02/05/2018    Bret M. Ribotsky, DPM

Formula for Value of a Practice (Jack Ressler, DPM)

I have been consulting and advising for the past
18 months in the buying and acquisition market
for medical dermatology practices. While I have
not specifically worked with the DPM market, the
foundations and principals from the hedge funds,
private equity people are similar. It’s all a
function of EBITA (Earnings before interest,
taxes, and amortization (EBITA) refers to a
company's earnings before the deduction of
interest, taxes and amortization expenses).

In simple terms, it’s the PROFIT left over after
you have removed your ownership from the
practice and paid someone (or you) to do the
work you have done. For example, if you're a
single practitioner and your practice gross is
1.4 million dollars in a year/TTM (trailing twelve months), and you spend 800K on expenses, staff, etc. that leaves you 600K. If you would need to pay another
qualified doctor 350K to do all the work you
were doing, you would have 250K of EBITA
(profit).

Armed with this number, the next question is the
multiple you would get paid on this number. A
single doctor or small group would only be able
to get 3-5.5 times EBITA in a sale. This often
comes with an agreement to work for 3-5 years.
In reality they are loaning you your money in
advance for these years. Of course, they are
taking the risk, and you are salaried now and
they get the profits. Often you take part of
the payment (up to 25%) and roll it into the new
company (newCo).

For example, in this scenario you sell for 5x of
the EBITA = $250,000 x 5 = 1,250,00 and choose
to roll over 25 % you get $937,500 in cash and
$312,500 worth of stock in newCo. As newCo grows
and collectively purchased new groups and
increases systems to increase efficiency, they
sell (re-capitalize) a portion of the business
at a higher multiple (ie 10x).

So your investment of $312,500 could double to a
value of $625,000 allowing you to remove 75% in
cash $468,750 and rolling over 25% $ 156,250
into newCo2. This would leave you with $
1,406,250in cash for your business and an
investment in newCo2 of $156.250. You also need
to keep in mind that once you get the $937,500,
you can start earning interest on this money, so
the ' $50k a year should be added to your
salary.

Bret M. Ribotsky, DPM, Boca Raton, FL

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02/06/2018    Robert T Morris III, DPM

Formula for Value of a Practice (Jack Ressler, DPM)

In light of the recent debate on practice
valuations, I thought I might add my thoughts to
the mix. I debated purchasing an established
practice vs. opening outright for a long while
before electing to open up on my own. Call me
naive, but in today's world I do not see the
value in what many of those selling established
practices are offering. I get it, you worked
your whole life to develop your nest egg into
something worth selling upon retirement, but is
the price you seek really worth it?

Let's start with facilities. Does your older
office desperately in need of modern furnishing
really command top dollar? We've all seen the
surveys on PM News. Many older doctors are still
using paper charts. Is that valuable to a new
practitioner in the modern world? What about
staff? Are they going to be committed to a young
physician coming onboard eager and ready to work
at a pace much faster than what they're
accustomed to? What about equipment? Thirty year
old instruments and fifteen year old desktop
computers? What about your patients? Do you
really think the few established patients that
return regularly will continue to come when the
new guy or gal arrives?

To me the answer was simple. Practices outlined
as above are more of a liability than an asset.
Facilities will need to be improved, EMRs and
digital XR will need to be installed, staff and
equipment will likely need to be replaced, and
patients? They can't be bought. They'll do
whatever they feel. Contrary to what many say,
bankers will loan you money. Landlords will
lease you spaces. Vendors will sell you
supplies. Job boards will help you onboard
staff. Quality attorneys and accountants and
consultants will keep you pointed in the right
direction. Lastly, marketing, when done
aggressively and in a calculated manner, will
fill your clinic with patients, and in time,
after you perform quality work, will lead to
increased business via word of mouth referrals.

To be fair, the availability of immediate cash
flow inherent to an established practice could
help to alleviate the pain early on in a
startup, and mentorship from the outgoing
physician is also something that could prove
valuable. All things considered, I remain
unconvinced that purchasing an established
practice is any less difficult than building one
from the ground up. I encourage those of you out
there reading this to consider all of your
options before electing which route to go.

Robert T Morris III, DPM, Salt Lake City, UT