Village

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Hi all
I want to start my own private practice and I fell on something that could be a good deal. Not sure. Need you all advise
A 69y old LCSW have a psychotherapy group that she wants to sell. Her son is struggling with TBI and she wants to retire. She has 10 therapists and they contribute 40% of collections to overhead. She owns 2 buildings; one is 5 rooms and the other is 4 room. Practice seems busy. She mentioned month of June she collected 60K. She has a psychiatrist and ARNP that she pays hourly. Psychiatrist license is used to credential business and also for marketing. She outsources med management cases as her psychiatrist and ARNP work only 5hours each a week
I am interested to purchase practice and buildings. This can be a golden opportunity for me to start with a good case load. What will be some good questions to ask and pitfalls to watch for? Any info appreciated.
 
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F0nzie

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Organizational documents, previous 3 years of business tax returns, current balance sheet, patient lists, existing contracts, property documents, contractor/employee/manager info, and marketing materials to name a few. You should also get a handle on how the operation runs and learn quick after you take over or your employees will leave.


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psych md jd

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IMO, this would be a complex transaction and if I were the buyer I would retain an attorney.

There are practice valuation analysts who look at the practice area, competition, good will, referral sources, patient mix and payment, cash flow, etc. and give you the market value of the practice. What's the gross and net income of the practice? Is the 60k her collection alone or for the entire practice?

Then, there is the real estate. That transfer should be a separate transaction. The real property will have to be appraised, properly zoned, and pass inspection, etc.

Then, there are the therapists, NP, and M.D.. What is/will be their employment relationship? Are they independent contractors or employees? Do they receive benefits? How are expenses handled?

Then there are insurance issues that need to be addressed for the property, business, and the practitioners.

Are there past due taxes, liens, lawsuits or pending lawsuits?

How are you going to make payroll and pay the bills/taxes/insurance for the first 3 to 6 months? How much working capital do you have for this transition?

Is this a corporation or LLC? Will shares be transferred?

And, most importantly, how much money are you willing to lose?
 
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PsyDr

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Business valuation is highly complex. You should hire a professional. Unless you understand the intricacies of real appreciation in a tax depreciating asset, liabilities, corporate structure.

One of the recurring errors I have seen is individuals who are educated in one field believe this somehow transfers to another field. Better described by Warren buffets maxim.
 

Shikima

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And you'd need a good office manager to begin with for managing the books, schedules, compliance and etc. Consider financial losses in the first year and if you'd be ok with this as you're learning/transitioning into the new business. Sounds like an interesting opportunity!
 

sluox

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I suspect that aside from the book value of the real estate, the actual practice is worth very little. If the practice generates 60K a month average of INCOME on a fairly consistent basis, it would be worth very conservatively more than 3 million, and upward to 10 million depending on growth, in which case she likely would not be reaching out directly to you but would retain an agent for sale, and specialized private equity firms would be interested in brokering such transactions. More likely it's 60k of revenue, with unclear profit.

To very roughly estimate the worth of the business itself, get the last two years of business tax filings, and calculate the net profit and multiply it by between 4 and 6, plus values of the real estate. This is a conservative number, since this represents a P/E ratio. Typical residential real estate has a price to earning ratio in the teens. Long term S&P P/E is ~ 15. You may find that aside from real estate equity the practice is not worth much, or even negative. And the transaction cost alone may favor a straightforward liquidation rather than continuation of the business as an ongoing concern. Nevertheless, she might still be willing to sell you the book value of the commercial real estate, as these things are often highly illiquid and basically waiting for another clinician for years to take over.

Psychologically, it's often very difficult to convince someone that the business they spent decades building is not worth much. This is what's really preventing her from retiring. If her business is really worth 3-10 million, she can easily use the business profit stream itself as a leverage to get liquidity and retire--think about it, she can just hire a CEO for 200k and the rest of the income then becomes entirely passive. It would be hard to ask her to relinquish her real estate to you for a price she's unwilling to accept, even if you retain some team of valuation specialists who can get a very accurate valuation.

From your perspective, if you want to start a practice, just start a practice. The most important question in this case is how much the contract psychiatrist is making. If you are seriously considering this, the first step would be to fire the contract psychiatrist and take his spot, and then also do what the SW is doing (i.e. general manager of the practice). There's not a lot of value in getting a book of patients in psychiatry, since the demand in most of the country is way too high for this to matter. In the meanwhile, the amount of time it takes to manage a large group of generally unprofitable therapists may not be worth it, dollar by dollar, vs clinical revenue that you can generate by simply being a practitioner.
 
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TexasPhysician

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Seems like everyone is a contractor. How long are their contracts? Could they all just leave once the transaction is complete?

Why is the psychiatrist and NP there only 5 hours? Can they not expand into a lucrative practice there?

How are the demographics and real estate values? Is the area going downhill?

Lots of questions.


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Village

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Organizational documents, previous 3 years of business tax returns, current balance sheet, patient lists, existing contracts, property documents, contractor/employee/manager info, and marketing materials to name a few. You should also get a handle on how the operation runs and learn quick after you take over or your employees will leave.


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I have noted this and will meet with them tomorrow. Thanks alot
 
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Village

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IMO, this would be a complex transaction and if I were the buyer I would retain an attorney.

There are practice valuation analysts who look at the practice area, competition, good will, referral sources, patient mix and payment, cash flow, etc. and give you the market value of the practice. What's the gross and net income of the practice? Is the 60k her collection alone or for the entire practice?

Then, there is the real estate. That transfer should be a separate transaction. The real property will have to be appraised, properly zoned, and pass inspection, etc.

Then, there are the therapists, NP, and M.D.. What is/will be their employment relationship? Are they independent contractors or employees? Do they receive benefits? How are expenses handled?

Then there are insurance issues that need to be addressed for the property, business, and the practitioners.

Are there past due taxes, liens, lawsuits or pending lawsuits?

How are you going to make payroll and pay the bills/taxes/insurance for the first 3 to 6 months? How much working capital do you have for this transition?

Is this a corporation or LLC? Will shares be transferred?

And, most importantly, how much money are you willing to lose?
Very insightful. I will check these out tomorrow too. Thanks alot
 
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Village

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And you'd need a good office manager to begin with for managing the books, schedules, compliance and etc. Consider financial losses in the first year and if you'd be ok with this as you're learning/transitioning into the new business. Sounds like an interesting opportunity!
I had a private practice before but closed due to family illness. I have some idea about what you are talking about but will need to understand how this practice runs, changes that can be made and if I am willing to deal with the loss/consequences.
 
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Village

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I suspect that aside from the book value of the real estate, the actual practice is worth very little. If the practice generates 60K a month average of INCOME on a fairly consistent basis, it would be worth very conservatively more than 3 million, and upward to 10 million depending on growth, in which case she likely would not be reaching out directly to you but would retain an agent for sale, and specialized private equity firms would be interested in brokering such transactions. More likely it's 60k of revenue, with unclear profit.

To very roughly estimate the worth of the business itself, get the last two years of business tax filings, and calculate the net profit and multiply it by between 4 and 6, plus values of the real estate. This is a conservative number, since this represents a P/E ratio. Typical residential real estate has a price to earning ratio in the teens. Long term S&P P/E is ~ 15. You may find that aside from real estate equity the practice is not worth much, or even negative. And the transaction cost alone may favor a straightforward liquidation rather than continuation of the business as an ongoing concern. Nevertheless, she might still be willing to sell you the book value of the commercial real estate, as these things are often highly illiquid and basically waiting for another clinician for years to take over.

Psychologically, it's often very difficult to convince someone that the business they spent decades building is not worth much. This is what's really preventing her from retiring. If her business is really worth 3-10 million, she can easily use the business profit stream itself as a leverage to get liquidity and retire--think about it, she can just hire a CEO for 200k and the rest of the income then becomes entirely passive. It would be hard to ask her to relinquish her real estate to you for a price she's unwilling to accept, even if you retain some team of valuation specialists who can get a very accurate valuation.

From your perspective, if you want to start a practice, just start a practice. The most important question in this case is how much the contract psychiatrist is making. If you are seriously considering this, the first step would be to fire the contract psychiatrist and take his spot, and then also do what the SW is doing (i.e. general manager of the practice). There's not a lot of value in getting a book of patients in psychiatry, since the demand in most of the country is way too high for this to matter. In the meanwhile, the amount of time it takes to manage a large group of generally unprofitable therapists may not be worth it, dollar by dollar, vs clinical revenue that you can generate by simply being a practitioner.
The current psychiatrist is being paid 250/hour for 5hours a week. She sees 8-9 patients in those 5hours. I guess the price is for also using her license for advertisement and credentialing of the therapy group.
My thoughts were to let go the psychiatrist and her NP and be the psychiatrist on site. 100% of my collections as my license will serve the purpose for credentialing and marketing. The therapists contribute 40% of collections to the practice. Will be interesting to know what their individual contracts are and how much revenue is brought in.
I agree the value of the patient list is not worth much as these are all therapy patient and I am not sure what percentage are receiving med management services. I will have to build case load for psych services.
 
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Village

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Seems like everyone is a contractor. How long are their contracts? Could they all just leave once the transaction is complete?

Why is the psychiatrist and NP there only 5 hours? Can they not expand into a lucrative practice there?

How are the demographics and real estate values? Is the area going downhill?

Lots of questions.


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They are expensive. MD is 250/hour and ARNP is 175/hour for 5hours too. Not sure the amount of med management patients cover for their expenses. Not sure why the psychiatrist did not set up practice there? Will try to dig into that.
I just moved close to that area few months ago. Alot of people moving into that area. Still to evaluate real estate values and business in that area. Yea lots of questions
 
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hamstergang

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The current psychiatrist is being paid 250/hour for 5hours a week. She sees 8-9 patients in those 5hours. I guess the price is for also using her license for advertisement and credentialing of the therapy group.
Is this saying that the psychiatrist is on staff in order to bill all the therapy work under the psychiatrist' s name? If so, is that actually legal, and if not, what do you mean by using the psychiatrist'a license for credentialing?
 
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Village

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Is this saying that the psychiatrist is on staff in order to bill all the therapy work under the psychiatrist' s name? If so, is that actually legal, and if not, what do you mean by using the psychiatrist'a license for credentialing?
I have heard counseling practices need the license of a physician as medical director for them to be setup with insurance companies to operate. I am guessing psychiatrist was added to tax ID so services can be billed and psychiatrist is paid per hour. The rate is higher than usual probably because they are taking into account her license carries some liability for the practice as medical director and they market the practice with med management as can service. Am not sure if psychiatrist employed or independent contractor .
 

hamstergang

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I have heard counseling practices need the license of a physician as medical director for them to be setup with insurance companies to operate.
I know of multiple insurance-based therapy practices around me with no MD or DO affiliated with them. So this seems odd to me.
 

TexasPhysician

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I have heard counseling practices need the license of a physician as medical director for them to be setup with insurance companies to operate. I am guessing psychiatrist was added to tax ID so services can be billed and psychiatrist is paid per hour. The rate is higher than usual probably because they are taking into account her license carries some liability for the practice as medical director and they market the practice with med management as can service. Am not sure if psychiatrist employed or independent contractor .
That is incorrect unless an odd state issue.

A therapist that takes insurance can fill relatively easily. I don't see why they would give up 40% of reimbursements. That's a poor decision unless 40% includes scheduling, staff, etc.


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Shikima

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That is incorrect unless an odd state issue.

A therapist that takes insurance can fill relatively easily. I don't see why they would give up 40% of reimbursements. That's a poor decision unless 40% includes scheduling, staff, etc.


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The going rate these days. I never understood the rate either.
 

WisNeuro

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I have heard counseling practices need the license of a physician as medical director for them to be setup with insurance companies to operate. I am guessing psychiatrist was added to tax ID so services can be billed and psychiatrist is paid per hour. The rate is higher than usual probably because they are taking into account her license carries some liability for the practice as medical director and they market the practice with med management as can service. Am not sure if psychiatrist employed or independent contractor .
As TP said, unless it's a weird state issue, not the case for a pure counseling/therapy/assessment practice. At least not in any of the 5 states I've lived/worked/practiced. As to the reimbursement percentage, you'd be surprised what some people will accept. There is a place in town here where the counseling/therapy staff have a 50/50 split with the practice. Now, they're mostly from the local diploma mill, so that's probably all they can get. 70/30 is probably the highest I'd be willing to give up, depending on other factors.
 

Jules A

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The amounts being paid prescribers sound reasonable for a part-time gig especially if they are good at what they do. I'd meet them and inquire about their prescribing styles because I personally wouldn't want to come behind a benzo/stim circus or Bipad dx for every child who is aggressive and has a trauma history. I would also be very particular about the quality of therapists. If the therapists suck they will be looking for you to prescribe a handful of pills to cure everyone's woes rather than do the difficult work in therapy. I've never understood therapy practices without the foresight to have full time prescribers they know and trust because attempting to farm that out to PCPs etc. is rarely a good situation and in my area the successful practices aren't willing to provide med management services if the patient is getting therapy elsewhere.

All that aside my tendency with any business aquisition like this would be, as someone else mentioned, to only pay for the real estate if its a decent property. Good luck.
 
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I think that the 60k per month must be the gross revenue after taking the 40% from the therapists. It makes sense as I generate about 8k per month for my employer in a 60/40 split and I am pretty sure that I generate more than the average therapist. It would also mean that they are generating 15k per month and taking home 9k while contributing 6k.
 
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Village

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Met with owner of therapy group. Buildings priced Right but practice priced at 150k. Practice has good reputation. Has been around for 11years Not too many med management patients but potential to fill up easily. Profit is 25k a year after all expenses. 7 Just not sure it is worth purchase. Looking at offices to start my own practice . Within 1year I should be getting busy and with low over head.
 

TexasPhysician

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Met with owner of therapy group. Buildings priced Right but practice priced at 150k. Practice has good reputation. Has been around for 11years Not too many med management patients but potential to fill up easily. Profit is 25k a year after all expenses. 7 Just not sure it is worth purchase. Looking at offices to start my own practice . Within 1year I should be getting busy and with low over head.
Would the 25k profit include all of your overhead rent and staff including full-time office staff that could support you working full-time? If you can insert yourself without adding expenses, 25k profit after all overhead is probably worth paying about 100-150k.

If you have to add staff/overhead to support you full-time, the value shrinks to maybe 15k if that.

A growing psychiatry practice can easily hire counselors and generate income from them.
 
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Village

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The 25k is after all support staff, rent and all bills paid at end of year. Inserting myself can increase pay for billing person but probably not much. They paid per claim.
 

TexasPhysician

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The 25k is after all support staff, rent and all bills paid at end of year. Inserting myself can increase pay for billing person but probably not much. They paid per claim.
Is the support staff sufficient to handle your full time needs though? If 2 FT staff handling calls/intakes is available and already expensed, that is $60k/year of revenue.

Rent for my clinic is close to $36k, but you are purchasing at fair value theoretically. Assuming that's all paid as part of expenses.

A FT psych could move billing in-house and salaried which could add savings.

A FT psych could easily bring in 50+ hours of counseling patients. Is there room to expand?

$60k + $36 + 24k = $120k. If you can move billing in house, retain counselors, have space available to grow, etc., then $120k may be a fair price. Asking $150k. Buyer pool is small, so negotiating close to $100k may be possible. My numbers above are rough, so obviously you will need to dig deeper.
 
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Village

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Thinking about this now the lobby is small and room for growth is limited. They have 3 full time staff for scheduling/phones etc. Billing is in house. May have to delegate office needs to current staff as 3 is alot for a therapy group of 9 therapists.

Am not sure the space will be able to handle the new influx of patients when am there full time. Alot of space sharing between the therapists to avoid crowded lobby. May have to move to bigger space in near future. That may affect the number of therapists who will stay with the practice.
 
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Village

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True. Just got an office and going on my own. I appreciate all the advise and info. Knowledge is wealth. Thanks guys
 
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F0nzie

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True. Just got an office and going on my own. I appreciate all the advise and info. Knowledge is wealth. Thanks guys
So is experience. Owning your own practice will make you a better buyer in the future if you wanted to expand.


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