Buying an Existing Practice Versus Starting One From Scratch

There are many things to consider when evaluating whether to buy an established practice or start one from scratch. There are advantages and disadvantages to both. Selling doctors tend to overvalue their practice. Often, the selling doctor has many years and lots of sweat, toil and tears involved in building the practice. There is an emotional factor here, which can cause the seller to raise the price to unrealistic levels. Do not let emotions cause you to lose objectivity. You need to love the practice, but you also need to be realistic about the financing.

The equipment that comes with an established practice may or may not be exactly what you like. With a practice you start from scratch, you can buy the exact equipment you like, in the colors you like and the size you like, but you will typically pay full price with no initial income.

Accounts receivable (A/R) are not always part of the sale with an established practice. A/R must be evaluated because the older the A/R, the more difficult they are to collect. Most A/R bills more than 90 days old are very difficult to collect and more than 120 days are virtually uncollectable. Some selling doctors want to sell their A/R; some don't. If the money is collectible, there is an advantage to buying the A/R at a reduced rate since it will give you cash flow. When starting a practice from scratch, you will typically need to have three to six months' cash for expenses to buffer the lack of cash flow with the initial start-up.

Your technique needs to be compatible with the selling doctor's technique. A Gonstead practitioner will struggle with the transition to an Activator practitioner. A practitioner who does ART will have some compatibility issues with the Diversified practitioner.

Is the selling doctor's practice success based on providing clinically excellent and ethical care with lots of referrals, or is it based on personality, gimmicks or scams? How does the selling doctor market and build their practice? If it is a referral practice, this is ideal. If there is a lot of advertising, this expense must be considered.

Will the selling doctor help with the transition? Generally, a shorter transition is better. Typically, once the doctor has decided to sell their practice, they lose the incentive to work hard to keep the practice going in a positive direction. This diminishes the value of the practice over time. So, if you are buying a practice that has been on the market for quite some time, understand that the doctor's heart might not be into the practice as much and the value of practice will simply be less. The production and collections over the past three years, up to the current date, should give you an idea of the trends of the practice.

Is the selling doctor on managed care plans, and does the new practitioner want to be on those plans? If you want to be on the managed care plans, buying a practice can be advantageous because you can more easily get on those plans. Starting from scratch, you will have difficulty getting on managed care plans because most plans do not want additional doctors.

Is the selling doctor involved in financing the sale, or will you need to get financing from a bank? The selling doctor has a vested interest in the buying doctor's success if the selling doctor is involved with the financing. It is typically better for the selling doctor to avoid being involved in the financing, so they know they have their money. For the buying doctor, sometimes seller financing is the only option for them. Banks can be very tight with their lending, especially to a recent graduate.

Location is always important, whether you are buying a practice or starting one from scratch. You want to practice in an area that you like and want to be serving long-term. Is the practice you are buying or the office you are considering starting from scratch in an area where you can visualize yourself working 20 years from now?

Does the practice you are going to buy have a computer system, and do you like it? If you do not like the computer system in place, can you easily convert the system to one you prefer? If you are starting a practice from scratch, we recommend you start day one with paperless electronic health records. Having a system with which you are comfortable is a very important factor.

Always have your attorney and practice advisor review any contract before signing. An attorney can recognize problems from a legal standpoint and your practice advisor can recognize problems from a practical standpoint. This point cannot be emphasized enough.

Look closely at the monthly statistics for the practice you are considering buying. The buying doctor needs to see the true practice stats, as DCs tend to exaggerate their production, sometimes significantly. What are the average monthly services, collections, new patients and total patient visits? The buying doctor is going to lose some patients in transition, so if the practice has high new-patient numbers each month, that will help with the transition. A practice with high new-patient numbers and low total monthly patient visits indicates a poor retention rate, whereas the opposite indicates a high retention rate, probably indicating longer treatment plans and perhaps a lot of regular maintenance patients. High monthly services and low monthly collections can indicate poor collection systems or high write-offs, especially with managed care. Make sure the selling doctor can and will contact all of their existing patients via a letter letting them know of the practice sale.

The decision to buy an existing practice or start one from scratch is an important decision and should be well-thought-out. Good luck.