Thinking about buying a practice?

At some point in their career, most medical practitioners consider the option of buying an existing practice. This is a big investment decision, so where do you start?

Firstly, you need to transition your mind-set and start thinking like an owner, not a clinician. This is a decision that requires hard-nosed analysis and investigation. You need to be prepared to walk away if the deal does not stack up – not every practice has saleable goodwill, despite what the current owner says!

Here are some key factors that must be reviewed in detail if buying an established medical practice: 

1. The right purchase price 

Detailed due diligence is the only pathway to establishing a reasonable buy-in price and to determining whether there is any real goodwill in the practice. This involves not only analysis of the financial records and projections (after normalisation adjustments) but also consideration of non-financial business factors such as location, existing staffing arrangements, the patient database, practice software, demographic analysis and competitor analysis.

Most vendors over-value the goodwill inherent in their practice, so you need to be prepared to negotiate a price based on a strong understanding of the future prospects of the practice. No two practices are the same.

Generally, there is a premium payable for the ability to walk into an existing practice structure and patient base but the level of this premium will depend on the exit arrangements for the outgoing practitioner.

Undertaking a thorough due diligence will assist you with pricing your offer and negotiating better terms.  

Key takeaway - if you haven’t done this before, engage an expert to review and do the due-diligence for you. 

2. The right business structure 

Having the right business structure in place from the outset ensures you are well placed from a legal and tax perspective. In my experience, fixing poorly implemented structures down the track is a very costly option.

Some aspects to consider in this area include separating the business from the premises (if you are buying both), income tax minimisation strategies, payroll tax management and long-term capital gains tax implications.

In terms of structuring, options include the use of trusts, companies and even superfunds (for premises). What is most important is that you establish business structures that will grow with you and which reflect your particular needs. 

Key takeaway – start with the right business structure.

3. The right financing options

It’s important to understand your borrowing capacity, business risk and the repayment implications for your personal and business cashflow, as well as the tax implications on any interest payments. Make sure you allow for working capital requirements in assessing your borrowing needs.

Whenever you undertake a major new financial commitment, it is an ideal opportunity to revisit your existing commitments as well. The opportunity may exist to tweak the mix of deductible vs non-deductible debt as an added benefit of any transaction.

You should also consider whether there will be any substantial practice upgrades required (new assets or a refit) after your purchase, as these need to be considered as part of your overall financing and cashflow plan.

Key takeaway – structure all your financing in the most financial and tax efficient manner.

Other factors to consider prior to any acquisition include:

• Undertake a complete review of the existing employment and associate agreements for the practice
• Work with trusted and specialist legal advisers on contracts and terms
• Consider whether the practice premises offer adequate scope for expansion of services
• Consider carefully any proposed ongoing service arrangements with the vendor. Sale agreements often see the vendor shift to an ongoing role as a part-time associate – we see too many proposed deals where the vendor actually improves their net effective return per dollar of patient billings at the expense of the purchaser. It is important to project forward the net return you will actually make as the new owner, after factoring in any ongoing payments to the vendor, before you commit to a purchase. 

Most importantly, take advice from trusted colleagues and advisers. Consider whether you are suited to practice ownership and all the related obligations. Take your time to make the right decision for your own circumstances.

If you would like more information contact Sam Gadani on 02 8262 8747 or sgadani@prosperity.com.au.