Dr. Margolies, I am a independent contractor within an office of one other D.C. This D.C. wants to sell his practice and has had it assessed by a practice broker. I have been in this practice location for 2 years and 4 months and have been out of school for 5 years. My practice was started from scratch is now seeing 50-60 patients/week and collections have been averaging approximately $5000/month. I would like to hire you to assist me in the determining the "realistic" value of this Dr.'s practice so that I am getting a fair market value for what I am buying. I believe the practice has great potential as to the location and the free parking. He had a practice broker, rate his practice on numerous factors to arrive at a multiplying factor that was used in determining the price of this practice. The breakdown goes like this: Collections (this is his number, I do not believe this to be accurate) for the last 12 months: $196,480 Multiplying factor determined by broker X .63 = $123,782 Market value of equipment determined by broker $19,552 Plus accounts receivable at 65% of the total collectible at the time of finance exchange which would be currently $79,784 X .65 = $51,859 TOTAL SALE PRICE: $195,193 A contingency that I become a "preferred provider" for HMO¼s when the owner DC leaves has been researched by and he was told that there should be no problem. I will be looking into this for myself, very soon. The seller, did highlight something I am not quite sure of. He said that the price for the A.R. is negotiable and that I would not be taxed on those accounts because I have already purchased those accounts. He also stated that any of the A.R. not collected could be written-off my taxes? Therefore, he feels that the more we apportion to the A.R. from the sale price, the less I would have to pay taxes on? Is he correct? If I do decide to buy his practice I would like to handle the sale independent of a broker and just work with a lawyer. Any help would be greatly appreciated! I just wanted to let you know that I am referencing all pertinent information I have had in the past regarding buying or selling a practice. How do I find out if he has bed debts! The practice is over 1o years old. The DC is leaving to be closer to his family and new baby girl. He gets most of his NP's through local businesses, YP, and referrals. Staff will be changing over here soon with someone who I know and want in here. The office space is 1200 sq. ft. with two adjusting rooms, one exam/adjusting room, two dr.offices, X-ray room, developing/dark room, and bathroom. The lease is to be renegotiated in November '99. I have a rough idea ofthe montly overhead, approximately $6000/month. As far as financing programs, I have no idea as to how I might be considered. I will be asking some of my collegues who recently bought practices for any more input. Thank you once again for all your work! A: Thanks for the e-mail. Obviously, you must do your homework from your end more than rely on a consultant for 100% feedback. I am an advocate of going on your own .. if you have been an IC for a number of years and have built your own patient base and have $5000 months .. what prevents you from going up the road within a 5 mile radius and open on your own? What prevents you from discussing getting on board with the local HMO¼s in a new location, especially if you contact them .. just as a point of interest .. and let them know you are now in a location that coverage is available and you¼d like to go on your own and be involved as well? What prevents you from taking some of the money that would be necessary to purchase this practice and begin your own .. also leasing if necessary equipment and all? If you feel you can do all these .. or at least explore the idea for a few more days prior to making a decision .. you may make out better on the short and long run. These are my thoughts: Usually the seller DC and especially their brokers inflate the numbers hoping that with any negotiation the end price would be in reason. The fact that the owner DC hired a broker means he has an advocate for himself boding less for you. This doesn¼t mean there is any negative stuff going on .. it¼s just business. If he has a list of potential buyers and you feel threatened and need to make drastic and quick decision .. you may find yourself in a position of distress and do the wrong thing (purchase at the price they asked). But .. if you really want the practice you have to be willing to also walk away hoping that the final offer is more in your favor .. saving thousands of dollars in the process. As far as receivable .. it is my understanding that you cannot write off what you didn¼t make .. and if you are paying an inflated price for things that are somewhat unpredictable (as getting insurance money) just so you can write it off at the end .. the buyer takes most and you may lose. As far as being or not being taxed on receivable accounts .. again .. if there were accounts not collected there was no taxable income .. you just would be able to write off the cost of purchasing the practice as a whole no matter how you break it down and they spin it. I would caution you about the receivable portion of the purchase .. instead promise to pay a percentage upon receiving the money .. or better yet .. don¼t even bother with this .. let him collect it himself and lower your purchase fee this way .. why bother anyway. Before you determine price to pay for a practice first determine the health of the present practice. How many patients does this DC see a week .. how many new patients .. how many for a reduced fee .. how many on HMO¼s that you may not be invited into? You stated that the lease is up for negotiation in November .. just five months away .. the price and contract should reflect a guarantee that you can renew at a price reasonable or the same. As far as staff changes .. if this is the CA staff .. this could be good and bad .. people are usually suspect of change .. if his practice base drops once you purchase it .. what are you paying for? If the staff is another DC .. in whatever capacity .. they can underplay you and cause friction unless all is understood from the start. If you are collecting $5000 a month you probably could go to a local bank and ask for a business loan .. if you own a home you can get a home equity loan .. you can contact Banker¼s Leasing a company that leases to DC¼s all the time .. there are many avenues to get funds. Okay .. about the purchase price. $196,000 (the collections) over a 12 month period is approximately $16,000 a month. Give or take a few thousand here and there .. and based on this number (which is also the purchase price) you need to seriously see if you will inherit enough patients and potential income to make this up within a year or year and a half (even if you intend on paying it off over an extended period). Do you foresee enough patient income from what you are buying? Take away the cost of equipment (which on the used part market is worth a whole lot less than the numbers you supplied me) the selling price is down now to $175,000 .. and take away the $52,000 for receivables .. which seems on paper that for $52,000 up front you¼ll be making $80,000 .. (though there is no guarantee and it begins to look more like gambling in Vegas with your money) this brings the price down to $124,000 divide that in half .. $62,000 that might be a better price to shoot for. Also .. don¼t forget you have $6000 a month just to open the doors .. not including your personal overhead. Obviously the seller wishes and probably deserves every penny he asks for .. but in our supply and demand society .. this is not realistic. So .. this is what I would say: „I gave this much thought, and really can¼t see paying $196,000 for any practice, the fee is way over my head. For example, your equipment is over five years old and maybe even ten years .. although I¼d need equipment to continue this practice, I can always lease new equipment for a few hundred a month and not start with such debt. As far as the accounts receivable, I realize, as you probably do, that getting all the money from an insurance carrier or past accounts from patients is unpredictable. Again, I¼d rather not take the risk of paying in advance for funds that may or may not appear, instead I¼d work with you on this and pay you a percentage, say 75%, of everything that comes in with the 25% going to me for the staff work etc. Also, as far as the practice price of $196,000, this is way over my head and also is based on many factors that I am fully unaware of. I probably could see paying cash of between $60-70,000 for your practice, including equipment, if I am assured to have the lease renewed at a favorable rate and have assurances that your patient load will continue and not drastically drop due to managed care contracts etc. I hope this is acceptable.¾ Expect for him to say no .. then remind him that the accounts receivable is not included and he can take his equipment if he wants (you then can leave it for less than what he is selling it for ..and it¼ll be new or used depending on deals you can find) and hope for the best. Don¼t be nasty .. just exploring .. if you dead set on getting the practice work from there but your low balling it gives him and his broker (who he also must pay .. no .. you must pay) room to wiggle in. Don¼t tell him that you may look across the street .. but I would recommend you exactly do this. Find a location close by .. take the $70,000 you were ready to place on the table (maybe even more) and use it .. it consider borrowing this much if necessary to start on your own. What happens if this doesn¼t go through .. you lose some momentum since you didn¼t purchase an existing practice .. you won¼t inherit an instant practice .. but to your advantage you already have a practice .. you already are thinking about spending or getting the money to purchase or in this case open a new practice .. you have experience .. and if you are on your own .. you can begin to build income rather than paying a new debt with interest .. (just think of the interest alone on a $196,000 loan per year ....) Final advice .. go with your gut feeling .. do look around to start your own .. don¼t feel threatened that some other DC will walk in on your territory if you don¼t take it .. they will also be walking into a huge debt. Disclaimer: Be sure to run the tax questions through your accountant and also have your own attorney looking over things Have a Great Day Dr. M