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A Prescription for Success
A Prescription for Success
By: Kim F. Drexler, Vice President

The long hours of medical school are behind you, and it is time to open your own practice. Whether you practice medicine or dentistry, the issues involved are the same. Do you begin a new practice or do you purchase an existing one? What type of financing do you need to make this dream a reality-a term loan or a line of credit? Can you afford to take this next step?

The financial considerations are key to helping you make the decision to step out on your own and start your own practice. Here are some practical steps and issues to consider when deciding whether or not you can finance a new practice or purchase an existing practice.

Financial Review
Before meeting with a lender, take the time to review your financial situation carefully and research the feasibility of this endeavor. First, review your personal financial situation. Complete a financial statement to determine the sources and value of your assets. Next, prepare a budget to determine cash flow income and outflow, including all of the monthly expenses you can anticipate during the start-up period of your practice. Remember that you might not be bringing in a salary at first. Then, determine your monthly debt, including your mortgage payments, auto loans or leases, student and installment loans, and credit card payments. Last, determine whether there are other possible sources of income during the start-up period. If not, try to calculate the amount of gross salary you would need to meet your personal needs before your practice is profitable.

Cash Flow Projection
Once you have a clear picture of where you stand with your personal financial situation, you should determine what your cash needs will be for the first two years of your new practice. It is wise at this point to consult an accountant who specializes in assisting new medical practices. In conjunction with your accountant, prepare a budget and projection of cash flows for the first 24 months. Consider all start-up costs for the office, such as:

You should also factor into your calculations any ongoing monthly expenses, including rent; salary and benefits for staff; fees for use of lab equipment; professional and consulting fees; continuing medical education; and retirement plans. Include monthly average operating expenses, such as telephone; fax; payroll taxes; licensing; insurance; dues; repairs; postage; and supplies. Don't forget to include the interest expense for your new financing.

Market Research
Your next steps will require some research. It is wise to prepare a market study of the geographic location and the concentration of physicians with your same specialty in the market area. Determine the needs for specific medical services and consider the makeup of the patient population in the area. For example, are the potential patients in the area upper-middle class or are many elderly and dependent on Medicaid for their medical needs? Make sure that the types of patients and medical needs in your location your match your particular specialty.

You should also consider commissioning a profitability study. This study evaluates collection rates, the timing of reimbursements from insurance companies, and the length of time until a full patient load is acquired. The 24-month budget discussed above would be extremely helpful in assessing your potential profitability.

Financing an Existing Practice
If you have decided to purchase an existing practice rather than start a new practice, there are additional issues to consider. To the extent you are financing the purchase of an existing practice, make sure that your lending commitment covers all of the costs associated with the practice. First, there is the basic cost to purchase the assets of the corporation, as well as the costs of corporate stock and accounts receivable. Second, consider goodwill for purchasing an established practice with an extensive patient list and a covenant not to compete. An appraisal will help you determine the market value of the practice and can provide an objective accounting of the corporation. This will aid you in comparing the costs of starting a new practice versus the costs of purchasing an existing one.

When determining the true costs of an existing practice, also consider whether it will be necessary to find a new office location or make improvements to the existing building. Medical equipment may need to be updated as well. Finally, your due diligence investigation should include reviewing the tax returns of the practice if possible and check patient charts for information.

Additional practical considerations include whether you will be able to retain the existing staff following the transfer. How extensive is the existing patient list and will they remain with your practice? What is the average number of new patients per month? These and other practical considerations should be factored into the equation when determining the cost of purchasing an existing practice.

If, after all of this evaluation, you decide to take the plunge and finance a new practice, you must then decide the best way to execute the financing. Typically, financing for a new or an existing practice is secured with two types of loans-term loans and lines of credit. Term loans are amortized over a certain number of years, usually 5 to 7. The amount can be drawn in one lump sum or in several draws for initial start-up expenses. Lines of credit are typically used as a cash management tool to pay for monthly expenditures that are not covered by the fees actually collected by the practice. Remember, it can take months to begin actually collecting fees. You can draw on the line of credit over the first several months of your practice in varying amounts to cover your start-up expenses. The line of credit can then be converted to a term loan.

Whether you choose a term loan or a line of credit, the start up of a new practice or the purchase of an existing one, realizing the dream of owning your own medical or dental practice takes forethought and careful planning. Your patients would expect nothing less, and your future profits will depend on it.

Updated: January 1, 2013

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.

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