Starting a New Medical Practice
Part 2: To Buy or Not To Buy
For specialists, it’s usually pretty clear-cut—they typically don’t buy existing practices. With lower startup costs and less need for a
specific location, building a practice from scratch is often easier and cheaper. The exception might be specialists like periodontists, who
might pay a premium to take over a retiring practitioner’s referral base, but that’s rare. Most specialists start small, sometimes
part-time, and grow their practice over time.
For GPs, the decision is trickier. They can either start from scratch or buy into an existing practice, each with its pros and cons.
Starting fresh means no goodwill to buy, plus full control over location, staff, and operations. You also have the chance to build your own goodwill, which could eventually be sold. On the flip side, buying into an established practice offers a ready patient base, reducing risk and providing income from day one. If you’ve worked there before, you know what to expect, and your contributions to goodwill could lower the buy-in price. The downside is paying for goodwill, with no guarantee of a return.
Ultimately, the right choice depends on your situation and the practice available. But if you can, buying an existing practice might be the way to go. Why deal with the risks and costs of starting fresh when you could take over a solid, established practice for less? Let’s dive into the key considerations when buying a practice.
What is Goodwill?
Goodwill in a medical practice happens when the future profits of the practice exceed what the owner could earn as an employee. A buyer will pay a premium for the chance to share in those profits, especially if the practice has unique qualities that can be passed on to a new owner.
While there's no set list, here are some factors that commonly create goodwill:
- Efficient Support Staff: Friendly, competent staff who build good relationships with patients.
- Modern, Accessible Premises: Clean, convenient locations with parking and family-friendly features.
- Stable, Skilled Associates: Well-trained associates who bring in their own patients and are locked into non-compete contracts.
- Strong Allied Health Relationships: Partnerships with professionals like physiotherapists and pharmacists that expand services and attract new patients.
- Specialization or Niche: A focus on a specific medical need or demographic that brings in a steady stream of patients.
- Location and Appearance: A prime location and appealing facilities can boost patient flow and reputation.
- Specialist Equipment: Unique or expensive equipment that gives the practice a competitive edge by offering services others can't easily replicate.
How Can You Improve Profitability and Goodwill?
To boost both profitability and goodwill, focus on improving the key factors we’ve discussed. Take a close look at your practice and see where you can make changes that will enhance performance and appeal. Remember, a practice that can’t improve hasn’t been built yet!
A good way to start is by getting feedback from a trusted colleague. An outsider’s perspective can offer fresh insights. You can also learn from other successful practices by asking things like:
- What attracts patients here?
- How do you keep patients coming back?
- What is the average consultation fee and how can it be increased?
- What types of patients does this practice serve?
- What are their hours? How do they handle out-of-hours calls?
- What services do they offer? Do they cater to a niche?
- How many practitioners are there, and do they have loyal patients?
- Are there other services nearby, like physiotherapy or a pharmacy?
- Do assistants have their own patients?
- Are home visits or after-hours care available?
Some things to consider:
- Support Staff: Are they efficient and friendly? Their rapport with patients matters a lot for loyalty and goodwill.
- Accessibility & Parking: Is the location easy to get to, with enough parking? A convenient spot makes a big difference.
- Patient Demographics: Does the practice have a loyal patient base, or is it more of a high-turnover setup?
- Billing: How do you bill patients? Clear, simple billing and a good balance of bulk billing can build trust.
- Time with Patients: Are you spending enough time with each patient? Longer consultations usually lead to better satisfaction and loyalty.
- PIP Eligibility: Is the practice eligible for funding programs like PIP? This can bring in extra income and show your ability to optimize care.
- Strengths & Challenges: What makes your practice unique, and what could be improved? Identifying these can help you stand out.
- Systems and processes in the practice : Do you have documented systems for how you do things in your practice? e.g. answering the phone, making appointments, dealing with patients
- Referrals: Do you have a system for getting patients to refer their friends and family?
- Website: Does your website stand out and differentiate your practice from others
- Patient education: How do you educate patients. e.g. Do you post educational blogs?
- Your premises: Do you have a waiting room or a patient lounge that makes your patients feel welcome and give them a great experience?
Using This Information to Improve Your Practice
At the core, goodwill is about having a sustainable competitive advantage that generates above-average profits. A practice with this kind of edge is one that a potential buyer will be willing to pay a premium for, rather than starting a new practice from scratch. To ensure your practice commands a premium upon sale, start thinking about these factors years in advance, and focus on building a practice that will have lasting value.
Improving Your Practice’s Goodwill
If your practice relies too heavily on you, consider bringing in someone to take on a portion of your patient base. Ideally, there should be at least one other practitioner or fee earner for every owner in the practice—preferably more. This increases profit leverage, reducing dependence on the owner and shifting from personal goodwill (which has limited value) to practice goodwill (which can be much more valuable).
By leveraging the efforts of others, you not only increase profits but also make your practice more scalable and attractive to potential
buyers, as it’s less reliant on the owner’s personal involvement.
The Impact of Practice Premises on Goodwill
The quality of your practice’s premises plays a significant role in its overall goodwill. Modern, well-located premises with good access and ample parking are key factors in attracting patients. Simply put, patients are less likely to visit a practice if the premises are substandard or inconvenient.
There’s a mutually beneficial relationship between a successful practice and its premises. Well-presented practice spaces not only improve patient experience and satisfaction, but they also boost profitability, which in turn enhances goodwill. In some cases, the premises themselves can even become a valuable standalone investment. It’s important for practitioners to closely evaluate how their premises impact practice goodwill.
The Valuation of Practice Goodwill
Valuing practice goodwill is a complex task that requires both art and science. While there are some general benchmarks and rules of thumb
available, they should be applied with caution as they might not always fit the unique characteristics of a specific practice. The essence
of goodwill
in this context is whether the practice has a sustainable competitive advantage, one that can generate above-average
profits over time and be passed on to a new owner. If the practice meets these criteria, potential buyers will likely pay a premium over the
value of its tangible assets.
Specialists and Goodwill
The situation for specialists is somewhat different. Goodwill is more challenging to value in specialty practices due to factors like the reliance on referrals and a specialized body of knowledge. In general, specialists find it harder to generate goodwill because their practices tend to be more dependent on the individual’s expertise than on broader practice characteristics (e.g., location or team dynamics).
However, there are exceptions, especially in practices where the business itself—like the letterhead or branding—becomes valuable. For example, medical-legal specialists may be able to sell the goodwill tied to the team and the business’s reputation, not just the individual doctor’s personal connections.
In high-capital specialties like radiology or pathology, significant barriers to entry (cost of equipment and expertise) can create more substantial goodwill, as these practices require a larger infrastructure. Similarly, ophthalmologists and periodontal practices have seen strong goodwill valuations due to their specialized nature and the high demand for their services.
Valuation Process
To illustrate the valuation process, let's consider an example of a General Practice where the Future Maintainable Earnings are calculated based on historical profit data over three years.
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Step 1: Calculate Future Maintainable Earnings
Using average data, we calculate the future sustainable earnings of the practice. For instance, if the average profit (after arms length owners remuneration) over the last three years is $200,000, that figure becomes the best estimate for what the practice will continue to earn moving forward.
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Step 2: Apply a Multiple
Next, a multiple is applied to this figure. This multiple reflects the perceived risk associated with the practice. Factors like the strength of the practice’s staff, its location, the stability of the patient base, and its future earning potential influence this multiple. For example, after considering various factors, the multiple might be 4, meaning the goodwill of the practice is valued at $800,000 ($200,000 x 4). This multiple can vary widely between practices.
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Step 3: Valuing Tangible Assets
Beyond goodwill, tangible assets such as plant, equipment, and furniture are valued separately, and the buyer will pay the market price for these assets in addition to the goodwill value.
The Due Diligence Process
The term "due diligence" is the series of checks and investigations that should be performed before acquiring a a
medical practice. Due diligence is a crucial step in any acquisition process. Its purpose is to ensure that the buyer has a clear and
accurate understanding of what they are purchasing. This includes evaluating financial, operational, legal, and other factors that could
impact the success of the acquisition.
In simple terms, due diligence is the process of verifying that what is being sold is exactly what the
seller claims it to be.
The Key Areas of Due Diligence
The exact nature of due diligence will vary depending on the specific situation, but the following are the core areas typically covered:
Financial Due Diligence
- Revenue and Expense Verification: Review the practice’s financial statements, tax returns, and billing records. Are the gross billings consistent over the past several years? Are there any significant fluctuations that should be investigated further?
- Profitability: Are the profits sustainable? What are the practice’s margins? Does the practice rely on any one patient or service for a large portion of revenue?
- Assets and Liabilities: Check the balance sheet for any liabilities (debts, unpaid taxes, legal disputes, etc.) that the new owner might inherit.
- Tax Issues: Ensure that all taxes (income, GST, payroll) are paid up-to-date, and that there are no issues or tax liabilities outstanding.
Operational Due Diligence
- Staffing and Employment: Review employee contracts, staff turnover, salary and benefits structures, and staff performance. Are key team members likely to stay? Does the practice rely heavily on specific employees for its operation?
- Patient and Service Analysis: Understand the practice’s patient base. Is there a strong retention rate? Are there any niche services that generate substantial income?
- Systems and Processes: Investigate the practice’s systems—whether it’s IT, billing, scheduling, or record keeping. Are they efficient and up-to-date?
- Premises and Equipment: Are the premises well-maintained? Are there any issues with zoning, building codes, or leases? What is the condition and age of the medical equipment, and will it need to be replaced soon?
Legal Due Diligence
- Legal Structure and Ownership: Confirm the ownership structure of the practice (e.g., partnership, sole proprietorship, corporation). Are there any legal complications, such as outstanding disputes or unsettled agreements?
- Contracts and Agreements: Review all business contracts, including leases, supplier contracts, and any contracts with employees or third parties. Are they legally binding and transferable to the new owner?
- Licenses and Certifications: Verify that the practice is licensed and in good standing with relevant medical boards and government agencies. Are all necessary permits and certifications current?
Market and Competitive Due Diligence
- Location and Demographics: Is the practice in a strong location? Analyze the local market to see if there are upcoming demographic or economic changes that might affect the practice.
- Competition: Investigate the level of competition in the area. Are there other medical practices offering similar services? Is the market saturated, or is there room for growth?
- Reputation and Goodwill: Assess the practice’s reputation among patients and within the local community. Does it have loyal patients? Is there strong goodwill built into the business?
Risk Assessment
- Risk of Litigation: Are there any pending or potential lawsuits? This could include malpractice suits, disputes with staff, or claims related to the sale of the practice.
- Regulatory and Compliance Issues: Are there any risks related to healthcare regulations or compliance issues? Are all policies and practices aligned with current medical laws and ethics?
In summary: getting advice from a specialist medical accountant is key when buying or starting a medical practice. They can help you navigate the complex financial and legal details, from tax planning to compliance, and set your practice up for success. The team at Tolevsky Partners can guide you through the process making sure you make an informed decision that works best for your situation.
Want to learn more?
Please click on the links below to view our 4 part series on "Doctors Guide To Starting a Practice"
Part 1 : First Things First
Part 2: To Buy or Not to Buy
Part 3: How to Buy a Practice
Part 4: Location and Premises
Chris Tolevsky has extensive experience in the medical and allied health fields, with in-depth knowledge of both general and specialist
practices. He provides expert guidance on tax strategies, and building and protecting wealth focusing on individual practitioners and
their practices. If you’re interested in discussing how we can help you grow your business or professional practice or optimize your
financial strategy, please feel free to reach out for a complimentary consultation by clicking on the box to the right of the screen.
Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not
take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable