Buying a Practice
by Patrick C. Alguire, MD, FACP
Buying a practice is a viable option if you are trying to locate in a very competitive environment. In these situations, purchasing an established practice is a proven way to enter the market quickly without having to spend much effort recruiting patients, obtaining equipment, and establishing referral systems.
The cost of a practice is usually determined by the value of its fixed assets and the "goodwill" of the practice. Fixed assets are tangible items such as the building or office space, equipment, and supplies whereas the goodwill of the practice usually means the transfer patients and referral patterns that have traditionally been associated with the practice. Another potential advantage of goodwill is assuming the reputation of the practice, particularly if it is excellent.
The most difficult part of buying a practicing is determining its worth. Determining the value of the fixed assets is relatively straightforward. The first step is to hire an independent, expert appraiser to identify and assess the value of the fixed assets. Remember, the value of an asset is the value to you, the buyer, not the value to the seller. The seller may have assets that were of great value to him or her, but if you are unlikely to use them, they have little or no value and should be priced accordingly.
The goodwill of a practice can be enhanced when the seller helps the buyer transition into the practice. This may be accomplished by having the seller and buyer work together for six to nine months prior to the seller leaving the practice. This helps ensure patient loyalty, maintain important referral patterns, and establish hospital connects. A seller that cannot provide this transition has devalued the goodwill of the practice, and this should be taken into account when negotiating the price.
Goodwill is more difficult to appraise. On average, the value of goodwill ranges from 30% to 40% of the practice's annual gross income. Patrick Malloy, in his book Planning Your Entry Into Practice offers the following three tips in assessing practice income:
- Assess the gross income for each of the preceding four to five years
Reviewing five years of records will provide a more accurate picture of the practice income as compared to a review limited to only one year. Also, be certain that the income you review is only from the practice and not other sources unavailable to you.
- Net income for each of the preceding four to five years
Use the gross and net income to calculate the ratio of net income to expenses. Healthy practices have ratios of 40/60 to 60/50; ratios of 50/50 are quite common. Ratios of less than 40% may be remediable, for example, poor management or billing strategies, or immutable, such patients with poor insurance payors. Before putting your money down, it's important to know the difference between what can be fixed and what cannot.
- Source of the income
Healthy practices have a variety of different insurance payors, none with a dominant hold over the practice. Some experts believe that HMO involvement should be limited to less than 30% of the total practice with no particular HMO accounting for more than 20% of the practice total.
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