and any ancillary costs (paying staff, licensing fees, hospital fees, professional dues...etc) you will incur.

Don't forget that there can be a 3-6 month lag in insurance payments AFTER you see that first person in the office, so expect to borrow more than you think, as you have to cover ALL the costs of the practice (and paying yourself) for up to and even longer than a full year with any loan financing you need. This INCLUDES repayment of the loan starting as soon as you withdraw that first dime. Some even say borrow enough to cover your first two years in private practice.

This is a VERY generalized version of what to expect but will most likely at least get you started. Good luck!

 

[sinustarsi]

if the owner is staying as transition, is he also getting salary also? Thanks for the great info

 

[347932]

if the owner is staying as transition, is he also getting salary also? Thanks for the great info

It really depends. If he/she is relocating and still "practicing", yes its likely that they will.

However, if it is someone retiring, they may still be getting money through the buy out but won't technically be taking a "salary".

That was a very good question and should be worked out before the deal is sealed.

And as always, you're welcome!

 

[Feli]

Kidsfeet is on the money: a practice is generally considered to be worth approx one year's net income (collections minus overhead) or ~50% gross income of one year. The better thing to do is avg the past 3yrs to attempt to account for any variation like equipment buys, gain/loss of payer contracts, etc (assuming there haven't been major changes like partner/associate gains/losses or major contract additions/subtractions).

The goodwill (introduction to pts and referring docs from outgoing DPM) and the sweat equity (perceived seller value due to work it took to build the practice) are the things you can't quantify but will influence the price. Practice type also influences the pricing. A highly elective surgical practice is worth less since it is based on the (community perceived) talent level of the surgeon and those office mostly have pts come in, get their surgery, and disappear. However, a C&C or wound care practice has a lot more "regular customers" who have been, and probably will be (esp if goodwill is achieved) stay with the new doc taking over. A deceased/retired practitioner's office (or one who has/will be vacated before the buyer takes over) has no goodwill, and it's basically worth the price of (used) equipment and property - if that - since most of the patients will have found new foot care providers due to the time gap.

In the end, the practice is worth the price it sells for... nothing more, nothing less. There have been pod practices "given away" by outgoing docs who couldn't find a buyer (no money up front from seller but instead a % of collections - usually 10-20% for 1-3yrs). There are also practices that go for well over twice their annual net income simply because their reputation, referral base, and office staff/setup are that good that they're perceived as worth the price. It's a complex valuation system.

As far as starting from scratch, it can be done. Don't let anyone tell you otherwise. However, it's becoming less and less common due to multiple factors:
1) Modern student debt is greater every year and it's more intimidating to take out even more.
2) It's hard to get onto all the local health payer plans from scratch and much easier to join a group that already is (this is esp true in saturated areas like major metros and pod school cities)
3) The billing is intimidating unless you go to a program where you learn it well (rare since more and more residencies are primarily in academic hospital settings)
4) As with any business, you need good credit and a good business plan to get the loans. Besides rent, supplies, etc... you need staff salaries, marketing, etc fees for 6mo+ since there is lag in the patients coming in, and more importantly, the insurance checks starting to roll in. Some equipment/supply companies will be willing to work with you and help with no payments for a bit, but your staff won't work for free, you have to pay state lic + hosp dues + malpractice etc, and the rent or property taxes don't stop just because your patients/insurances haven't sent you the money yet.
...Doctors are a "good risk" for banks, though. Unless you find a way to lose your license, you will always be working: for yourself, for a hospital, for other docs, etc. Therefore, even in the worst default case, the bank will always have a way to garnish their loan back from a doc.

It's exciting that we have a lot of possibilities.

 

[347932]

The only thing I'd like to add to Feli's excellent post is that banks these days don't consider anyone or anything a "good risk".

If you don't have a good head for business and the business of medicine this can create real problems for income stream and loan repayment. There are many out there with no sense of what this is and once they get into practice for themselves, its a complete disaster.

Right now, banks use one thing to determine your suitability for a loan. Your debt/income ratio. That's it. Also, since you probably don't have much to give the bank back if something goes wrong, expect to have to sign for the loan personally rather than as a a representative of your new business. This means risking your house and personal assets if you have any. They will overlook this somewhat if you have a good business plan with a solid model for how you intend to build your practice financially, but the suits in bank land want their money back. That's it. Its not hopeless by any stretch, and new docs get loans all the time, but the days of flashing your Medical Diploma of any kind and the banks throwing money your way are LOOOOOONG gone. You have to have a solid plan, go in there in your best suit and flash your best smile. Know what you're talking about financially and its a done deal. Go in there blabbering and not knowing your market or what you're going to use the money for specifically and be prepared to be be denied.

 

[PADPM]

There is an important factor to consider that often negates any "rules" when it comes to formulas that are utilized to purchase a practice.

That factor is called managed care and more specifically, capitation. If your geographic area includes a significant amount of insurance companies that pay via capitated contracts, the formula for purchasing practices is very complicated. I will explain....

However, for those who don't understand "capitation" I will first explain this nasty word. The way this works, a PCP or the primary care group has to choose ONE DPM (or a particular podiatric group) to send ALL their patients who need podiatric care. Any patient in their practice who has insurance X must see you or your group if they are seeking podiatric care, once the PCP selects you as his/her designated provider. You then get paid a fee per patient, per month for every one of that PCP's patients who have that insurance.

So if that PCP has 1000 patients with that insurance, each month you will receive a check for those 1000 patients. Before you get too excited, the per patient per month fee can vary from about 38 cents per patient to about $1.50 per patient per month, depending upon the patients co-pay that they have during each visit.

That means that regardless if you EVER see these patients, you will receive a check. On the other hand, if you see Mrs. Jones 100 times you receive no additonal money, other than any co-pay she may have. Additionally, most of these capitated plans also INCLUDE surgery in the capitation, therefore you receive no additonal money for performing surgery. And that's why some docs are performing significantly less surgery!!

Statistically, in order for you to really make a profit with these contracts, you must have a utilization rate of no more than about 8%. That means that you really will start losing money if more than 8-10% of the 1000 patients see you regularly.

The positive part of accepting capitation is that you have a guaranteed check at the end of the month and a patient base, and these patients do also have a copay. Many of them do opt for non covered services such as orthoses, ESWT, etc., and these patients are also potential referral sources for other patients such as friends, relatives, etc., who may have other insurance carriers. Additonally, it "sets" the referral pattern from the PCP. If they send you the capitated patients, the chances are VERY strong they will also send you ALL other patients. If you don't accept the capitated patients, they will probably send all the other patients to the other doctor who accepts the capitated patients.

There is ONE big negative. You can lose these contracts in the blink of an eye, which is a large patient population and often a big chunk of change.

And that brings me to my original point. If you are purchasing a practice with a fairly large number of managed care patients under capitated contracts.....buyer beware.

When you purchase ANY practice, there is a normal expected attrition rate of patients who won't give you a try, don't like you, or decide to leave for a myriad of reasons.

But when you purchase a practice with a lot of capitated patients/contracts, you can literally lose hundreds or thousands of patients in ONE DAY with the swoop of a pen, if those doctors suddenly decide to switch the contract to another DPM. And this happens quite often.

These doctors may have been loyal to the doctor who previously owned your practice, but now their brother-in-law is opening a new podiatric practice so they will switch to him. Maybe they just built a new medical complex and some young hot looking podiatrist just rented space in their new building, so they decided to switch their contract to her, etc., etc.

Over the years, our office has lost HUGE contracts for the most unbelievably goofy reasons and we have picked up contracts from other DPM's for even more silly reasons. If the PCP is having a bad hair day, they may decide to swith podiatrists.

So, although every time a doctor takes over a new practice, there is a normal attrition rate, losing managed care capitated contracts can literally destroy a practice overnight and cost you huge bucks and hundreds or thousands of patients instantly.

Therefore, you MUST consider this when looking at a practice, and understand that a practice that derives a majority of it's income from managed care may NOT be as valuable as you think, since it's very volatile. If you do purchase a practice like this, you must have some agreement that it is contingent on you maintaining those contracts for X amount of time.

This is one factor everyone forgets to mention, and can be a nightmare to young docs. Some of these managed care insurance companies have "closed panels" and you may not even be able to provide services for these patients, even though the prior doctor did for years. So do your homework before making any decisions.

 

[347932]

Excellent post PADPM!

Happily where I am there are no capitated plans, but where I did my residency in Houston, this was a HUGE deal and Docs got burned with this a lot.