Should I Buy a Practice or Start a New One?
You have probably had colleagues both start practices from scratch, and purchase existing practices. With that you have undoubtedly heard that one or the other is “best” and that you’d be making a mistake if you went against their opinion. So what really is the best option?
We get this question often and we work on both sides of the business. There is no perfect way to answer this but it is worth the time to think through the question and consider what we see as the advantages and disadvantages to both.
If you start by doing some googling you’ll find that most transition company websites and articles on the matter boil it down to “if you buy a practice then the money you make in the first two years compared to starting up makes buying better even if the startup is better long term.” This is an over-simplified way of making the decision.
The real estate companies don’t really have articles on the subject, and if they do the message is simply “you can choose a great spot that fits what you want, have all new equipment, etc.”
That’s not the right answer either.
It’s Time to Put on the Entrepreneur Hat
As we think through all of our clients that have done one or the other, the common thread in each of those decisions was which was the “best opportunity” available to the entrepreneur in the market where they wanted to be.
You as an entrepreneur must do your due diligence on the opportunities you could pursue and understand the steps and actions available to you to mitigate the risk in any opportunity as much as you can. Only then can you really compare the risk vs reward of buying any specific practice vs opening a new one.
So, don’t think of it as buying or starting a practice. Think of yourself as an entrepreneur thinking through business opportunities that fall into two general categories. You have to think more about which OPPORTUNITY is best for you vs which category is best.
Owning a practice whether through startup or acquisition is not for the faint of heart. They both can be great opportunities, that carry risk, and take commitment and a leap of faith from the entrepreneur to be successful.
Buying a Practice
Advantages and Caveats of Buying a Practice
- Cash Flow – This commonly stated benefit is true. If a practice is bought correctly the debt should have been structured in a way that you will have cash flow coming to you. Of course that assumes that revenue does not decrease and all costs aside from the debt remain constant.
- Existing Staff – If the transitions goes the way it should you will have an existing staff to work with and will not have to go through the pains of hiring and training. This assumes the staff stays with the practice and you are able to build good working relationships with them.
- Existing Systems – You don’t have to create new business processes and systems to run the practice. What if those existing systems are really inefficient, and you want to change them but the existing staff is stuck in their old ways?
- Existing Patient Base – Marketing will not be as important as in a brand new scratch practice since you have an existing patient base to build off of and treat. Some key questions to assess: What percent of the patient base is realistic to retain? Will the patients be open to accepting treatment from a new doctor?
- Proven Market Potential – There is a history of the practice producing a revenue. You know the market potential is there.
- Additional Treatment – Expanding services can be a great way to increase revenue, just be sure the new services are a good fit for the existing patient base, or be willing to increase marketing to attract new patients that are.
- Time – This is the one item that is consistently touted as an advantage of purchasing a practice. Once you identify one, you should be in the practice faster than starting up. How long will it take you to identify the right practice to buy?
Disadvantages of Buying a Practice
- Cost – Typically, the practices with solid cash flow will cost more than the $500,000 or so that it costs to start up. Additionally, in growing markets, it is usually a seller’s market. You will pay a premium for most desirable practices.
- Space and Equipment Maintenance/Upgrades – Typically you will be buying a practice with older equipment and an older space. How much should you budget for maintenance and repair in the practice? What about replacement of equipment? Should you want to relocate in to a new or larger space you are looking at spending what you would have to start from scratch.
- Location – The “ideal location” definition has changed over the last 10 to 15 years. Many desirable practices are located in older office buildings with no visibility, older mechanical systems, and older design standards and aesthetics.
- Retaining and Building Relationships With Existing Staff – They now have a new boss that probably does things differently than the previous boss. How will they react?
- Seller’s Reputation – In most cases the majority of purchased assets of a practice are literally Goodwill. You are buying their reputation. What beyond habits keeps current patients coming back? They now have a great excuse to go to a new doctor that might be more convenient or “better” in their mind.
- Capped Revenue – Is the full potential of the practice already been realized by the current owner? Has it hit its ceiling? If it has and you dreamed of a larger practice you will have to look at owning a second practice.
- You’re Buying a Business and a Job – Most of the time when buying a practice you are functionally paying a price at which you are buying a job that will provide you income with a chance for upside if you run the business well.
Starting a Practice
Commonly Touted Advantages to Starting a Practice
- Location – You get to research the demographic and competition data to find the area that best fits your personality, type of patient you want to see, and services you want to provide. You then get to find a building that you are proud to call home to your practice.
- Design – You get to design the practice exactly how you want it. You can make it a place you love coming every day.
- Equipment/Technology – You get to start off with the equipment and technology that you like to use. Today’s new patients are typically expecting that businesses they frequent are caught up with the times.
- Cost – You can start a practice for around $500,000. It is a scary endeavor to spend $500,000 without one penny of guaranteed revenue, but what if you are one of those practices that does $1,000,000 the first year and you only spent $500,000 to get there? We have clients that are doing $2,000,000 in year 3 or 4 and even after fully equipping it with brand new gear they are in for less than $1,000,000. Sound pretty nice?
- It is Yours – It is your staff, your brand, your marketing, your patients, your equipment, your space, your signage, your systems.
- Longer Runway – If you start up your initial investment will simply last longer with less maintenance and cost than buying an existing business.
The Disadvantages to Starting a Practice – Bootstrapping
- No Patients – This is the most obvious and glaring. You are literally spending $500,000 more or less to start a business with no customers. It is scary. You are responsible for working to get patients in the door and doing a great job so they’ll refer their friends and come back happily.
- Little to No Income – Many startup practices do not make much if any profit in the first year. At the same time you are usually able to pay yourself to produce while the practice ramps up. We do typically see and hear of docs doing $350,000 to $500,000 their first year. If they pull that off then they will have income from production and the business overall.
- Time – Starting up a practice takes time. It can take over a year by the time you identify and negotiate on a proposed project, it’s built, your space is built out and you’re in and open for business. Even if you take on existing space you will also spend many hours with different vendors making choices and decisions. It is a large upfront time commitment with no for sure ending or answers
- Hiring – You must find and hire all staff. The good news is you get to choose and train them the way you want things to be done. The bad news is you have to find them and train them on how you want things to be done.
It’s All About Risk vs Reward and Getting Specific
All of these explore different points of risk in each type of opportunity. We’d say that in general starting a practice is a bit riskier than buying something existing. That is why you pay more for a built practice than you do to start up a practice – you are paying for the decrease in risk and effort (just don’t shoot yourself in the foot and try to materially change a working practice after acquisitions).
The upfront cost to start a practice is lower and the risk is greater, but the potential financial reward/return is often greater on a startup.
You can mitigate a substantial amount of startup risk by building a team of trusted vendors with experience in areas where you aren’t as strong. Never run a business before? A good consultant might be worth paying to help you bridge your experience gap. Have a clear vision for who your patient base is and how to reach them? You might be OK skipping a marketing consultant.
Making the right decision on buying a practice vs starting a practice from scratch starts with having an understanding of both processes generally, and then coloring in the specific details of each opportunity by looking at the unique characteristics of the market, the practice in question, and your abilities and practice vision. If you’ve been looking down one of these roads and have gotten stuck, go back to the other for some perspective on the other options you have. It can often help either get you unstuck or shine a light down a path you didn’t know existed before.