How much does it cost to buy a private practice?

[golfdoctor]

Quick question for ya'll. Hopefully knows something more about this than i do.

If my father-in-law is letting me take over his private ophthalmology practice, do you think he wants me to buy it from him, or will he just let me take over? It is kind of an awkward question to ask him, and ultimately I will have to ask him, but I just wanted to know the norm for sons taking over a father's (or father-in-law's) practice.

I would assume I would need to pay him something, but he talks to me as if I will just be taking over the reigns free of charge.

Anyways, let me know if anybody has been in a situation like this.

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[Doowai]

You really need to have it firm and in writing before you start.

I had an uncle who told the same sort of thing to my cousins husband. Father-in-law and son-in-law scenario. Seemed too good to be true for the son-in-law. It became horrible. I don't remember all the details. The father-in-law (FIL) became very demanding. My cousin and her husband might have plans on a Friday night and 10 minutes before they left the FIL all of a sudden wanted something done - "what do you mean you can't come and help me move my piano now....after all I am letting you have my practice".

Soon the FIL felt he was not grateful enough, so he changed the locks and took the practice back (there was no formal contract, and technically it was in the FILs name). Eventually the son-in-law(SIL) had to go and start his own practice anyway in the nearby area. There was bad blood and the FIL did things in the community to apparently sabotage the SIL's new practice. My cousin and the SIL got a divorce. I am sure there was more, but I know the business deal gone bad was alot of stress. The SIL wrote about it several times in various magazines.

With family more than anyone, business needs to be business -spelled out so that there is no passive aggresive manipulation, hurt feelings and destroyed relationships - too much to lose.

 

[Winged Scapula]

Generally when you buy a practice you are buying the capital investments made in equipment. It used to be standard to charge a value for the practice (which doesn't really exist outside of the value of the equipment) and good-will. No longer. You can't really charge for that stuff anymore because no one nows how to value that (ie, how much is good will worth?)

Regardless of whether or not this is your FIL, you need a lawyer to help you (both of you) with this. If all he owns are the charts, some paperclips, etc. then the cost to you should be minimal. If he does LASIX and owns the equipment, the presumably he'll want you to buy that (after some depreciation of its value).

This is very complicated stuff, so don't try and go it alone and even if you and your wife never divorce, and there is plenty of good feelings with your FIL, you absolutely have to have an independent person value the practice and an attorney to draw up the contracts.

 

[Doowai]

If you buy it there are options:


What you buy it for depends on what you can get him to sell it to you for. I have never done such business with family, but with strangers I have no problem low balling them - the worst they can do is say NO. I have bought a few practices very low and resold them at a much higher price.

How is the old guy set? If he is well set, then maybe you would feel okay about talking him into giving it to you at a really good price. I mean, the best way he can ensure his daughters future is to make sure his SIL does not start a practice with too much debt. If he sells it to you at too high of a debt, he is putting his daughters and grandchildern's futures in danger because of burdening the dad (you) with debt. If he was a good FIL he would let you have it cheap.... LOL, I am being a bit melodramatic here.

1) So you could talk them down and buy it outright cash. Is there a bunch of equipment you don't need? Or equipment that can be sold and used to buy less expensive equipment that serves your purpose. SO if you buy it outright for $10, and then can sell $4 of equipment you don't really need and use it to buy $1.35 of equipment that will serve the purpose, you can use the $2.65 difference.

2) you can buy it at a higher price with a loan and use the equipment as collateral to secure a loan (the equipment should be debt free ). The banker lends, and if you default they take posession of the equipment.


3) You can work in the business for a while at a lower salary, the difference between what you salary should be and what you are actually getting paid is used as a down payment. This is called sweat equity. If you should be getting paid $3 a month, but only take $2.50 cents a month, then at the end of a year you have built up $6 of sweat equity to be applied to whatever you determine the value of the practice to be. Then you can assume the entire responsibility and privilege of running the business - and make monthly payments. If the practice is valued at $15, you made a $6 sweat equity payment - and have 9 dollars left to pay. If you made 25 cent payments a month, you would have paid it off in 36 months.

There are other options, but once you determine a fair price that is agreeable to both of you (and it can be valuable to have an expert evaluate the worth of your practice), then there are several ways you can finance it

 

[f_w]

In the valuation of an ophtho practice, there are generally three components to the final price:
1. accounts receivable
2. hard assets
3. 'goodwill'

#1 This is the amount of money the practice has billed to patients but not received yet. There are standard ways to assess the value for this 'asset' (in a tightly run practice it should actually be a rather minor amount).
#2 Is the practice in real estate owned by the practice or is it a leased space? Is the real-estate owned by a separate corporation? What equipment is owned by the practice? How far is the equipment written off?
#3 The 'value' of being able to start working on day1 with established staff, established patient base, billing payroll etc. This is also what you pay for the priviledge of removing a competitor from your local marketplace.

And yes, 'goodwill' is still charged for ophtho practices.

2-3 words of unsolicited advice: FIL-->SIL business transactions have an extremely high potential to go bad in a hurry. And as pointed out above, you not only risk a business relationship to sour but also your marriage. I don't know how to broach this subject with your FIL, but you rather want to pay a fair price for the practice and have your in-laws be your friends than some undocumented deal with asymetric expectations that has a high potential to blow up over Thanksgiving dinner.

How you pay for is a different story. Fresh out of residency/fellowship, it can be difficult to find a bank to finance the deal. You could give your FIL a note with a security interest in the practices AR. This is a method often used in purchases from strangers as it allows the practice owners to spread the income from the sale over for example 5 years reducing its tax impact. In a intra-family transaction this may not be the best option as it can still create awkwardness at family gatherings knowing that you still owe your FIL the value of a nice little house.

 

[golfdoctor]

I appreciate all of the detailed responses. It will be interesting to see how things eventually unfold for me.

 

[Doowai]

When I have bought a practice I have never bought account receivables.

I have seen practices in which they list an account receivables that dates back 6 months or more. In reality any accounts receivable over 90 days is worthless , except for one type of practice (personal injury - and that has no place in Ophtho). 90 days is the outside of what I would even consider paying for , if it was a practice that was heavily insurance based.

So if you do consider buying accounts receivable (which is a gamble), look at what their percentage of collections is. Its certainly not my thing, but some practices only collect perhaps 50% of what they bill. I myself like to bill what I think is actually reasonable to pay, and then collect it. I would rather see 10 patients at $10 a piece, collecting 100% of it; than see 20 patients at $15 a piece , collecting 50% of it. The latter is slightly more money, lots more work, but there is more overhead with seeing more patients.

If their collections are low, like 70% - then don't pay more than 30% of the accounts receivable up to 90 days.

Buying accounts receivalbe is buying bad will. If a stranger starts trying to collect money from patients, it can alienate them.

 

[Doowai]

Fresh out of residency/fellowship, it can be difficult to find a bank to finance the deal. .

I am not sure what experience you have had with buying or selling practices, but I am guessing it is all MD practices you are talking about.

What is your experience with lenders financing the deal with a secured loan - secured on the existing equipment? The equipment has to be free and clear of course. I have seen this as a viable option and seen in work many times, but wonder how that would work in a MD situation.

 

[f_w]

I am not sure what experience you have had with buying or selling practices, but I am guessing it is all MD practices you are talking about.

Ophthalmology practices (not so much the selling end, more the buying).

What is your experience with lenders financing the deal with a secured loan - secured on the existing equipment? The equipment has to be free and clear of course. I have seen this as a viable option and seen in work many times, but wonder how that would work in a MD situation.

In a ophtho practice, equipment is typically a minor portion of the overall deal. Also, unless the stuff is brand-spanking new, it is pretty much unsellable. If you have commercial real-estate owned by the practice (e.g. an office condo), things look of course different.
Banks tend to be hesitant to finance the amounts necessary based on your future ability to make money with the practice (the only security available are the future receipts). Once you have a track-record of being able to build a practice in a different setting (and maybe a nice chunk of change to put down yourself), things look different.

 

[f_w]

I have seen practices in which they list an account receivables that dates back 6 months or more. In reality any accounts receivable over 90 days is worthless

That is why in practice valuation there is a standard way to look at this. Typically 90days after discounts.

 

[Doowai]

Ophthalmology practices (not so much the selling end, more the buying).



In a ophtho practice, equipment is typically a minor portion of the overall deal. Also, unless the stuff is brand-spanking new, it is pretty much unsellable. If you have commercial real-estate owned by the practice (e.g. an office condo), things look of course different.
Banks tend to be hesitant to finance the amounts necessary based on your future ability to make money with the practice (the only security available are the future receipts). Once you have a track-record of being able to build a practice in a different setting (and maybe a nice chunk of change to put down yourself), things look different.

Cool, thanks.

Are you familiar with lenders other than banks?

 

[f_w]

Are you familiar with lenders other than banks?

Ahm, no. (you mean private individuals willing to take a note for a wad of cash? in a P.C., you can't make a non-professional investor partner)

 

[LADoc00]

IMO, you are an idiot if you buy a practice, start your own.

If people out there are still buying practices, I have some California Air Im willing to sell cheap too!

 

[DadofDr2B]

Go to a business school in a well known college and ask for someone to appraise the business (practice). If the current owner dies the IRS is going to want to know the value for estate taxes. There is worth in having a steady patient flow with a known address.

Your cash flow will be much better taking over someone's practice.

Arranging a payout using the money that comes in over a defined time period would be one way to pay for the practice and to keep the current doctor interested in the success of the practice. This would keep the possible "bad" will from being created.

There are other methods for taking over a practice if you use a little imagination.

 

[Doowai]

Go to a business school in a well known college and ask for someone to appraise the business (practice). If the current owner dies the IRS is going to want to know the value for estate taxes. There is worth in having a steady patient flow with a known address.

Your cash flow will be much better taking over someone's practice.

Arranging a payout using the money that comes in over a defined time period would be one way to pay for the practice and to keep the current doctor interested in the success of the practice. This would keep the possible "bad" will from being created.

There are other methods for taking over a practice if you use a little imagination.

I agree. THere are more than one option to buy a practice.

I have purchased two practices - but my goal beforehand in both cases was to resell them at a profit. One practice I bought from an older doctor diagnosed with liver cancer, and the other was owned by an investor who hired doc's to work it - both his parents had died, he had made his money and was just going to close his office. Both practices were very slow at the time I bought them - 10 or less patients a day.

The the first case I bought the practice for the price of the traction unit. I knew I could turn even just 10 existing patients into 30 referrals with some personality.

The second practice had been there for many years. I bought it for the price of the x-ray unit getting everything else thrown in (2 tractions units, ultrasound, computer, billing software, patient files etc) - the way I presented to the owner/investor I saved him money if I just took it off his hands - he would have to pay an x-ray expert to move the x-ray unit battery, and he would be paying storage until he sold the equipment piece meal - he would probably lose money in the end. I offered him a very low figure (again the price of the xray) and he took it. He later regretted it and tried to get me to buy his accounts receivable - not a chance.

But I knew I could take existing patients and turn them into a goldmine of referrals. I built both practices and sold them for much much more than I bought them for, after making a good profit on each for several years each. Then lost the money in real estate...damn,....LOL. But I could not go wrong - if I simply sold the equipment, I would have not lost money. I found "don't wanters' - people who did not want the burden of their practices for whatever reason, and took their problems off their hands.

Invest in loss

 

[Doowai]

Note : when you buy an office they may include the electronic medical records, billing software etc as part of the price. No can do. That stuff is licensed to the owner.

WHen you buy it, most health care specialty softwares require a fee to transfer ownerships. If you have a technical problem with the software down the road, and call for technical assistance, you can get fined for using the software illegally. The seller needs to not include the software in the price, or pay to have the software ownership transferred to you.

Not all software is this way, but the EMR I used in the first office I mentioned was this way, and the billing software in the second office was this way.