Pitfalls of Buying a Satellite Office from a Multi-Office Practice
As we’ve written here before, we rarely encourage doctors to buy multiple offices. The reason for this is the number of failures we’ve seen in the added offices. And eventually these failing satellite offices go back on the market while the multi-office practice owner retreats to her/his strong “home base” office. Deal-seekers, this is a good way to get a discounted office, but there’s a reason the price is likely low. Here’s what to look for:
Intentional or not, multi-office practice owners often do a poor job of segregating collections and expense. The more clever multi-office practice owner who knows he’s going to sell in a couple of years will begin recording more revenue and less expense in the satellite office, shifting expenses onto one of his other offices. In one recent transaction I worked on, the profits were so high in the satellite office being sold that the seller recorded a special “Outside Consultant” expense of $450,000 “for tax purposes.” Well, the tax purpose is that in his primary office, revenue was artificially low and expenses artificially high that he was transferring some of the real profit to where it rightfully should have been. How can you combat this? Require access to the financial statements and tax returns of all of the offices in the area owned by the multi-office practice, and do financial due diligence.
2.Staff and patient loyalty
With few exceptions, multi-office offices are within geographic proximity to one another for the owner’s convenience. Often times staff are shared, and can only reach their desired total work hours by dividing their time between both offices. But working for two owners after the sale may strain their loyalty and the buyer of the satellite office may see a lot of talent defect to the multi-office owner. Same story with the patients…with their original doctor so close, why not just continue with him? Staff and patient loss risk goes up when buying an office from a multi-office practice. How can you deal with this? Avoid offices that share staff and patients, or at the very least, clearly delineate that the seller cannot give staff more hours at their primary office or treat patients of the office you are buying.
3. You’ve got a fixer-upper on your hands
Quite often, satellite offices have been neglected – patients, staff, supplies, equipment, and so on. They were just part-time projects for the multi-office practice owner. So you’ve got a big turnaround to do, usually at a practice with depressed collections and deteriorated goodwill. You might get a deal on it, but you’re probably buying it at the same price a startup would cost, and for good reason – you’re going to have to put the kind of hours and bring the kind of skills a startup would require.