Op-Med is a collection of original articles contributed by Doximity members.
I recently returned to my home state of Louisiana for the American Society of Aesthetic Plastic Surgery’s annual meeting in New Orleans. Aside from being a homecoming of sorts, I also had the opportunity to speak about moving from Louisiana to San Francisco six years ago when I took over an existing practice. In my presentation, I reviewed what to look for in a practice, how to determine the practice’s value, and finally, was it worth it?
After finishing my fellowship at the Cleveland Clinic in 2007, I moved back home to accept a hospital-employed position in Baton Rouge. Although I enjoyed my six years as an employed physician, I started to build a cosmetic practice and realized I needed my own OR to provide a more personalized experience for my patients. Because the hospital wasn’t in a position to build me my own operating room, my wife and I began looking for alternative practice settings.
We found several opportunities on the plastic surgery job listings page of the ASPS site but chose to take over an existing practice with a AAAASF-accredited OR. That opportunity just happened to be across the country in San Francisco.
After speaking with the owner over the phone, we decided to visit the practice. It was everything we were led to believe. The office was clean, fairly up-to-date, adjacent to a hospital, and had a view of the Golden Gate Bridge. Most importantly, there was an accredited office-based OR. The reality of being in a more competitive environment also quickly set in: There were seven plastic surgeons in the building, two of whom also had an in-office OR.
The seller made an offer, basing the purchase price on net revenue from injectables over the course of a year (i.e. how much the practice made in one year from neuromodulators and fillers, then subtracting the cost of said neuromodulators and fillers), and then multiplied that by two. The magic number was $191,000.
To ensure the accuracy of this number, the seller’s QuickBooks account and tax records from the previous three years were made available to my accountant and attorney. Their exact words were, “This seems too good to be true, but it is true.”
To the credit of the seller, he based the value on injectables only – not surgery. In his opinion, the most likely patients who would continue to see me were non-surgical patients that typically receive injections every three to six months. Therefore, surgical patients who may never return, were not included in the valuation.
A buyer must ask himself or herself, “What am I buying? Is the asking price fair?” Although this asking price was attached to the value of net injectables, the valuation was still based on “good will” — the catch-all term that describes the seller’s patient charts and potential value.
Buying a database of patient charts is tricky because it’s never clear how many patients will return to see the new doctor.
In my case, only 151 patients (8.66 percent of his patients) came back. At first, this was disappointing, but then I realized I didn’t have a baseline for comparison. There are no good studies regarding patient retention or attrition after taking over a practice. However, there was very good news in the data. These 151 patients each spent an average of $5,214 on surgical and/or non-surgical services over the subsequent five years. That’s $787,308 in total revenue from this small cohort – or, a 312 percent return on investment in five years.
The long-term gratification is great in hindsight, but the immediate value in the practice was the already-accredited office-based OR. Some equipment required upgrades, but having the established and accredited OR meant I could operate immediately, so the ability to generate revenue was instant.
Based on research, if I had chosen to build and not purchase an existing operating room in San Francisco, it could have cost me three times as much as what I paid. As a bonus, I inherited a facility name and phone number that had existed for several decades.
Advice for Buyers and Sellers
If you’re only buying a patient database, beware. You have no idea how many patients you will retain. Although my total revenue from 8.66 percent of patients was over $780,000, that’s mostly because cosmetic patients receive high-dollar treatments. If you’re taking over a primary care practice, 8.66 percent retention will likely be inadequate.
A long transition period where the seller remains in the practice to introduce the buyer to the existing patient database can also help retain patients. In my case, the seller remained in the practice for a little more than four months (during which time he covered all expenses). If he stayed longer, then yes, my retention rate could have been higher than 8.66 percent.
However, the concern with the seller staying longer is that he or she may never leave. It’s possible the seller will enjoy the camaraderie associated with a new junior associate and start to second-guess retiring or selling. It’s critical the purchase agreement very clearly states when the seller will leave.
A successful purchase has a lot to do with the seller not trying to wring an entire retirement nest egg from the sale. It also helped that I was not coming directly out of training. Fellows or residents typically don’t have the business or real-world experience to know what is, and is not important when purchasing a practice. After six years of practicing – even as an employee protected from the full brunt of medical economic realities – I still had a better appreciation for what I wanted out of this purchase than someone right out of training might.
This explains why so many sales of practices fail – because the seller erroneously considers the doctors coming out of training as an appropriate pool of buyers. Due to changes in the market, more doctors finishing training are becoming employed by private hospitals, thereby initially passing up private practice or academic positions. However, at some point, many will realize they want to go in a different direction. Those buyers, armed with more experience, will have reasonable expectations. If sellers tap into this cohort of interested, more seasoned buyers, the buying and selling of a practice is more likely to be a success.
Jonathan Kaplan, MD, is a board-certified plastic surgeon and founder/CEO of BuildMyBod Health, an online marketplace for health-care services that allows consumers to determine costs on out-of-pocket procedures, purchase non-surgical services. In exchange, health-care providers receive consumer contact info for follow-up.
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