The First Step to Your New Practice Space: Understanding the Letter of Intent

One of the hardest conversations I have with physician clients is regarding selling their practice. Most of them think the ideal time to sell is when the business is humming: revenues are strong, patients are loyal, and all is well. They're right. What many don’t anticipate, however, is how significantly timing can impact outcomes. Declining revenues are more than just a warning sign—they can meaningfully affect the overall value of a practice. Why Declining Revenues Decrease Value in Your Practice When you sell your practice, buyers aren't buying your “past” success. They're buying cash flow in the future. The moment revenues start going down, you've really changed what you're selling. A revenue-declining practice sends a buyer one message: Risk. Buyers will discount substantially for that risk. Practice valuations are normally done on a multiple of EBITDA or gross revenues. If your revenues decline 15% and your margins contract, you're not only losing 15% of your practice value. You're losing that plus the multiplier effect, which can reduce your valuation by 30% or more. Hang on another year while revenues continue to fall, and you might find yourself with an unsellable practice at any price. The "Just One More Year" Trap I see this pattern all the time. A physician notices profits slacking but convinces themselves that it is only temporary. Maybe it's a seasonal dip, some key patients moved away, or insurance reimbursements were received late. They convince themselves they'll turn things around and sell next year when the numbers are better. The problem is next year rarely gets better. What started as a 5% reduction in revenue becomes 10%, then 15%. Margins shrink. Turnover increases. By the time the physician is ready to admit they need to sell, they're already negotiating in a position of weakness. The practice that could have sold for $1.2 million two years earlier might now fetch $600,000, if anyone will even look. Conclusion The best time to sell is when your practice is profitable, and the story you have for a buyer is one of growth and possibility. Deteriorating revenues are a red flag and must not be ignored. If you see a pattern of declining revenues taking shape, don't wait until it reverses itself. Have an independent assessment, talk to an advisor familiar with practice sales, and determine what options you have. The line between selling at the right time and waiting too long can be the difference between financial anxiety, and an easy retirement. Timing is not everything when it comes to selling your practice, but it is close.

 One of the first major decisions physicians make when going into private practice is purchasing an existing practice, or starting one from scratch. Both can succeed, but they involve radically different risk, timelines, and expense. The Case for Buying an Established Practice Buying an established practice likely gives you immediate cash flow. You receive a patient base, trained personnel, existing payer contracts, and infrastructure. That is to say that you start making money immediately, instead of taking months or years to establish a patient base from zero. The finances are likely more stable. You can analyze prior revenue statements, learn about referral patterns, and establish profitability before investing. This is sometimes simpler to obtain financing for. The compromise is cost in the long run. You are, in essence, purchasing the seller's reputation and systems which may not always be the perfect fit. If the previous owner had poor relationships with referral sources or outdated processes, you will have those problems to resolve. The Case for a Scratch-Start Beginning from scratch gives you total control. You choose the location, design the space to your own specifications, hire your own staff, and build the culture that you want. No legacy baggage and no politics of inheriting another person's practice. The entry cost is sometimes intimidating. Sure, you'll still be paying for build-out and equipment, but you're also not paying top dollar for goodwill. The down side is time and risk. Building up a patient base requires time, and during that time, you'll have expenses while working on increasing your revenue. Conclusion If you need to start in a hurry, buying an existing practice is usually the better choice. If you are not bothered about a longer timeline and value autonomy, a scratch-start may be preferable. There isn't a one-size-fits-all, “right” solution. Talk to advisors who understand practice ownership, be conservative in assumptions, and choose the path that best suits your objectives and risk tolerance. The wrong choice will cost you money and time. The right one sets you up for long-term success.

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