Starting up: Make or buy?

From the May ACP Observer, copyright © 2007 by the American College of Physicians.

Owning a private practice is not for everyone. It calls for a rare mix of superior clinician and driven entrepreneur. The "make vs. buy" decision — whether to start a practice from scratch or buy an established one — is the first step. Here's what to consider:

• Starting: Starting from scratch reduces the front-end investment and allows for the creation of a practice that fits the physician's unique practice style and personality. It requires finding the right location, hiring staff, designing and equipping space and developing a marketing strategy. There are steep learning curves when establishing operating systems and working relationships. Expect bare bones staffing, equipment and furnishings before a patient schedule fills enough to reach the financial break-even point.

• Buying: Buying an established practice means inheriting a patient base, which could help the new owner reach a break-even point much sooner. Staff members are trained, and equipment, furnishings and operational processes are in place—the good with the bad. This can ease the transition, but the new owner must blend his or her style with that of the predecessor.

  Identifying the right practice at the right price can be tricky. Is the practice financially stable? Is it growing? How many active patients does it have? How many patients will stay with the new owner? Is the current office space acceptable? What about the existing employees?

  Unfortunately, there is no single reliable formula for valuing a practice, and values vary widely depending on location. A professional valuation expert will help determine the right price, but the new owner must ultimately bargain for the best deal.

Buying a practice front-loads the capital investment, usually requiring a bank loan. Starting a practice requires funds to cover the expenses until it becomes self-supporting. It can take two years to attract enough patients to generate the revenue needed to cover all operating expenses plus provide a comfortable income. Usually a bank line of credit can be set. If buying can compress that timeline, then investing in an existing practice may be a more attractive option.

For more detailed guidance, ACP members may download the following guides from the ACP Practice Management Center's (PMC) Web page: "Starting a Practice" and "Buying and Selling a Practice."

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