When considering a medical practice buy-in, it is important to do your homework and know what you are getting into. Making the decision to buy-in to a medical practice is a long term decision that will affect both finances and the lifestyle of the doctor.
No matter, whether it is a solo medical practice, or a group medical practice, the same considerations apply. Here are 3 key steps to think through when looking at a medical practice buy-in offer:
1) Ask whether a Buy-In is possible
In a typical medical practice buy-in scenario, the current doctor (or group of doctors) looks to bring on a new associate as an employee, and then eventually makes the associate a “partner” two to three years later.
In some cases, the offer of partnership may not actually be available, so it is important to determine this before agreeing to become an associate physician.
A medical practice buy-in can be likened to getting married. Having a fellow doctor as a business partner is akin to having a spouse. It may sound obvious, but it is advisable that the associate should be very cautious of accepting any buy-in offer immediately, no matter how enticing. Two or three years is generally sufficient time for a physician to get to know the personalities of his or her future partners and the dynamic between them.
Sometimes there are better alternatives to buying in, such as remaining an employee or simply leaving the practice altogether.
2) Review all available Financial Information
Once you know that the offer of a buy-in and future partnership is a possibility, it is time to look at the financial potential the practice can bring.
The first thing to review are practice income tax returns and accountant-prepared financial statements for the three most recent fiscal years. The financial statements can include:
– Balance sheet. this is a statement of the practice’s assets, liabilities and partner equity at a given time.
– Profit and loss statement. A statement of the revenues and expenses for the stated period.
– Depreciation statement. A statement of accumulated depreciation on existing assets, dates placed in service and cost at a given time.
– Accounts receivable summary. This will generally contains, at a given time, a statement of outstanding charges by age (e.g., current, 30 to 60 days, 60 to 90 days, etc.).
– Breakdown of Physician productivity. A report showing charges and collections for the most recent 12 months.
3) Consider the potential ‘Goodwill’ on the practice
Goodwill is perhaps the most elusive concept to consider when looking at a medical practice buy-in.
Medical practices all have some kind of intangible value other than accounts receivable. This is known as ‘Goodwill’. It typically exists where there are barriers to entry into a given industry that takes some time to overcome. With high start-up costs, increased competition and other factors, Good has became a recognized component of many medical practice purchases and buy-ins.
A medical practice’s goodwill value depends upon various factors, such as competition, reputation of the doctors, the community connection of the practice, amount of overhead, and the specialty of the practices. Determining the appropriate goodwill percentage in light of these factors is where a lot of subjectivity happens.
