1 thing you must do before buying a medical practice
“I want to take care of my patients in my own way!” is most common reason doctors give themselves for starting own medical practice. There is absolutely nothing wrong with it.If one has passion, love autonomy, have a good business acumen and ability to put hard yards, then generally private practice is right fit for him/her.
Quite a few doctors start on their own and many doctors buy an existing practice. Both have very different implications. We are focusing on buying a practice in this article.
Often doctorsbuy practices based on some multiples. The current practices are either multiple of sales or EBITDA or Nett Profit and paying between 2 to 5 times of these multiples. It’s a huge range! But this is the most common practice I have seen.
Somedoctors buy based onsome kind of abusiness plan prepared by accountant or consultant, who may not have enough experience in health industry. They agree on a price suggested, raise the money and buy that practice.
Similar to buying the property, the demand- supply dynamics plays important role in the price.
Few months or years into the business (yes it’s a business of health), many find that it’s still not the way they envisioned. Expenses are high, sales assumptions based on which they bought practice are not materialising and patient book is not growingas anticipated- a harsh reality check!
What is one thing they can do avoid this?
That one thing is – “having a basic financial plan”.
I am not talking about financial planner’s plan or traditional business plan. Personally, I am not a big fan of 20+ pages report that your consultant prepares which is used to get funding and then it lies under your desk for rest of the time.
I am talking about a detailed cash-flow analysis of how much money the medical practice requires and when, and how it is going to return that money and when. One can then arrive at a correct price to pay as part of this reverse calculation.
Buying on multiples is called thumb rule. And everyone knows what a thumb rule is and what would be the outcome when one buys based on such rule. In my 25+ years experience, I have seen very few purchases based on thumb rule worked.
As a staring point for any small medical practice, a cash-flow plan that fits a single A4 sheet is essential. Bigger the venture, elaborate the plan. For large investments, we have developed financial plans that barely fit A0 sheets.
For small medical practices, that A4 sheet cash-flow plan (ideally done in excel or similar software) should have following elements, all across a timeline:
- Money invested , including scenarios for purchase price
- Research based Sales projections
- Expenses budget
- Paying investments back to their funding source, while retaining your profits
If this financial plan says that you can return invested money to its sources in given time by buying the practice at that price, then there is higher probability that the medical practice might make it.
I suggest my clients to buythe medical practiceat a priceonly when that financial planfirst stacks on paper. That way one can ensure that atleast the purchase price is realistic and not going to hurt the business.
However, there are no guarantees as real world is different than an A4 sheet. In coming blogs, we will discuss more on how to manage the variations in real world.