As we’ve wound our way through this group practice roadmap, we regularly get asked a simple question: throughout the discussion, you’ve talked about building a new location as the means to add new locations to your group practice. What about acquiring an existing practice? And certainly this is an effective, useful way to grow your practice. In fact, most of the top group practices grew through a combination of new office development and acquisitions. And we were definitely going to get around to discussing it. Now, would be a good time to have that discussion.
Like a lot of other folks out there, we’ve done our standard hundreds of acquisition deals – from having no money and begging for owner-financed deals to having public market money and overpaying in cash to beat out competitors. And while every deal has its own characteristics and unique issues, things can generally be boiled down under the umbrella of some major overriding points.
In our first review of acquisitions in this post, we’ll talk about things you need to know and should consider. We’ll follow that up with a discussion of some problem areas, do a breakdown of how the economics of a deal might look and then give you some places to look for a practice to buy.
If you are going to buy a practice, make sure to consider these handful of items before signing that final deal.
Know what you are buying
Of course this includes the fundamentals: Are you buying the existing patient contracts? If so, what do these remaining contracts look like in terms of treatment remaining and collectibility of the unpaid amounts? Are you purchasing equipment? Signing onto the existing lease or doing a new one? Are you assuming existing obligations? Are you purchasing the practice’s corporation or just assets and/or liabilities? What are the tax implications? And so forth. There are quite a number of sources with background on purchasing a business and we are happy to talk more details with you as well if you have specific questions.
What often gets missed are the operation concerns. Specifically, are you purchasing a practice from a retiring doctor? If so, what is the transition plan to a new doctor? Do you even have a new doctor set up to take over. Are you purchasing a Medicaid-based practice and planning to convert to a fee-for-service type patient base. Or are you trying to do the opposite? In either event, are you set up for that transition? What about the existing staff? Don’t simply walk into the practice without seeing exactly what kind of operational, financial and tax situation you are entering.
Have a plan for the future
Here’s one possible situation: You see a potential acquire and walk in noting that the office needs a major facelift. New flooring, paint job, etc. That has to factor into your purchase price. If that remodel is going to cost $50,000, should you try to reduce your offering price by $50,000? Maybe so. Without knowing that you planned a major remodel, you would make a purchase and then sink another $50,000 into the practice without seeing the first patient in that practice.
Or, on a larger scale, consider an office that you love everything about except the location. Maybe the office is located in a dying strip center and moving it to the new center just 3 blocks away will make all the difference in the world. Here, you are looking at a potential $200,000+ investment on top of the purchase price. Make sure your incorporate this into your offering price.
On the flip side, there are things that may cause you to pay a premium because you know that you are about to make a killing by making a few simple operational changes. Here’s one that I’ve seen frequently: an office located in a vibrant area with lots of families is underperforming because they do not have the desire or ability to market to the public. I know that when our group comes in with our marketing plan and spending commitment, results at that location are going to jump to a new level. In these cases, we are willing to pay extra to make sure that we get that practice because we have such confidence for the potential of that office.
Do your due diligence
Clearly, you wouldn’t buy a house or a car or make any other major purchase without kicking the tires first so don’t do this with a practice purchase, no matter how much you like the acquiree. It’s just business. Some experts will tell you that you need a forensic accountant, contract lawyer, purchase consultant, tax accountant and brokerage attorney to review everything before making a deal. And that may be exactly what you need, but consider the cost of these things versus what you are purchasing. If you are purchasing a tiny, 50 patient office for under $100,000, there is probably a different risk profile than the purchase of a 10 office operations for $3.5 million. As with everything, do what makes you comfortable. And as always, we’re here to talk about it with you if you want to consider your options before jumping in with any advisor.
Whatever you decide to do, on top of all the UCC searches, equipment inspections and other steps you take, please take the time to look at some individual patient cases to make sure that you are not running into any surprises. Here’s a very common scenario: a practice deal gets done. The new owner walks in, sees patients for a day and declares that treatment has been done improperly for all of the existing patients and that all of them are going to require an additional 12 months of treatment to straighten things out. Threats of lawsuits, patient financial arrangements are reconsidered and everything becomes an absolute mess. Happens all the time with professionals. A new one comes in and declares that the old one did everything completely wrong. Maybe the previous one did screw up or maybe there were just different methodologies. In any event, if you see treatment with which you just cannot work, walk away and look for another deal. But make that decision before you spend a bunch of money on a deal.
Consider the tax implications
A good tax advisor can help you structure a purchase in a number of tax advantaged ways. Stock-for-stock exchanges, improved writeoffs, etc. I’m not a tax guy and didn’t stay at a Holiday Inn Express last night, but I have seen enough of these deals to know that purchases are heavily taxed or fall apart as the result of tax advice that isn’t thought through. Tax benefits can be had on the selling side as well if both parties are willing to work together. Make sure this piece is considered before you get a nasty surprise at tax time or walk away from a lucrative deal because no one could get comfortable with the tax side.
Of course, these are just some of the major considerations when you do a transaction. We are happy to talk more with you about these deals. Just click here.
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