Starting your own medical practice – it’s a common dream made uncommonly difficult by today’s rapidly changing healthcare industry. As a physician, your top priority is your patients, but as the founder of a startup you are obligated to navigate the risky, often unpredictable small business landscape, which requires a significant investment of time and money. The result is a responsibility tug of war that often renders owners of fledgling medical practices unable to effectively manage either of their roles.
According to Web MD, ” fewer doctors are opting to run their own small private practice, with more seeking jobs in hospitals or larger medical groups”. The reasons for this shift include increased competition from large medical organizations, the economic effects of the COVID-19 pandemic, and increased student loan debt from medical school.
Though working as an employed physician for a hospital or large medical group is certainly the safer option, individuals who choose this path lose out on the increased clinical autonomy, decision-making authority, and earning potential that contributes to the “remarkably low burnout rate (13.5%)” reported by a 2018 survey of small independent practices in New You City.
The challenges of starting a medical practice are daunting, but that doesn’t mean owning a practice is an insurmountable goal. There is a way you can acquire your own practice while avoiding many of the risks associated with startups – you can purchase an existing medical practice. Purchasing an existing practice means you are acquiring a finished product. Many of the hurdles and pitfalls that cause startups to fail have already been overcome, all you have to do is step into the shoes of the previous owner and ensure things continue to run smoothly.
Of course, there are still risks to consider – including some that may surprise you. In this article, we explore the benefits of purchasing an existing medical practice, the best way to go about it, and pitfalls to look out for.
Advantages to Purchasing an Existing Medical Practice
Assuming that you are purchasing a profitable practice, you will begin making money right away. This is a far cry from a startup, wherein you may not see any profits for the first year an will need to largely depend on loans to pay staff, rent, and other expenses – loans which will need to be paid back with interest. Having income right away means minimal disruptions to your cash flow. This is especially valuable if you’re just getting started, still paying off student loans, and growing a family.
One caveat is that though you will start making a profit sooner, it may be more challenging to grow profits if the nuts and bolts of the business are already in place. You can work to improve efficiency, increase advertising, and improve the technology and aesthetics of the practice, but these changes will take time and money, and incur some of the risks you would have faced managing a startup.
Anyone who has ever owned a business will tell you that finding and hiring good people is extremely time-consuming and difficult. Finding the right candidates takes time, interviewing takes time, and training takes even more time. Then half the time, it doesn’t work out, and you must start all over again. Putting together the right team – and keeping them by offering competitive benefits – takes experience that most new business owners simply don’t have . When you acquire a practice there is already staff in place. There should also already be set insurance benefits, vacation time, 401ks, and other benefits that are necessary to employee retention.
On a related note, a major “but” related to this issue is that just because there is a staff in place in the existing business, that doesn’t mean they are going to work for you. Transfers of ownership can be a time of transition for existing staff. Before taking over the business, it’s good practice to interview critical staff and make certain they aren’t going to walk out the door on day one. If they are leaving, find out their planned last day and work on an offboarding strategy so you can plan ahead and establish continuity throughout the transition. You may also consider writing a new employee handbook. It is important to recognize that changing the values and culture of any business is a challenging, long-term proposition
Existing Billing, Payroll, and Insurance
Establishing billing, payroll and insurance is a complicated and time-consuming task. The IRS has strict reporting requirements on billing and payroll. Failure to properly complete forms will result in penalties. Similarly, insurance providers require proper procedural codes to approve reimbursement. These codes are subject to regular change. In fact, more than 400 updates have been made to Current Procedural Terminology in 2022. For this reason, we strongly recommend you hire third-party contractors. Handling either of these processes places a heavy burden on your staff and runs the risk of incurring tax penalties and rejected insurance reimbursements requests.
When you acquire an existing practice, relationships with third party contactors are already in place and presumably fast and reliable service is being provided. Confirming that this is indeed the case is part of the buyer’s due diligence, though, and it is strongly recommended that you confirm these relationships and assess their effectiveness and efficiency.
When you’re buying an existing practice, you are essentially purchasing the reputation of your predecessor. The equipment, staff, billing and payroll, and real estate are all nice (though you need to make sure the lease isn’t ending soon), but it’s the steady flow of incoming patients from day one that is the true advantage. Those patients come again and again because your predecessor built a relationship of trust with them.
This aspect of a business is referred to a goodwill, and it is considered an actual asset of the company which can be bought and sold. Goodwill is notoriously difficult to evaluate – just because patients like a business doesn’t mean that they will continue to frequent said business once it is under new management. However, there is an undeniable advantage to taking over a successful medical practice with many loyal patients over starting your own business from scratch.
Types of sales
There are two methods of purchasing a medical practice: a stock purchase and an asset purchase. In a stock sale, the purchaser acquires the full assets and liabilities of a company. The new owner essentially assumes full responsibility for the existing company, while the previous owner walks away with no further responsibility.
Stock sales are generally preferred by sellers, in part because they are fully relieved of responsibility, but also because there are certain tax benefits for the seller in such a sale. In a stock sale, any financial gains are usually recognized as capital gains, whereas in an asset sale, gains can sometimes be recognized as an income gain, resulting in unfavorable tax rates for the seller.
This disadvantage can be avoided by negotiating a lower sale price, which, although it may sound counterintuitive, can result in much-preferred capital gain status, which can see the seller benefit from a more favorable tax rate. We will go more into this in a future blog.
For buyers, asset purchases are almost always the better option because in a stock sale the buyer takes on full responsibility of the existing company, including any liabilities such as malpractice suits, tax, liabilities, charges of fraud, insurance claims, and even contractual obligations. For this reason, many physicians opt to merely purchase the assets of the existing practice under ownership of a company they’ve set up themselves. You can acquire tangible assets from the existing company – such as equipment, furniture, and real estate – as well as intangible assets – such as goodwill, or the patient book. By purchasing the assets of the existing practice rather than the practice itself, you aren’t paying for things you don’t want. And for the things you do want, you can negotiate favorable rates.
There are many benefits to the buyer when a medical practice is acquired through an asset purchase, but there are also a few potential drawbacks. For example, if the existing company has third party contactors handling billing, payroll, and insurance credentialling, then transfer of these services is more complex in an asset purchase than in a sale of stock. Medicare does not require providers to change their TIN in cases of a transfer of stock or a merger of two corporations. Asset purchases, on the other hand, are considered by Medicare to represent a Change of Ownership (CHOW). In such cases, the seller and owner are both required to formally notify Medicare, at which point a new TIN will be provided. In rare cases, a new provider agreement may be required. This process can take several months. After that, services may be established with third parties’ contractors. In the case of billing payroll and insurance, this additional step is little more than a nuisance. However, in the case of managed care contracts, these relationships can be more difficult to reestablish. This can be especially problematic if the existing practice had a particularly beneficial contract which the buyer would like to preserve. So, in a way, existing contract and liabilities are both the primary benefit, and the primary drawback of a stock sale.
The most important element of any sale – whether it’s a stock sale or an asset purchase – is due diligence. In the case of stock sales, carefully researching the company’s financial statements, tax returns, insurance policies, contractual agreements, and any other factors that may have bearing on the sale. This process requires the assistance of an experienced legal professional. In the case of a stock sale, if any issues are encountered the buyer can recommend an asset purchase to avoid liability. However, even in an asset purchase, due diligence is necessary as there’s a very real danger of not purchasing everything you need to properly run the business.
How Hippo Can Help
Hippo Lending provides doctors nurses with lending options that others can’t. How? Hippo Lending uses a value-based business model that prioritizes helping healthcare professionals accomplish their life goals, rather that’s owning your own practice, or consolidating your debt into a low interest monthly payment you can spend time enjoying life rather than balancing your budget. Rather than a simple “yes or no” approval system, we take the time to review your loan request with you and discuss lending options that fit your needs while not straining your wallet. We understand a doctor’s income and provide flexibility that banks can’t when considering your request. And if we are unable to provide a loan, we will provide you with guidance on how to get one in the future
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