A Guide to Purchasing an Established Medical Practice

August 20, 2019 Real Estate Insights

If you’re a medical practitioner wishing to avoid the challenge of building your own medical practice from the ground up, you may consider purchasing an established medical practice. Buying an existing practice lets you step into an already validated business and focus on running your business rather than getting it started.

Here’s how to go about purchasing an established medical practice.

Perform Due Diligence

Not all deals are created alike. When purchasing a medical practice, you need to consider two key factors: the viability of the business and the projected ROI of the space you’ll be buying. Ideally, both of these will show an upward trajectory, delivering both ample revenue and a powerfully appreciating asset.

When considering a prospective practice, weigh the following:

  • Revenue and profitability. Is the business currently profitable, and what are the short- and long-term projections?
  • Operational efficiency. Are the necessary processes and systems in place to ensure a seamless transition to new ownership?
  • Patient mix. Does the practice serve a sustainable demographic, and one that you’re interested in serving in the long term?
  • Unique selling point. Does the practice have something that sets it apart from others, and will this be impacted by the purchase?
  • Premise and location. Are you happy with the location, neighborhood, facility and current tenant leasing terms?
  • Franchising options. Is the practice part of a franchise, or can it be scaled into a sustainable franchise practice?
  • Invisible costs. Are there factors such as asset protection, insurance and turnover to keep in mind that may impact profitability?
  • Financing options. Do the financing terms make sense from a business perspective?

Make Sure the Numbers Add Up

Most medical practices sell for roughly 1.5 times the practice profits, a figure calculated by subtracting salaries and overheads from overall income. However, whether this number works for you will depend on your answers to the questions raised in the previous section. Practices that seem to work on paper may be less viable when debts from major equipment purchases or medical malpractice costs are weighed, while those with a complex patient mix may end up being more profitable if that mix is streamlined. Additionally, a practice in a booming real estate market can deliver serious returns from a resale or equity perspective, even if the business itself is less profitable.

Another thing to verify is what exactly is included in the purchase. For example, existing electronic health records may be worthless if you’re buying the practice with the intent of franchising it. Price your offer accordingly. Similarly, if the practice’s current practitioners are moving on as a result of the sale, consider what this means for your projected numbers. Remember, it’s much better to shop based on current cash flow than prospective cash flow.

Before putting in an offer on a practice, review any numbers and projections with a CPA or business development expert.

Get a Broker’s Opinion

As mentioned above, the real estate component of your transaction is a major factor in purchasing an existing medical practice. Obtaining a broker’s valuation is highly recommended. A broker can undertake a thorough audit of a prospective property with consideration for the market, patient-service mix, facility and existing or proposed lease structures. You can also invest in a Uniform Standards of Professional Appraisal Practice (USPAP) valuation to obtain a fuller picture of the practice.

Shop smart with the help of experts, and you’ll be well on your way to profitability. Considering purchasing an established medical practice? Contact the experienced team at GZ Realty for personalized, expert advice.