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Physicians looking to become small practice owners have many factors to consider before making the leap

Physicians need to consider geography, size, patient base and technology before buying or setting up a small practice.

Jeff Lagasse, Associate Editor

Consolidation may be the name of the game in healthcare, but even with large health systems merging or swallowing up smaller entities, there still are plenty of small physician practices out there -- and medical graduates with an entrepreneurial spirit may look to purchase one and set up shop.

But a small practice is a small business, and many healthcare practitioners lack some strategies for effectively running a small business. If they go the practice owner route, there are several considerations to keep in mind.

The would-be practice owner needs to mull several questions before making a go of it. Where do they want to practice? Is there a geographic consideration? What size practice are they interested in? What does the patient base look like? Is it a specialty or a general practice? How up-to-date is the equipment, and what kind of data investment is needed?

"I think when looking at acquiring a practice, the general thought is ... 'Is it possible or not possible?'" said Lisa Enright, director of healthcare business banking at Citizens Bank. "There's so much that goes into making that decision. People need to make sure they understand how they feel about each of these categories."

Some new practice owners go into business without fully taking the answers to those various questions into account, and not doing that due diligence can make running the business extremely difficult.

"They may find themselves in a situation they hadn't planned on if they haven't considered each of these variables," said Enright. "Can they stay on as a practice? It depends on what the issue is, and hopefully they can remedy the situation. If not, maybe there's a partial sale, or they take on a partner. They helps remedy some of the things they hadn't considered. The general feeling is they're going to figure out how to make it work."

VALUATION

No successful practitioner buys a practice without knowing how much the practice is actually worth, and so an important first step is to have a valuation done. Most of the time physicians will look to external sources to complete the valuation.

Several factors can affect the valuation of a practice, such as whether the practice in question is already active and has an active patient base.

"There are several different valuation methodologies," said Enright. "Some have a value approach, a market approach or an income approach. Those are probably the three most common we see. We typically like to see two different approaches in a valuation."

Determining the valuation is one thing. Maintaining the value of the practice is another. A practice owner who's eyeing retirement, for example, may be thinking about cutting back their work hours or days. That, said Enright, can lead to a drop in production, which can in turn reduce the value of the practice.

So if a physician at the tail end of his or her career is considering selling their practice, cutting down on hours might not be the best route to take.

Under normal circumstances, a smaller practice will likely have a succession plan in place, or it may have found a buyer in the community -- with the same goals and values -- to essentially take its place. Who to transition the practice to can be of prime concern.

"We're also seeing physicians staying on post-transition," said Enright. "They may sell their practice, but may stay on part-time or full-time. We're seeing more and more transitions with physicians staying on, and from a financial institution perspective, we like to see that because it makes it an easier transition for the staff and the patient."

TECHNOLOGY AND THE FUTURE

As with most facets of healthcare, technology is a growing consideration for practice owners. Newer medical graduates in particular want to work in an office that has equipment with which they're familiar, so when a practice limits its exposure to new technology, it limits the ability to attract and recruit talent. And employers can't get very far without employees.

It can be a tricky balancing act, though. Younger patients, especially millennials, expect more technology from their providers, such as online patient portals and bill-pay options. Older patients, such as those in the baby boomer cohort, miss having a personal touch, and can feel a lack of connection to a practice without it.

Practice owners should invest in technology that keeps the practice relevant, but also facilitates the way they interact with the patient base. If it's a specialty practice, that becomes even more important, as specialists generally need to be make bigger investments in technology, according to Enright.

"We're seeing more procedures in-house, which is driving the need for more diagnostic equipment," she said. "We're also seeing more specialties clustering together -- a pediatric dentist partnering with a pediatrician, for example. … Having that one stop where you can get multiple specialties in the same office is something millennials in particular are looking for. It's driving the need for equipment. You don't want to go to another location to have tests done."

With the market somewhat unstable, there's a reluctance among providers to take on debt, but Enright sees a slightly more bullish attitude among physicians than she's seen in the past. The number one concern she sees is the sustainability and transitioning of these smaller practices, and that will likely continue.

"But I think the young physicians coming out of school are more entrepreneurial, and have more of a business focus than physicians did in the past,"she said. "So I see the business model for practice ownership changing, and becoming more business-focused."

Twitter: @JELagasse

Email the writer: jeff.lagasse@himssmedia.com