Buying a practice after residency

[jbomba]

In a somewhat unique situation in that a family member is looking to get out of their psychiatric practice which they have maintained for the better part of the last 3 decades. This is a boutique cash practice in a very HCOL area. They have approached me about taking over for them as they are now approaching 80 and ready to retire. Frankly, I'm not really sure how to begin entertaining this. It seems like a huge risk to simply pay ___ X yearly revenue - couldn't patients just pick up and walk away? Wouldn't I essentially be paying 7 figures for a patient list? The other idea I had was to create some sort of payment structure that delivered a decreasing percent of net revenue over a set number of years. FWIW I do have experience running a small business, and while not an expert, think I have my general bases covered from that regard.

Anything else to consider here?

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[Bartelby]

I have never bought or started a practice but paying 7 figures for (as you mention) mainly a patient list sounds like a very bad deal. I think the decreasing revenue cut idea is worth exploring. I would have a low threshold for walking away and starting your own practice though, it may take some time to fill but probably not enough to justify a seven figure expenditure (with no guarantee those patients will stick with you anyway).

 

[TexasPhysician]

There is a lot to consider. Cash practices, number of psychiatrists, counselors on staff, and rate premiums all add value to a practice. Premium patients are harder to obtain than a typical insurance patient.

Is your prescribing in-line with the outgoing psychiatrist?

Is your demeanor and therapeutic techniques complementary?

Will the outgoing psychiatrist stay on to introduce you to patients?

Will outgoing psychiatrist help recommend and introduce you to referral sources?

Will staff that know the system be staying? Are they being paid reasonable rates?

Is the revenue significantly higher than you can get salaried elsewhere?

In comparison, I would pay $0 for an insurance based practice from 1 psychiatrist that wants to walk away. I could quickly accumulate insurance patients and do things my way without paying a premium.

I wouldn’t pay X of yearly revenue though. That is not an adequate valuation.

 

[Sushirolls]

Family, just give it away.

Should my kids or other family members enter medicine AND happen to do Psychiatry, I'd be glad to know I could help family out and just give it to them. At most ask for a token of like 10-50K but most likely would just give it to them.

 

[hebel]

In a somewhat unique situation in that a family member is looking to get out of their psychiatric practice which they have maintained for the better part of the last 3 decades. This is a boutique cash practice in a very HCOL area. They have approached me about taking over for them as they are now approaching 80 and ready to retire. Frankly, I'm not really sure how to begin entertaining this. It seems like a huge risk to simply pay ___ X yearly revenue - couldn't patients just pick up and walk away? Wouldn't I essentially be paying 7 figures for a patient list? The other idea I had was to create some sort of payment structure that delivered a decreasing percent of net revenue over a set number of years. FWIW I do have experience running a small business, and while not an expert, think I have my general bases covered from that regard.

Anything else to consider here?

So no sale of an office space?

 

[jbomba]

There is a lot to consider. Cash practices, number of psychiatrists, counselors on staff, and rate premiums all add value to a practice. Premium patients are harder to obtain than a typical insurance patient.

Is your prescribing in-line with the outgoing psychiatrist?

Is your demeanor and therapeutic techniques complementary?

Will the outgoing psychiatrist stay on to introduce you to patients?

Will outgoing psychiatrist help recommend and introduce you to referral sources?

Will staff that know the system be staying? Are they being paid reasonable rates?

Is the revenue significantly higher than you can get salaried elsewhere?

In comparison, I would pay $0 for an insurance based practice from 1 psychiatrist that wants to walk away. I could quickly accumulate insurance patients and do things my way without paying a premium.

I wouldn’t pay X of yearly revenue though. That is not an adequate valuation.

I would say that we're very much alike and I would anticipate patients would appreciate the style and demeanor we both bring.

These patients are all cash paying, very stable. After expenses the practice generates ~400k/year. No staff, only rents office space (doesnt hold any other assets). He would be happy to stick around and introduce me as a family member, get me acquainted with patients, etc. So at the end of the day, this is just a patient list in my mind. He's kind of put the ball in my court and has not asked for a specific number - I just don't know what would be fair/what to offer in this particular scenario.

 

[robellis]

In a somewhat unique situation in that a family member is looking to get out of their psychiatric practice which they have maintained for the better part of the last 3 decades. This is a boutique cash practice in a very HCOL area. They have approached me about taking over for them as they are now approaching 80 and ready to retire. Frankly, I'm not really sure how to begin entertaining this. It seems like a huge risk to simply pay ___ X yearly revenue - couldn't patients just pick up and walk away? Wouldn't I essentially be paying 7 figures for a patient list? The other idea I had was to create some sort of payment structure that delivered a decreasing percent of net revenue over a set number of years. FWIW I do have experience running a small business, and while not an expert, think I have my general bases covered from that regard.

Anything else to consider here?

I would say that we're very much alike and I would anticipate patients would appreciate the style and demeanor we both bring.

These patients are all cash paying, very stable. After expenses the practice generates ~400k/year. No staff, only rents office space (doesnt hold any other assets). He would be happy to stick around and introduce me as a family member, get me acquainted with patients, etc. So at the end of the day, this is just a patient list in my mind. He's kind of put the ball in my court and has not asked for a specific number - I just don't know what would be fair/what to offer in this particular scenario.

The practice is worth 0 dollars, if he doesn’t want to give you it and entrust someone worthy to take care of his patients, go start your own practice. Cash PP the patients can simply walk away so what exactly would you be paying for? 7 figures? Wtf..

 

[Bartelby]

If you have not talked about a sale price yet I would start there. I'd bet his sale price point is *much* lower than you are imagining.

Also keep in mind a turn-key employed position often hits 300k with benefits factored in, at around 40h per week. So the cash practice is nicer, but not wildly so. If you pay 1 million dollars for this practice I suspect you would never close the gap compared to just taking a job +/- starting your own practice on the side.

 

[dl2dp2]

This is done and not especially rare. You are not going to be paying anywhere close to 1M. Typically we are talking about 2-4x EBITA, so optimistically the value is something like 200k. You should talk to your accountant who would point you to companies that can help you do a rough valuation/appraisal and get recommendations for small business lawyer to draft a contract.

OTOH, it's definitely not worth $0. So if he decides to just give it to you it would be quite generous. But, someone who practiced to 80 with a revenue of 400k would be wealthy if he's not reckless. So I suspect he doesn't necessarily care about that. Something to think about.

 

[TexasPhysician]

I would say that we're very much alike and I would anticipate patients would appreciate the style and demeanor we both bring.

These patients are all cash paying, very stable. After expenses the practice generates ~400k/year. No staff, only rents office space (doesnt hold any other assets). He would be happy to stick around and introduce me as a family member, get me acquainted with patients, etc. So at the end of the day, this is just a patient list in my mind. He's kind of put the ball in my court and has not asked for a specific number - I just don't know what would be fair/what to offer in this particular scenario.

Multiple worrying factors. No staff? How much time is burned with scheduling and med issues? Gross $400k is not high. Is this working 20 hours per week of patients? How many hours total per week?

Without knowing those answers, I’d estimate value around $150k or less.

 

[michaelrack]

The practice's (economic) profit after accounting for a reasonable psychiatrist salary is at best 100k per year. I would offer 80k for it

 

[Jules A]

I would want to be certain an 80 year old's prescribing philosophy is in keeping with mine and would wonder if a majority of his patients might also be geriatrics.

 

[Liquid8]

As there are no physical assets involved, you are only paying for a patient list so we’re really talking about a goodwill payment – I think all the estimates have been rather high, and if his patients know he is retiring, they might have already started to look elsewhere to plan the transition process.

Being family complicates things a little bit, with a potential downside being that you might feel obligated or pressured to take on patients that you don’t necessarily want to get involved in. While cash payers are good, you also have to take into account the actual amount being charged and whether it’s actually reasonable in this current day. I remember when starting a lot of the senior psychiatrists were still charging the same price as when they started decades ago, and established patients had their own expectations about this.

 

[jbomba]

Multiple worrying factors. No staff? How much time is burned with scheduling and med issues? Gross $400k is not high. Is this working 20 hours per week of patients? How many hours total per week?

Without knowing those answers, I’d estimate value around $150k or less.

Sorry should have specified. Nets 400k a year. He's working about 30 hours a week.

 

[dl2dp2]

The practice's (economic) profit after accounting for a reasonable psychiatrist salary is at best 100k per year. I would offer 80k for it

Yup. You offer 80k and the fair market value of something like this is somewhere between 100-200k I think. For family, it's a fair offer because it gets rid of the transaction fees, marketing costs, etc. PE usually offers between 4-12 EBITA, but 12 would be more like a multispecialty large group practice. If you don't have the cash you can always offer an owners financing (sort of like that in selling a house). This is all very standard stuff. Probably 5-10k with lawyers/appraisers, etc. at a minimum.

But this older physician is very very likely to be a multi-millionaire. I doubt he'll care about 100k when it's all said and done AT BEST, plus capital gain tax, blah blah.

 

[dl2dp2]

Sorry should have specified. Nets 400k a year. He's working about 30 hours a week.

Nets inclusive of his salary or not? You need to subtract the salary of a typical psychiatrist who would be paid to replace him. Typically with benefits, this ends up being at a minimum 300-350k. This means the business itself has a rough EBITA ~ 50-100k as @michaelrack said.

 

[jbomba]

Nets inclusive of his salary or not?

Inclusive of his salary

 

[PikminOC]

Inclusive of his salary

How much is he charging for intake and for follow up

 

[NickNaylor]

What do you get out of this? Doesn't sound like all that much other than a bunch of referrals that may or may not pan out, unless the prospect of having something that is theoretically turn-key and ready to go is appealing to you.

I wouldn't pay anything significant for what he's offering. He's going to have to refer his patients to someone when he stops practicing - I would just offer to accept his patients if they would like to continue to follow-up with you. Helps him out, potentially helps you out, and costs you $0.

 

[robellis]

What do you get out of this? Doesn't sound like all that much other than a bunch of referrals that may or may not pan out, unless the prospect of having something that is theoretically turn-key and ready to go is appealing to you.

I wouldn't pay anything significant for what he's offering. He's going to have to refer his patients to someone when he stops practicing - I would just offer to accept his patients if they would like to continue to follow-up with you. Helps him out, potentially helps you out, and costs you $0.

This

 

[jbomba]

What do you get out of this? Doesn't sound like all that much other than a bunch of referrals that may or may not pan out, unless the prospect of having something that is theoretically turn-key and ready to go is appealing to you.

I wouldn't pay anything significant for what he's offering. He's going to have to refer his patients to someone when he stops practicing - I would just offer to accept his patients if they would like to continue to follow-up with you. Helps him out, potentially helps you out, and costs you $0.

My feeling was I would be able to walk into a full cash-based practice with lots of very stable patients, rather than having to spend X number of months/years building that up. As a fresh grad, I'm definitely going to be looking to work more hours than he currently is (I'd also like to find a 1099 inpatient job as well). My feeling was if I already had a very solid patient base and did good work with them, I should be able to expand my panel via word of mouth of this existing base much quicker and/or feel less pressure to get new patients to make ends meet since the practice is already profitable.

This also feels like a way to avoid big box shops or doing insurance based practice where I have to churn through 2.5 patients an hour to make comparable income.

 

[Mad Jack]

My feeling was I would be able to walk into a full cash-based practice with lots of very stable patients, rather than having to spend X number of months/years building that up. As a fresh grad, I'm definitely going to be looking to work more hours than he currently is (I'd also like to find a 1099 inpatient job as well). My feeling was if I already had a very solid patient base and did good work with them, I should be able to expand my panel via word of mouth of this existing base much quicker and/or feel less pressure to get new patients to make ends meet since the practice is already profitable.

This also feels like a way to avoid big box shops or doing insurance based practice where I have to churn through 2.5 patients an hour to make comparable income.

The thing is, psychiatry is very much about the relationship between the psychiatrist and the patient. Psychiatrists aren't just fully interchangeable. You're going to be a new grad, what makes you think his current clients will both want to pay the same cash rate to you with no experience and will happen to have such a good connection with you they don't walk to another shop?

 

[Psychresy]

On a mostly unrelated note, is a medical director able to have a pp and take on cash paying patients from the program they oversee? Or are there rules against this?

 

[Mad Jack]

On a mostly unrelated note, is a medical director able to have a pp and take on cash paying patients from the program they oversee? Or are there rules against this?

Really depends. Sometimes it's in their contract that they can't, sometimes it isn't

 

[Psychresy]

Really depends. Sometimes it's in their contract that they can't, sometimes it isn't

Gotcha. Just didn't know if this was like against medicolegal rules or something.

 

[Mad Jack]

Gotcha. Just didn't know if this was like against medicolegal rules or something.

Nah. Plenty of attendings do it. Who you can accept is going to be constrained by certain insurer agreements and your director contract though, for various reasons

 

[futuredo32]

I can see inheriting his patients as being very beneficial. All he has to do is give his patients a thirty day notice and tell them to contact their insurance company or list any psychiatrist and give them 30 days notice. I would ask about his prescribing habits, patient population and see if they mesh with what you want. I'm sure a lot of his patients have a positive transference to him, if you saw some of the patients with him, it might ease the transition (I did this in residency when we had to thin the amount of outpatients we were seeing and it helped. ) As long as it's medication management and not therapy, most patients will likely adjust easily and be happy to have a psychiatrist instead of having to search for one. No idea on how much to pay for this. Good luck.

 

[clozareal]

I've recently been cold emailed this practice that someone is selling because he's retiring. It's 3 days a week of working, 8 weeks off per year, gross of $477k per year, expenses are $23k/year, and net is ~450k per year. Standard adult outpatient psych, accepts only one insurance, also offers Spravato. He's selling it for $395k OBO based on a valuation of $575k. Seven figures for your family member's practice seems way more than what this practice, for what it would have in equivalence, is going for.

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[clozareal]

On a mostly unrelated note, is a medical director able to have a pp and take on cash paying patients from the program they oversee? Or are there rules against this?

The Stark Law doesn't apply here. I know of several medical directors of inpatient units who take their patients on as outpatients in their PP, including the person who is selling their practice in the link in my previous post.

 

[michaelrack]

The SF practice sale is basically a primarily cash pt list, some used office equip, and a discounted office lease arrangement. Ignoring the lease,
I would not pay more than 100k

 

[dl2dp2]

The SF practice sale is basically a primarily cash pt list, some used office equip, and a discounted office lease arrangement. Ignoring the lease,
I would not pay more than 100k

You drive a hard bargain. I would pay somewhat more than 100k, but probably not 400k, depending on other parts of the books. Say you write an owner's loan of 4% over 10 years, it means $4k per month against a net of 450k = 400k subtract 50k for benefits, 401k. This is comparable to a turn-key 350k job with 0% attrition, which is unlikely, so you need another haircut--this is a big one--I'd say attrition is probably at least 20% in the first year.

So you pay yourself a 300k salary and the EBITA is somewhere between 30-50k. Assuming 3% growth after 10 years, DCF says ~ 400k for 20 years of cash flow. You think you are worth more than 300k a year to a facility, then the DCF goes down from there.

Another fair valuation would be the opportunity cost of building up a practice like this-- this would also favor the 400k valuation (how long does it take to fill 400k revenue? 2-3 years maybe?), so, say 2 years at 2*400/2 is a rough estimate. If you are "good" it takes you less time so it's worth less.

The problem is there's no market for this kind of asset, which is why the sales price is usually depressed. PE is uninterested in acquiring practices like this for the dollar figures are so low. IMO *usually* these are good deals to pursue if you are the right fit (i.e. you just happen to be a brand new grad or newly moving into a market and prefer PP over a facilities job and have the right CV to be able to retain most of the patients passed on to you). In my experience/story I've heard people who end up doing this do *very* well. You can think of yourself as the PE coming in, get the patient list, immediately raise fees on everyone, then drop the ones who don't want to pay. ---> $$$$$. To me this kind of thing feels very much like buying your neighbor's lot kind of deals. It's worth absolutely zero to most people, but if the timing is right it can be a great deal for the right people.

 

[Merovinge]

What do you get out of this? Doesn't sound like all that much other than a bunch of referrals that may or may not pan out, unless the prospect of having something that is theoretically turn-key and ready to go is appealing to you.

I wouldn't pay anything significant for what he's offering. He's going to have to refer his patients to someone when he stops practicing - I would just offer to accept his patients if they would like to continue to follow-up with you. Helps him out, potentially helps you out, and costs you $0.

Clearly having a patient list that pays cash and presumably likes their current doctor who will hand introduce you and keep you in the same office setting is worth something. I certainly don't think that's anywhere near 7 figures but this is a much better situation than just a bunch of referrals. Just cutting down the ramp up period with acquiring patients (of course assumes you agree with this doctor's general approach to things) is easily worth into the low 6 figures. Attrition rate is even fine for this doctor as presumably they will want to have some new patients or get their own referrals. Basically like starting the race half-way to the finish line of starting a PP, particularly if this person is willing to do a little mentoring on the side.

 

[futuredo32]

Did you ever get a quote for the practice?

 

[jbomba]

Did you ever get a quote for the practice?

Have not. Waiting to have this discussion in person next time I'm back for a visit. I will definitely post updates in this thread when things become more clear though.