If you are considering starting your own practice or purchasing an existing practice, ponder these points before you plunge in.
The Advantages of Starting a Practice from Scratch
You work for yourself, set your own rules and office hours, see as many patients as you want, make as much money as you want, practice your own techniques, have a floor plan that’s custom designed for you, equipment you want, and have CA’s that are loyal to you.
The Disadvantages of Starting a Practice from Scratch
Time management is difficult. You never seem to have enough time to see patients, promote your practice and be with your family. You are tied to your practice, because when you’re not in the office, your income stops, but your overhead doesn’t. This makes it difficult to take vacations, educational seminars, etc., and you spend extra hours doing record keeping and administrative duties.
While there is a tremendous amount of joy being your own boss, it will cost you a lot more than you think. Depending on the economic area you choose, starting a new practice can cost anywhere from $40,000-$70,000 (this includes living expenses until you open, remodeling the office, first and last payments on everything, utility down payments, and enough money to pay for six months practice and personal overhead, etc.).
Expect a minimum office overhead of $5,725 per month. (Breakdown averages are: $1,000 rent, $1,000 staff salary [good luck if you can get someone to work this cheap], $75 taxes, $200 telephone, $250 utilities, $200 insurance, $100 accountant, $300 supplies, $1,000 practice start-up loan repayment, $1,000 equipment lease payment, and $600 for student loan repayment). Then add to this, a minimum of $2,500 per month for personal living expenses.
You can reduce this monthly overhead if your office doesn’t need to be remodeled or built out (a very rare occurrence) and can start your practice without an X-ray machine or physical therapy equipment.
Buying a Practice
An often-heard chiropractic myth states it’s better to buy a practice than to start one. By doing so, you reduce your financial risk and achieve your goals quicker. The fact is it’s far riskier to buy a practice than it is to start one.
However, under certain circumstances, buying a practice may be a good idea. Today, most practices are experiencing an income decline, while their overheads are increasing; therefore, the net profits of these practices are significantly reduced or totally eliminated. Rule of Thumb: Don’t buy a practice that is declining!
How do you know if a practice is a good buy?
Inexperienced buyers are at the mercy of the seller or the seller’s representative. My advice to the reader is to hire your own buyer’s representative or an experienced consultant to represent you. I wrote the book on How To Buy And Sell A Practice, and I’ve guided hundreds of clients in their purchasing of good practices. An experienced buyer’s representative will not only help you determine if a practice should be purchased or not, he could also save you many thousands of dollars.
The advantages of buying a good practice are you have an instant practice, with instant income, and a trained staff.
The usual disadvantages of buying any practice are you inherit undesirable financial deals made by the previous doctor, CA’s that are loyal to another doctor, equipment you don’t want, patients who don’t want you, and adjusting techniques you don’t care to practice.
Why is the Practice for Sale?
Acceptable reasons for selling a practice are: the departing doctor is leaving for specialty training, or is retiring after a successful career.
Poor reasons for a practice sale are: low or decreasing volume, high overhead, low or no net, or the bad reputation of the doctor. If any of these situations exists, don’t buy the practice.
What Type of Practice Are You Considering Buying?
Personal Injury (PI) Practice: A PI practice is strongly built on the loyalty developed between the departing doctor and certain attorneys. Loyalty is not a transferable asset. Because the previous doctor has developed attorney loyalty, doesn’t mean you will be able to do the same.
An HMO/Managed Care Practice: HMO and Managed Care contracts are not passed from one doctor to another when a practice is bought or sold. There are no assurances that those carriers for which the previous doctor was credentialed—will accept you. You also need to consider that most HMO’s require you to have been in practice at least three years before they’ll contract with you.
A Nutrition Practice: If you’re not as equally well versed in nutrition as the departing doctor, the patients will not stay.
Practice Purchasing Rules
All office records, including new patient volume, regular patient volume, collections, and services, must be made available to you. The selling doctor must also provide you with the income tax returns and profit and loss statements (P&L’s) for the prior two years. If these items are not readily made available to you—don’t buy this practice.
When computing the goodwill (blue sky) of a practice, only use the collections, services, new patients, patient visits, net profit and overhead figures produced in the three months prior to the closing date. To compute the purchase price based on a year’s performance, multiply the total of the three months’ figures prior to the closing date by four. Ignore the prior year’s income and future potential, as you’re buying what is, not what was or might be.
Patient backlog is the essential element in determining the “goodwill (blue sky)” figure of a practice sale. A practice less than five years old doesn’t have a sufficient patient backlog; therefore, it has no or little goodwill.
Check all insurance procedures. Make sure they are non-questionable and ethical. Make sure the departing doctor is charging only for those services rendered.
You must use chiropractic techniques that are compatible with the previous doctor’s techniques; otherwise the departing doctor’s patients will depart with him.
To accommodate a smooth and effective patient turnover, the departing doctor must agree to stay with you for ninety days.
Will the departing doctor’s CA’s stay with you and, if so, will they understand, respect and support you as their new boss? If they don’t, they will hinder your practice turnover efforts and jeopardize future growth.
When buying a practice:
Only buy a growing practice, and only if you can get an excellent deal.
Never buy a practice with declining income, patient visits, etc.
If you find an honest, high net profit practice at a good price, buy it. In this case, you’ll make net profit your first month in practice.
Caution: My research as a consultant reveals that 98.7 percent of practices purchased do not grow. Don’t let this happen to you. Ask your consultant to help you eliminate this practice- building barrier.
by Peter Fernandez, D.C.
Dr. Peter G. Fernandez is the world’s authority on starting a practice. He has thirty years’ experience in starting new practices, has written four books and numerous articles on the subject and has consulted in the opening of over 3,000 new practices and the purchasing of hundreds of practices.
Please contact Dr. Fernandez at 10733 57th Avenue North, Seminole, Florida, 33772; Phone 727-392-0822, 1-800-882-4476 or Fax 727-392-0489, or visit www.drfernandez.com.