How Can You Create Value in Your Medical Practice?

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A medical practice that is exitable at the highest possible value has an owner who is obsessed about the predictability and sustainability of the future stream of earnings.

Medical practice owners seem to obsess about exiting and exit value. The reason so many businesses fail and many of the remainders struggle to find a buyer or are sold for a far lower price than expected, is not for a lack of an exit strategy. They all had an exit strategy; unfortunately, they did not have an “exitable business” strategy.

No question, a smart medical practice owner must think long-term. But the thinking should be orientated to creating a sustainable business that minimizes risks. Do that, and the business is exitable.

The greater the predictability and sustainability, the greater the enterprise value and, thus, the more attractive it is to a buyer.

Regardless of the decision to sell or not, the path to maximizing the enterprise value and creating an excitable business remains the same: Grow the earnings and control risks.

The following is a description of the six critical risks a medical practice owner and his management team must address to help create value in your medical practice:

Concentration Risk

This happens when a medical practice is too reliant on any one payor, supplier, referral source, strategic partner, employee or owner.  Excessive concentration risk in any form destroys exit values. Buyers are uncomfortable with concentration risks and therefore ratchet the purchase price down or simply pass on buying your practice.

For the majority of small businesses, the owner is the most significant single-point-of-failure risk, which explains the low exit valuations and difficulty in selling.

Sustainability Risks

Buyers of medical practices are buying the future stream of earnings. Any risk that could disrupt those future earnings impacts the sustainability of the business and therefore enterprise value.

The greater the number of risks, the less the value. What could cause revenues to tumble or expenses to soar?

Business Model Risks

A business model is a structure of how a business makes money and reveals whether or not the amount made is adequate to compensate investors for the risks they take. All business models are subject to both internal and external pressures, which will require you to bend and sometimes break your own model to remain competitive and relevant in the marketplace.

External Risks

All businesses operate in an environment and are therefore subject to external risks. Something can always go wrong, and often these bad things are external to the medical practice but also things we have zero control over.

External risks might include your competition, a regulatory change, healthcare reform, being dropped from a payor, or an economic meltdown. Whether the risk is internal or external, manageable or uncontrollable, it is vital that you identify these risks early on and keep your eye on them.

Leverage Risk

Adding debt to any financial structure adds risk. Too much debt stresses cash and cash flow, which ultimately endangers the viability of the medical practice. Understanding the debt structure, interest rates, debt maturities, debt service requirements, and robustness of lender relationships is crucial for all business owners.

Excess Capacity Risk

Every business has underutilized assets or excess productions capacity that can be made more productive, outsourced, or eliminated from the medical practice’s cost structure. Examples might include staff, inventory, excess receivables, expertise, office spaces, alliances, etc. 

If resources are idle or lacking in productivity, a great medical practice owner will strike immediately and remedy this waste.

Minimizing the internal and external risks and how these risks impact the predictability and sustainability of your future stream of earnings are critical to the value of your medical practice and your ultimate chance to exit your business as an owner.

Strategic Medical Brokers are trusted partners to medical practice owners who want to maximize their exit value and create an exitable business strategy. We would love to have a discovery call with you to learn more about your practice and how our services could help you. Get in touch by phone or email today!

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