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Questions on buying a practice

Discussion in 'Young Ophthalmologists' started by golfman, 10.30.10.

  1. golfman

    golfman

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    I'm thinking of buying a practice, after I eventually get through residency. Sure hope I get in somewhere for residency...

    Anyways, I have an opportunity all lined up with relative that is going to retire when I'm done and I am going to buy his practice.

    A few questions for those much more knowledgable than I.

    1. He makes about $600,000 a year. How much do you think it would cost to buy his practice? We haven't discussed cost yet. I think he will give me an okay deal. I don't know the number of patients he has, but it seems he consistently sees around 120 people per week in clinic and has 2 surgery days. Pretty busy (At least I think that's busy).

    2. How many patients would I expect to lose when I buy the practice? 20%? It just seems you would lose a lot of patients that just wouldn't trust a young doctor.
     
  2. orbitsurgMD

    orbitsurgMD Senior Member

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    What is the practice gross revenue? The patient volume you are describing is solid, if they are the office encounters seen over the three non-surgical days (and still fine if they are including the surgeries).

    I have to assume the $600,000 is net of all overhead expenses of the practice.

    You didn't say what the asset base of the practice was: does the practice own its offices or a surgery center? (Or part of a surgery center?)

    Calculating the market value of the assets should be straightforward. An equipment inventory is needed for that. Don't forget to include the computer system and software, phone system and other non-ophthalmic items.)

    Are there liens or debts on the practice? Will you be assuming those?

    If you will be purchasing the accounts receivable, get an idea what the value of that would be. ( A rough estimate might be 50 percent of a month's average revenue, if he is filing claims electronically.)

    The goodwill value is the hard part. Is there a lot of competition in the area? Are the hospital or other groups actively recruiting others? Is it possible for both you and the selling doctor to work there at the same time so that he can remain for a time to introduce you to his patients?

    I will assume you will be able to be qualified on all of the carriers plans. Are the referring doctors going to be willing to refer to you? Introductions to them are just as important as introductions to patients. Also, I will assume you will be able to get staff privileges at a local hospital sufficient to satisfy your surgical center's transfer requirements.

    How many patients will stay with you versus leave for someone else over the first year is going to depend on how many other doctors are available and accepting patients nearby. Your losses to other practices could be negligible or very substantial. The old rule of thumb was one-third leaving, but that is old information. Much depends on the circumstances and how well the seller prepares the practice for your arrival and taking over. You might have very few lost patients with enough months of announcements, a photo of you in the waiting room, letters to the patients assuring them of continuity and your qualifications (first a letter from him to patients then perhaps a letter from you sometime later), possibly a trip around to meet key referring optometrists and medical doctors before you arrive to the practice, all laying the ground for your arrival, then local newspaper advertisements in the month before you start work.

    So what is the value of that goodwill? Good question. Worst-case scenario, not much. Best case scenario, it is worth the advertising you would have to buy to attract a similar volume of patients to the office on opening without the value of the departing doctor's introductions. (The location value of goodwill is debatable--one could say if you moved next door, you would owe nothing in supposed goodwill by location and in fact, someone wanting to compete with you could do just that.) Remember, the goodwill value is not the value of the work you will have to do for the patients who choose to stay. And it also isn't the cost of your advertising yourself or doing things yourself to establish your presence and build your own goodwill. You are going to do that work, not the departing doctor. So I don't think goodwill is going to be par or more of the services. Also, "goodwill" as such has its greatest value at the outset and is worth less as you remain and the seller departs. At six months, your own reputation should overtake the value of the goodwill--particularly in a referral-dependent practice, and by a year, your reputation will have to carry the practice, not that of the departing doctor. No one would place the advertising cost at 100% of revenue and expect to stay in business. Also, patient turnover is important. Do patients get referred by local optometrists just for surgery but return to them afterward, meaning that the practice has a high flow of new patients but a relatively low percentage staying beyond 90 days? Or are there a lot of steady patients with glaucoma, dry AMD, contact lenses and general eyecare issues who return regularly for years?

    You need to see some trends in the practice. Is income declining or steady?
    If declining, that will push goodwill valuation down as the steady to increasing operations costs everyone sees will squeeze your profits going forward.

    Suppose you got no introduction at all. The practice was just sold to you at asset value plus or minus AR and liabilities. You might keep half the patients by doing nothing. The goodwill owed to someone else for that half remaining would be zero. You would have your own introduction campaign, meet the referring doctors, advertise in the local papers and so forth, Patients would call, be surprised that Dr. Niceguy had left, and you would have to do a sales job on the phone to get them to make an appointment with you. Are the local patients going to book with you or will they hang up and go to the local consumer guide or call their friends to see who they see? The goodwill value really pertains to those patients who would otherwise go elsewhere but because of the reputation and persuasiveness of the selling doctor, will choose to remain with you. Also, it is short-term; it is only relevant to the patients who come because they or their referring doctor respect the selling doctor's reputation. Everything you do after that is your goodwill.

    I happen to think assigning a blanket value to a practice or to goodwill, say one year net revenue, is a bad way to estimate anymore. If anything, with annual threats to revenue by way of Medicare cuts and freezes--which affect nearly all ophthalmology practices except peds and refractive practices--make profitability uncertain, and ultimately, improved profitability is the only reason to place a value on goodwill at all.

    One possible way to value goodwill is to make it contingent on practice performance: agree to pay a percentage of net revenue from the practice that declines with time but that goes to zero if the practice does not meet expected revenue targets within the payout period. That protects you from overpaying and it heavily incentivizes the seller to prepare the practice well for your arrival and successful transition. Win-win, as it were.
     
  3. golfman

    golfman

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    I really appreciate the detailed answer. Thanks for your time. You have me thinking about quite a few things I've never thought about before. I guess I've been just too focused on getting into residency than actually knowing what I'm getting in to when I'm telling a relative I would be willing to buy the practice.

    The numbers I mentioned were office encounters. I believe the $600,000 is net. He currently is a part owner of his own building, which has a surgery center attached to it as well that he is a part owner in. No debts on the practice. Patient encounters are declining a bit, just because he is getting older and doesn't feel like working as much. Hopefully that downward trend doesn't continue too much over the next 6 years.

    You bring up a good point that it would help me a lot if he would prepare his patients, and possibly docs who refer to him, for my eventual takeover. That would help out a ton more than me just randomly showing up out of the blue.

    That last paragraph I thought was an excellent idea, by the way.

    Very awesome response. Thanks again!
     
  4. KHE

    KHE Senior Member SDN Advisor

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    Let me tell a story I've told before that includes 3 separate anecdotes...

    When I bought my practice (an optometry practice) the person I bought it from is/was a local legend in the town where my office is. He started it over 40 years ago. Was born and raised in the town. Everyone knew him and loved him. Active in numerous local civic and church groups. His children were all well known in town.

    When I bought him out, we made no announcements. Sent out no letters. His last day was Friday, my first day was Monday.

    I can count on one hand the number of patients who left the office. Virtually no one did. All the patients were told when they called or showed up was that the previous doctor retired and that I was his hand picked replacement and the retiring doctor strongly suggested that they see me.

    Again, virtually everyone did.

    My lawyer, who helped me with the contract for that practice told a story of how the senior partner in his firm retired 5 years ago. The partner's name is still the first name in the law firm. When he retired, he claimed that very few of his clients would be willing to see other attorneys in the firm because of the intimate relationships he had with his clients.

    Virtually no client left and they all readily and happily agreed to see other attorneys in the firm. The response was almost universally "What? He retired? Wow! Good for him! Did he move to Florida or something? No? Why not? Is he crazy? Har Har Har! Now, about this contract issue I have......"

    I helped a local ophthalmologist purchase a practice from a retiring doctor and that retiring doctor gave the same story. He had such a special relationship with his patients that they would be very hesitant to see the new guy and that he, the retiring doctor should stay on for a "few years" to help with the transition. The buyer felt that his demands for salary and time frame were unreasonable so in the end, he just retired and vanished like a fart in the wind. One announcement was made in the local paper.

    Two and a half years later, virtually no patients have left that practice. In my case and in the case of the ophthalmologist I helped, most patients expressed surprise that the doctor retired but every patient was willing to give the new guy a chance.

    And there's the rub....if you're a good doctor and more importantly, not an arrogant dink, patients will stay with you. The notion that most retiring doctors have is that they have the Midas touch and no one else could possibly step into their shoes.

    I would respectfully submit that in all but a vanishingly small number of practices, that's just not true.

    Patients will stay in the practice where their records are, where the staff is familiar, and most imporantly, where their insurance plan is taken.

    Of the small number of patients that left me, I would say that 95% of them were patients who had moved away to beach towns in retirement and once a year, they would drive an hour or an hour and half to the old town to see old friends and get their eyes checked by the kind old eye doctor they've been going to for 40 years. Well, now that it was me, they weren't going to drive an hour and a half. If they have to see a new guy, they might as well see a new guy where they live in their beach town. Perfectly reasonable.

    So don't get too caught up into the notion that you need the seller to do much other than not bad mouth you around town. If the seller is financing any part of the purchase, they'd be crazy to do that anyways.
     

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