The Executive Suite: Key considerations for every physician before acquiring a practice

Saturday, May 2, 2020

Key considerations for every physician before acquiring a practice

Deciding whether to buy your own practice is among the biggest financial decisions a physician or team of doctors will make over the course of a career in medicine.

When assessing a potential acquisition, a physician should research and fully assess all aspects of the targeted medical practice, notably: patient volume, timeliness of patient bill paying, condition of facilities and equipment, revenue and growth potential, location, economic health of the market, and recent sale prices of comparable operations, among others.

First things first: As the novel coronavirus impacts much of the United States, we recommend that acquisitive doctors temporarily move to the sidelines and wait for public health and economic conditions to stabilize. A wide range of preventative care visits and elective procedures are currently on hold, distorting the financial picture of many practices and making it difficult to assess a practice’s true worth and realistic outlook.

When the economic climate steadies, there will surely be opportunities. Demand for health care continues to steadily march upward as the population ages and medical advances drive continuously improving treatments and medications, adding to the appeal of ownership. At the same time, more doctors who own practices are nearing retirement age and likely will consider sales. Nearly a third of all doctors are between the ages of 55 and 65, according to data provider Statista, accounting for a larger share than any other age group.

When the time comes, physicians should seek answers to these important questions as they examine the financial merits of a potential acquisition:

What are the total costs and the most substantial expense drivers?
Are these costs expected to climb in coming years and by how much?
Are near-term upgrades to facilities and equipment needed?
Will existing staff stay on and at what cost?
How much revenue does the practice generate in a month and in a year? Does it cover all expenses by a healthy margin?
What are the principal drivers of revenue? Are there potential new sources of income?
What is the composition of the patient base? Is it growing?
Does the practice’s accounts receivable aging report – a record that shows unpaid invoice balances and the duration for which they’ve been outstanding – show that an acceptable level of patients paying bills in timely fashion?
Is the practice located in an economically healthy market? Is its population growth?
Does the practice have strong market share? How competitive is the market?
And, of course: How does the asking price stack up against recent, comparable sales in the market?

The answers to these questions will also help a buyer decide if the practice is a good investment. Often, a buyer will need a loan to finance and close a deal. An experienced banker should be well-positioned to provide counsel on potential acquisitions. A banker with significant experience in health care lending and knowledge of the market’s dynamics can both add value to decision-making and ensure fitting loan options.

An important part of the loan application process is a determination of how much a buyer can confidently borrow. This is based both on the borrower’s personal financial situation and the expected success of the practice.

A banker will need the following from the buying physician to help determine this:

A statement of assets and liabilities
Last three years of tax filings
Resume
Medical license

And from the owner of the targeted practice, a banker will need to see:

Three years of tax returns
A comprehensive practice evaluation—patient base, revenue, demographics, competition
Productivity by health care provider
An updated accounts receivable aging report

For all the near-term challenges imposed by the coronavirus pandemic, there is an abundance of reason to believe physician practices will thrive over the long haul—most notably increasing demand for ever-improving care.

U.S. health spending is projected to grow at an average annual rate of 5.4 percent between 2019 and 2028, reaching $6.2 trillion by the final year of that window, according to the Centers for Medicare and Medicaid. The CMS projects that health expenditures will on average grow more than 1 percentage point faster per year than overall gross domestic product in that span of time, and it estimates health care’s share of the national economic pie will rise about two percentage points to 19.7 percent by 2028.

Clearly, patience is required in the near team. But there is little doubt that opportunity lies ahead for owners—and would-be owners—of physician practices.