PracticalDermatology

In the past several years, we have seen an increase in practice owners approaching retirement and beginning their initial phases of succession planning. This is creating an opportunity for younger physicians to step into practice ownership.

If you are thinking of becoming an owner—whether by purchasing an existing business or becoming a partner in a practice—there are certain aspects to consider before moving forward. We recommend conducting your due diligence by examining the practice’s culture, operational processes, and financial health. These considerations may help you make an informed decision and lay the groundwork for a successful purchase.

PRACTICE CULTURE

Behind every successful business is a strong culture that has defined beliefs and goals. Culture is the backbone of any organization. A workplace with a positive culture may attract talented employees who are happy, engaged, and motivated to perform.

When evaluating culture, consider the following questions to get a sense of the practice’s identity and if it aligns with your own values:

• Does the practice have a defined mission statement, a clear vision, and core values in place?
• Are these guiding principles communicated to team members?
• Are decisions made based on the practice’s mission, vision, and values?
• Are practice goals specific, measurable, achievable, realistic, and timely (SMART)?
• What is the leadership style of the current owner and managers?
• Does the practice’s culture and leadership style align with your own?

Evaluating your vision, values, and leadership and communication style against what exists may be critical to long-term practice success. If there is a disconnect, decision making might become an uphill battle. This could cause headaches for all involved and might even lead to an unsuccessful purchase. Conversely, when alignment exists, it may help to foster harmony, collaboration, and integration. All good qualities to have during a transition.

OPERATIONAL CONSIDERATIONS

Operations define how well an organization functions. Therefore, when assessing operations, you are examining the practice’s internal processes. The goal is to ensure that correct procedures, processes, and resources are in place to maximize efficiencies. Let’s consider some areas to examine before accepting ownership.

Employee Management

Employees are the lifeblood of all businesses. Keeping them happy, engaged, and productive is critical to short- and long-term company success. With that in mind, consider asking yourself the following questions:

• Does the practice have enough staff to support its net collected revenue? Understanding this metric may help avoid employee burnout and high turnover by ensuring the practice is adequately staffed.
• Are employees in the “right seat?” When employees are in roles that align with their strengths, their performance and job satisfaction usually improves.
• Do job descriptions exist for all positions within the business? Job descriptions may help ensure employees know their responsibilities and can meet the needs of the organization.
• Does a process exist for annual employee evaluations? Annual employee evaluations may promote communication, create opportunities for useful performance feedback, and foster better working relationships.
• Does that review process include employee individual development plans? Encouraging individual development plans may help providers and support staff to see growth opportunities within the practice, further develop and advance their talent, and potentially contribute to their retention.
• Does a training and onboarding structure exist? Properly preparing new employees may ensure better performance, help set them up for success, and lead to higher retention.

Vendor Considerations

It’s important to make a list of all the vendors the practice uses to understand the current partners. From there, you may want to evaluate each vendor by asking these questions:

• Does the vendor offer quality products that deliver optimal patient outcomes?
• Do the vendor’s products enhance the practice’s financial and operational stability? That is, do patients consistently return for the vendor’s products or services?
• Is the vendor committed to helping the practice grow and maximize its purchases? For example, providing marketing resources, pull-through strategies, patient offers, and business reviews.
• What are the processes and protocols for each vendor when there is new practice ownership? Knowing this information upfront may prevent frustration and potential challenges in acquiring products, which could impact patient care and practice flow.

Systems Assessment

A big component of practice efficiency may include software and information technology resources. Therefore, it could be beneficial to assess the systems in place to ensure optimal performance. Potential questions to ask include:

• Is the electronic medical record (EMR) system optimized for efficient patient scheduling?
• Are business critical reports (ie, net collected revenue per provider) easy to pull in the current EMR system?
• Does the payroll management platform allow for proper reporting functions to aid the business?

Patient Experience

For patients to have the best possibility to leave the practice happy, consider reviewing the patient journey with these questions:

• What does ongoing patient communication look like? Assessing patient communication at all touchpoints (pre- and post-consult, post-treatment, and follow-up) will ensure patients feel valued and satisfied with their experience.
• Are there processes in place to easily communicate changes with existing and new patients? Having the means to notify patients of practice changes—big or small—may contribute to providing seamless care and remaining with their practice of choice.
• How are marketing platforms being used? The practice website and social media accounts are direct links to existing and potential patients. Evaluating how they are being leveraged and the successfulness of campaigns may help in reaching and activating the patient base.
• Do patient intake forms need updating? Reducing potential redundancies in patient paperwork could create a more pleasant patient experience.

FINANCIAL CONSIDERATIONS

It may be difficult to make good business decisions—like whether to purchase a practice—without solid financial information. Gaining a strong financial understanding of the practice and engaging with reputable financial advisors may be critical in your financial assessment of the practice.

Is the practice in good financial standing? Consider working with the existing owner, practice manager, and accountant to understand the current state of the business by evaluating key financial reports and ratios (listed below). How do these financial data points compare with industry benchmarks? Determining this may help put a practice’s financial standing into context.

Profit and Loss Statement (P&L)/Income Statement

This practice “report card” summarizes the practice’s revenues, expenses, and resulting net income during a specific time period (month, quarter, and year). Here are several insightful P&L financial ratios that you may want to track regularly.

• Overhead ratio (all expenses and cost of goods ÷ by revenue). This ratio tells you how well the practice converts revenue into income, how expensive the practice is to operate, how well expenses are being controlled, and how well the practice is generating revenues. Note: Owner compensation and owner personal expenses are excluded from operating expenses.
• Payroll expense ratio [payroll expenses (staff and provider compensation) ÷ by revenue]. This ratio tells you how productive and efficient employees are as a group and whether the practice is appropriately staffed.
• Marketing expense ratio (all marketing and advertising expenses ÷ by revenue). This ratio represents the effectiveness of the practice’s marketing expenditures and indirectly the effectiveness of its retention activities.
• Rent expense ratio (all rent expenses ÷ by revenue). This ratio reveals how efficiently the practice is using its office space and it may indicate available capacity for practice growth.

Balance Sheet

This statement represents the sustainability of the practice and reveals what the practice owns (assets), what it owes (short-term and long-term liabilities, ie, debt responsibilities) and the owner’s equity (paid-in capital and retained earnings). There is a basic accounting equation associated with the balance sheet: assets = company liabilities + owner’s equity. Much like the P&L statement, there are ratios that you may want to monitor to better understand the health of the practice.

• Current ratio (current assets ÷ by current liabilities). This is an approximate indication of the practice’s ability to pay obligations due in the next 12 months. A high number could indicate adequate cash on hand. A low number may signal cash flow challenges. The industry average is considered 2:1 ($2 in assets to cover every $1 of debt). A 5:1 ratio is more ideal.
• Debt-to-equity ratio (long-term liabilities ÷ by total equity). This measures how leveraged the practice is (ie, the proportion of assets that are financed through debt and shareholders’ equity).

What Accounting Method Does the Practice Use?

There are two main methods: cash basis and accrual. Cash basis recognizes revenue and expenses when they are received, whereas accrual accounting records revenue and expenses when they are realized, regardless of when they are received. The cash basis method may distort the true picture of practice performance.

How Is Inventory Managed?

Practice inventory includes the cost of goods sold (COGS) such as products, injectables, laser consumables, and medical supplies. These are major assets to the practice and may impact the effectiveness of financial statements. Given that, it is wise to manage and track inventory.

• Identify and value the products on hand. This may ensure products are properly accounted for in logs and financial statements.
• Establish run rates and periodic automatic replenishment (PAR) levels for all COGS. This may help determine the minimum inventory needed on hand to meet demand in a given time period.

What Is the Current Service Mix?

Assessing this may indicate whether current service and retail offerings are adequate or if further investment—and how much—is needed to be relevant in the industry.

What Are Current and Potential Staff Expenses?

The biggest expense for any company is its people. For this reason, you may want to take a careful look at personnel expenses. Some items to consider include:

• Do employee wages and benefits align with industry benchmarks? If not, how may they need to be adjusted? How might that increase or decrease practice expenses?
• Is the practice appropriately staffed? If not, how might that impact patient care? In addition, are current staffing levels adequate to support future growth goals?
• Is additional investment needed for staff training and development?

DOING YOUR DUE DILIGENCE

Reviewing these these components before engaging in a transaction may be helpful. It might uncover what risks, improvements, and opportunities exist before making such a large purchase and commitment. From there you can determine whether you want the keys to the practice or to walk away. With so much on the line–your finances, the practice’s livelihood, and the well-being of patients and staff–you need to be confident in your decision.