Important issues to understand about buying your own practice
Buying your own practice can be a complicated procedure. Throughout the buying process, it’s important to keep an open mind while searching for a practice that will fit your needs, talents, skills and lifestyle. A practice broker has many different types of practices for you to consider; however, you need to remember that there is no such thing as that “perfect” practice.
Another vital thing to keep in mind is that at some point you must be able to make the leap of faith that separates you from being a looker to a doer. This isn’t easy, but it must happen if you are ever going to be in practice for yourself. The following discussion of other key issues may help in the process:
Perfect Practices, Turn-Arounds, and what is really a Good Buy
Some buyers want to buy the “perfect” practice; high profits, low risk, great potential, easy to run, excellent books, no problems, etc. Practices like this are very rare and when they are for sale they command substantial premiums. Other buyers look for very cheap practices, or “deals,” often failing or distressed practices. Each of these has a certain appeal on the surface. The perfect practice is perceived as being the lowest risk and best return on investment. The distressed or turnaround is perceived as an opportunity to buy cheap, turn it around, and sell high.
Interestingly enough, both the perfect practice and the turnaround have one thing in common, they both require a great deal of capital. An exceptional practice with high profits, good growth, great books, etc. is rare and will command a substantial premium on the market when they are sold. Likewise, a turnaround or distressed practice, although they can be bought cheap, will require substantial capital investment to sustain operations if it is losing money and additional investment to correct its operational problems.
The exceptional practice, while offering good profits may actually yield a lower rate of return on investment due to the premium paid to acquire it. A distressed practice has significant risks, may require additional capital investment, and may not become profitable for months.
Exceptional practices and distressed practices may not be the best choice for buyers. There are a wide variety of small to mid-sized practices available at very reasonable prices that do not require additional capital investment (unless the new owner chooses to expand or change the practice). Frequently these rather ordinary practices offer good cash flow, good rates of return, and much lower risk than turn-arounds.
These practices are priced lower than the “perfect” practice (if it really exists), and are less risky than turn-arounds. The key is to look for an established practice, which may have some problems you can solve or things you can improve. This practice will be affordable and you can take all the profit from the improvements you make.
It’s a Team Effort
Your PracticeLink agent will assist you in your search and acquisition of a practice, but they can’t do everything for you. As a serious and motivated buyer you must be committed to working diligently with your practice broker. Your PracticeLink agent can provide you with details about the various practices available and guide you through the process of making an offer and due diligence (financial review/practice inspection).
While your PracticeLink agent is an excellent resource, they can’t do your work for you, nor can they read your mind. In order to be successful, buyers must be willing to do their own research. Communication is vital to a successful search and purchase of a practice; both buyer and practice broker must keep each other informed and work closely together.
Importance of Information
Understand that in looking at practices to purchase, you will have to dig out a lot of information. Practice owners are not known for their good record-keeping. You want to make sure you don’t overlook a “gem” of a practice because you don’t or won’t take the time it takes to dig out the information you need to make an informed decision. Try to get an understanding of the real earning power of the practice. Once you have found a practice that interests you, learn as much as you can about that particular practice.
Negotiating the Deal
Allied Health Sales works with all lenders specializing in dental / medical practice loan acquisition. We are always happy to refer buyers to lenders. It is important to speak with a lender and become a pre-qualified buyer. Pre-qualification tells the seller that you are a serious buyer and lender approved. It is also beneficial to a buyer to understand the current lending environment and interest rates.
The vast majority of practice purchase transactions are financed by a lender and many will offer 100% of the practice acquisition loan plus some working capital if needed. If your credit is good, supply a lender pre-approval letter and financial statement with your offer. This may ease the seller’s concerns.
Furthermore, don’t try to push the seller to the wall. You want to have a good relationship with him or her. They will be teaching you the practice and acting as a consultant, at least for a while. It’s all right to negotiate on areas that are important to you, but don’t negotiate over a detail that really isn’t key. Many sales fall apart because either the buyer or the seller becomes stubborn, usually over some minor detail, and refuses to bend.
The responsibility of investigating the practice and confirming the owner’s claims belongs to the buyer. Don’t depend on anyone else to make the decision for you. You are the one who will be working in the practice and must ultimately take responsibility for the decision. There is not much point in undertaking due diligence until and unless you and the seller have reached at least a tentative agreement on price and terms. Also, there usually isn’t a reason to bring in your outside advisors, if you are using them, until you reach the due diligence stage.
This is another part of the leap of faith necessary to achieve practice ownership. Outside professionals normally won’t tell you that you should buy the practice, nor should you expect them to. They aren’t going to go out on a limb and tell you that you should buy a particular practice; in fact, if pressed for an answer, they will give you what they consider to the safest one. You will want to get your own answers; an important step for anyone serious about entering the world of independent practice ownership.