What to Know Before Buying a Medical Practice

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8 mins

IN THIS ARTICLE
IN THIS ARTICLE

Have you dreamed of operating your own medical practice? You could take a leap and start your own medical practice, or you could buy a private practice that already exists. Buying into an existing practice is certainly easier. The owner could be retiring, moving, or simply tired of the day-to-day business. By the time you’re done reading this article, you’ll know what questions to ask, where to look and everything in between to buy your own medical practice.

Why Would a Doctor Sell Their Practice?

First, let’s investigate a few reasons why a physician would want to sell his or her practice in the first place and whether those reasons are red flags for you.

Rising business expenses

As a result of economic pressures, local community physician offices have decreased. Since 2001, the cost of running a medical practice has increased 39%, according to Becker’s Healthcare. Total direct expense per physician full-time equivalent (FTE) rose to $955,281 in the fourth quarter, according to Fierce Healthcare. This figure is up 9% compared to the fourth quarter of 2019 and increased 16.3% compared to the final quarter of 2020.

Shrinking payouts from insurers

Declining pay rates from Medicare, Medicaid and commercial insurers are also a common complaint. Independent physicians get paid less by these institutions when compared to physicians employed by large hospitals or healthcare networks. According to a survey of doctors through the AMA, doctors delivering the same service were paid a higher rate because of their health system affiliation. The Affordable Care Act contains cost and health outcome reporting requirements for Medicare patients. Failure to comply hurts reimbursement rates which puts the hammer on small private practices, which receive the heaviest penalties.

Too much paperwork

Some physicians simply don’t want to deal with the hassle of running a medical business anymore. Administrative burdens contribute to an increase in physician burnout, especially among primary care doctors. A total of 31% cited “paperwork” as a major drawback and in a 2020 American Medical Association survey, 86% of respondents described the administrative burden as “high or extremely high.”

Retirement

Older physicians are more likely to own their own practices, including 54.3% among physicians 55 and older and 25.5% among those under 40. However, you will be more likely to find a male physician looking to retire over a female one. A survey of more than 3,400 doctors found that 48% female physicians want to retire in the next five years and 56% of male physicians. That said, the average age for men who took the survey was 62 years old, and the average age for women was 55 years old. So it is probably a mixed bag. The point is, that physicians experience burnout from all their years in school, practicing, opening their own business and more. Retirement will be a key factor to look for when you are searching for a medical practice to buy.

Income drops

Independent physicians earn an average of 0.8% more than doctors working in hospitals, according to an article in Health Affairs. Medscape also said that individual practice owners make more. For example, the independent orthopedists made $29k more than W-2 orthopedists in 2021. That said, the coronavirus made a big dent in these earnings for medical practice operators. A report published at the end of 2021 found that 81% of physicians surveyed in July and August 2021 of said physician revenue was still lower than pre-pandemic limits.

How To Value a Medical Practice

Prices for primary care practices have dropped substantially from the mid-1990s, according to Medical Economics. Practices were going for between 50% and 100% of a year’s gross revenue. Today, you can expect to pay about a third of gross, and specialized practices might cost more money than a general practice. When buying into a medical practice or buying a medical practice, there’s no partnership buy-in formula, but you’ll want to consider factors such as:

  • Accounts receivable: A medical account receivable refers to the outstanding reimbursement owed to providers for issued treatments and services, whether the financial responsibility falls to the patient or their insurance company.
  • Assets: The buyer typically purchases the majority of the seller’s assets such as equipment, patient lists and other items like exam tables, office furniture and computers. The age and usability of technology, including computer software and electronic health records (EHRs) will also fall into the “assets” category.
  • Cash flow: Cash flow refers to the total revenue minus all expenses and net income, then adding back in all of the non-cash expenses such as depreciation, to equal cash flow.

Collect as much information from the owner of the business as you can, but take it with a grain of salt. The owner wants to make a sale, and may leave out key information or fudge the value of his latest equipment. Double check all valuations and balance sheets yourself and consider getting a professional appraisal done (check out uniform standards of professional appraisal practice).

Calculating the ROI When Buying a Medical Practice

Here’s an important question to ask yourself: How long will it take to recoup your investment? The typical payback period from buying a practice or buying into a practice is five years or less. That means if you borrow $2 million in the form of a practice loan to buy an existing office, you should earn $2 million back in less than five years. However, this depends on a lot of factors. For example, if the practice needed a renovation, new equipment or the staff deserved a pay raise – those costs will eat into your return. You also have to consider how much to pay yourself, as the owner! Your best best is to contact loan officers at the nation’s leading banks specializing in practice loans. These individuals, although not doctors or business owners, will have a ton of insight into financing a medical practice and what to plan for.

Wells Fargo

Today, Wells Fargo Practice Finance is particularly active in the medical, dental, optometric and veterinary fields. The company is the only practice lender chosen particularly for members of the American Dental Association and approved by ADA Business Resources for practice financing. Wells Fargo is also the preferred lender for members of the American Animal Hospital Association and the American Medical Association. Learn more here: Wells Fargo Practice Finance Review.

Bank of America

Bank of America is the #1 provider of practice loans in the country amongst doctors. They specialize in veterinary and dentist loans. Learn more here: Bank of America Practice Solutions Review.

U.S. Bank

In 2014, U.S. Bank was chosen as the endorsed practice finance program for members of the American Association of Orthodontists. Under the 3-year designation, the bank provided practice finance loans with favorable pricing to qualified orthodontists among the association’s U.S. members. Learn more: U.S. Bank Practice Finance Review.

Is Buying a Medical Practice Tax Deductible?

Allocating higher values for assets that depreciate quickly like equipment and lower values for assets that depreciate slowly or not at all means that depreciable assets can be written off in the future, such as purchased equipment. (Check out Section 179 of the IRS.) While that’s true, it’s important to get expert advice about your tax situation. When looking at your partnership buy in formula for taxes, you must have an accountant on your side. There are tax implications for the way a practice is established. The more physicians involved with the practice, the greater the complexity. As a doctor, dentist, veterinarian or chiropractor who plans to buy a practice or perform a physician buy-in, it’s important to look at all the angles from every perspective — legal, accountancy, reputation of the practice and more. Furthermore, you must be comfortable with debt and want to get involved with the day-to-day management of your newfound practice.

Buying a Medical Practice: 101

Here’s a few final things to consider and look for as you begin the journey of buying and running your own medical practice. Remember, this research phase alone could take a year. Once you find a perfect candidate, it could easily take another year to close. So don’t rush the process!

Actively Look for Red Flags

When you’re planning on buying into medical practice, look into the amount of debt you’ll inherit. What type of equipment debt does the office carry? How current are accounts receivable? Does the place have a good reputation? Have you read their Yelp, Google and Facebook reviews? What about the employees? Are they happy there? Read Glassdoor reviews or just ask them yourself. Ask the owner about the longevity of receptionists, nurses and vet techs. If these vital individuals don’t stick around, you may have a problem on your hands when you take over the practice.

Find a mentor

Before medical practice partnership buy-in, find another doctor who already went through the process to serve as your mentor. This person will be able to give you some tips and advice that you might not have considered before. Ideally, your mentor will also practice in the same type of specialty as you. You can ask about financials, goals, concerns, staffing and other big-picture issues before you buy.

The importance of finding the right attorney

Unless you have a law degree as well as well as a medical degree, you must have an attorney help you navigate how to buy a medical practice. Look for a well-respected attorney in your area who is well-versed in healthcare law and regularly works with practitioners on practice purchase and sales. The right attorney can help you navigate your state laws and how to establish your practice as a professional entity. A lawyer might charge a flat fee in order to give your small practice standard documentation.

Melissa Brock

Melissa is the owner and founder of College Money Tips. Formerly the editor at Benzinga Money, she has also written for Investopedia, The Balance and Personal Capital. Melissa writes fresh, thought-provoking content (with a touch of humor) about topics in personal finance, higher education, and travel.

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