Create a Checklist:
Mara: Jay, you and I are seeing this, again and again, the practices are coming to us and people are now ready to open the location that they have been dreaming about for years. It could be they’ve been dreaming about it for a decade. They could have been dreaming about this since they were five years old. They are ready to open up their location and therefore, they’re doing one of two things. They’re either looking to buy an existing practice, or they are starting a practice from scratch. We’re going to talk about the top mistakes that we see providers make when opening up a practice. The first mistake that we see again and again is that practices don’t have a checklist in place. They don’t have a timeline of when they want to do things and when they want to open up their practices. When we talk to our practices about a checklist and a timeline, let’s talk about the types of things that they need to include.
Jay: I think, additionally, they come to us, and they don’t have a plan and they have a thought. The thought has to develop into a plan, not what I call a , “Hey Mara” moment.
Mara: Tell our listeners where that phrase comes from.
Jay: Those of you who want to know what is a, “Hey Mara” moment, my daughter’s name is Mara, as you may have heard, and I try to monetize most of everything that I do in business, and when I come up with another idea I say, hey mara and she goes “oh here we go again.” I didn’t have a plan for my thought, because once I get confirmation from the Hey, Mara, then we put a plan into place because 90% of the Hey, Mara moments never go anywhere. My thing to everybody is when you have that thought you want to open up, it looks easy on the one side, but there are so many challenges and opportunities on the other side that if you don’t have the plan, then you’re not going to be able to reach your goal. A plan includes things like, what is your timeline? What do you want to do? When do you want to get it done? And how are you going to get there? You need three major components. You need an operational plan, you need an administrative plan and most importantly, you need a financial plan. You can have all the points in place, people and machinery, but if you don’t have the money to support everything, you can’t buy anything. You can’t rent a place or buy a place. You can’t get capital equipment. You need years out of operating expenses and staffing.
Understanding Your Financials:
Mara: Moving on to mistake number two, understanding your financials. It’s not just your own financials as the buyer but you know this better than anybody else, Jay, is for anybody that doesn’t know if you haven’t caught this already. The joke with anybody that knows Jay is that Jay’s foreign language is numbers, and he is fluent. So it takes Jay longer to explain to me how he came up with a number in his head than it does for him to actually calculate it. Jay works with all of our clients on the financial side, anything that has one dollar sign, anything that has a number to it, that’s Jay’s domain. Quite honestly the amount of P&Ls you have evaluated for the seller, not just the buyer of a practice, but that you’ve evaluated for the seller. Where you’ve had to send those panels back to the accountant sometimes three times because they just weren’t clean. Expenses were miscategorized, we had things that you would look at a seller’s P&L and say there is absolutely no way that we can explain to a buyer why you spend this much on a vehicle. We just can’t justify it. So I think that it’s not just understanding.
Jay, can you explain a little bit of the difference because some of our listeners, when they open a practice, they’re going to open it from scratch and some of them are going to be purchasing somebody else’s practice. Can you explain what financials do they need to understand on their own side as far as applying for a loan from a bank, for instance? And what do they need to have in order there? And on the flip side, what are some of the things that they need to look out for?
Jay: There are two components where we help practices. The first one is when we represent a seller but we’re going to put this into the buyer’s perspective. When we represent a seller, I’m going to go back a little bit, and I analyze the P&L and the tax returns, I analyze them to a point that I look at them as if we were representing the buyer. If the buyer has a Jay and Mara representing them, they’re going to ask some very pointed questions as a buyer, because they’re buying something that they need to ensure that the financials makes sense. So when we get P&Ls and we get tax returns, I don’t want to say people cook their books, but they may intentionally miss categorize something to the fullest extent of the legal limit. That’s all well and good until it comes time to get value for your business because you’ve taken all these deductions and expenses and then when it comes time to sell, we’ve got to back those expenses out.
Understand we just went through this last weekend with a buyer and a seller and we had a deal in principle for a letter of intent. However, I don’t believe it will go through not because of the financials, because there is a multiple of gross and there’s a multiple of earnings on the EBITA, the earnings before interest, taxes, and depreciation. You have to understand, it doesn’t always marry the tax return because in one thing you may have taken depreciation, that’s for taxation. However, it is still taking the expense on the P&L but you’re not taking it any longer. If you’ve taken a section 179, for example, and you’ve taken all the depreciation over one year, it’s no longer able to be depreciated in subsequent years, but you have to show on your P&L. At least I want to know so now when I analyze that same identical P&L from the buyers perspective, I want to know are we buying a good deal? Are we buying the practice as a stock sale (meaning all the assets and the liabilities)? Are we buying it as an asset purchase agreement (meaning goodwill, patient base capital equipment)?
Mara: We’ve seen a couple of different things happen so when you are looking to buy a practice, but for example, you want to buy certain pieces of equipment, i.e. certain laser hair removal technology and RF devices it could be a micro-needling device. If it’s a surgical practice you’re looking for other things like that. We could be looking at and it could go on and on. However, if somebody says well but their exam tables and chairs have been around for forever and ever and ever if they say yes, but you should see that reception area waiting room furniture, it is so incredibly old. It’s not my style. I don’t want that but then the buyer goes in and says It comes with it. It’s beautiful. How could you not want it? So how do they then handle these situations?
Jay: Now you’ve got two different things to discuss. One is furniture and tenant improvement build-out, and the other is actual tangible equipment. One, understand if you’re going to buy a practice, even an asset purchase agreement, is the property owned? Does the property have an additional contract that you’re buying the property with? Or is it a leased property? So you need to be careful. If I’m coming in to buy the practice, what is the balance of the lease, because of the balance of beliefs about buying out the balance of the lease, does the landlord agree to allow me to do it either as a sublease or to transfer the lease? That’s number one.
The second part of that though is very important because if you’re at the termination of your lease and you love the business, and you love the equipment, the things that physically can be taken off of a wall like a picture, or a laser or a piece of equipment that can be wheeled out of the office, or out of the operating room, versus tenant improvement that you put hundreds of 1000s of dollars in that you cannot take out. Then the tenant improvement bill that has no value, and I mean, no value unless you’re going to stay there.
Now furniture is a buyer’s choice. I’ve had practices that loved their furniture, it’s the old Greek architecture, the seller loved it, the new buyer said, It’s beyond me. It’s the old type of furniture, I don’t want it. The other thing is about capital equipment, where somebody thinks that the value of the equipment is worth what they paid for it. That is a misnomer because the value of your capital equipment is what it’s selling for on eBay.
Mara: Another mistake or missed opportunity we see is an improper designed layout for proper workflow, storage, patient flow, patient and staff safety. There are a lot of things that we were seeing before COVID and now there are all sorts of different things that we have to think about during the COVID era. We always recommend to our practices to have somebody other than just the architect that designed your layout, walkthrough, and look at it as if you were actually going to be treating patients in there.
We have seen some mistakes that honestly an architect wouldn’t have thought of. You don’t necessarily want the restroom to be right next to a treatment room so that you hear toilets flushing while you’re trying to sell a $10,000 procedure. We need to think about the electricity and how all of the voltage goes into the rooms because you need to make sure that the room you thought you’re going to operate a particular piece of equipment out of you’re not actually able to do that and you’re just stuck with a standard plug. We also say that you don’t want to have the kitchen area, the break room area directly next to a treatment room because your patients don’t want to hear the staff chatter and gossip and things like that.
Jay, what are some of the biggest changes and transitions that you would say people need to keep an eye out for in the past year, as far as whether it’s been inspection issues that you’ve seen or design flow issues that you’ve seen related to COVID are not related to COVID?
Jay: Number one, I think you need to design your office as if there will be another pandemic. For personal safety measures, reverse airflow, have it where there is Plexiglas in between people, have it where maybe there’s plexiglass, and it may not be aesthetically pleasing as much but there may be regulatory issues coming down the pike in the future and you want to be prepared for it. Now in an operating room, reverse airflow is totally different. All right, because you’re going to design your operating room that way but there are different ways to design your practice, whether it’s going to be for a surgical practice or a non-surgical practice. That’s number one. I think you need to design it even in your reception area, where there could potentially be social distancing because in the future, I’m almost going to venture to say that people are going to want to come in and they’re going to have masks, they may not sit right next to one another like they used to. So maybe redesign your reception area. I mean, I had about 20 seats in my reception area and you were sitting 6 to 12 inches from the person next to you. You really have to think about things like that.
Even the water fountain, you know, in your office, there are no more water fountains anywhere where water comes out of the fountain into your mouth, everything must be individual cups. I know the fountains where you push the button and the water comes out or bottled water. Now we’re getting away from the design. But there are professionals out there that do just that. They design offices, if you’re going to do it right get a professional who designs medical offices because this is a whole different world today. It’s going to change from yesterday, till today, until tomorrow, but you need to have a budget. When you’re negotiating your space, this is one of the mistakes that people make. They do it on their own, they don’t get proper negotiation on your rent or your lease with tenant improvement build-out.
Mara: Jay can you real quick just give a quick summary of what tenant improvement build-out includes.
Jay: It could include anything and if it’s first-generation space, it can include the build-out that you’re doing and the shelving and the flooring and the type of doors and the type of locks you have on the doors. It includes what window goes where, and they’ll give you x and I’m not going to give you a number because it really depends on where you are, but it’s x amount of dollars per square foot. Now naturally, the longer-term lease you go, the higher dollar per square foot you’re going to get because the landlord is going to get more rent out of you over a period of five years and ten years versus three.
Mara: When you’re talking about the length of the lease it’s not like a residential lease where you’re looking at 12 months. What amount of a lease is too short and what do you recommend to clients say that’s too short of a lease that makes no sense versus that is preposterously too long.
Jay: If you’re starting out then three years is a minimum. Many times, depending upon where you’re at, it’s an open space landlord who might be really happy to get somebody in there to rent, especially during the pandemic. But afterward, five years is a good lease. The reason for that is when you go into a space, you have to think before you even go into this space, where are you going to be in three to five years, because you may only go into a 1500 square foot 2000 square foot space that has three exam rooms and a mini-office. You have to understand you will probably outgrow that space. If you outgrow that space, I want you to understand that everything you put into that space, the design, the textures, the walls, the flooring, whatever you cannot take with your cabinetry, you’re going to leave.
Mara: Exactly, you’re not ripping up your hardwood floors and then reinstalling them in the new place. That’s not exactly how that works.
Jay: We have clients that are going into a location that is three years knowing they’re out of there in three years because they’re going to increase their business to a point where they’re going to outgrow the 1500 to 2000 square feet. They may bring on another provider, they can bring on a nurse practitioner, PA, esthetician, and they’re going to need more space now depending on the specialty. A plastic surgeon isn’t going to need anywhere near the amount of rooms that a dermatologist will because a dermatologist doing functional dermatology is going to be working out of a minimum of three rooms at a time.
Top Things to Be Aware of When Building Out:
Mara: One of the other things I wanted to ask you about was, as we’re talking about build-outs, and whether it’s first-generation or second-generation space, so we’re talking about the build-out and while yes, we need to look at the costs and the lease and everything that goes with that. But where and I pose this question to you because I know that there have been mistakes that you’ve seen. Where have you seen mistakes made when it comes to the certificate of occupancy inspection process, because people can’t just do whatever they want and expect that it will be approved. It’s like building a house. I mean, there are certain things you can do and certain things you can’t do. Anything you know from permitting, zoning, and building and fire safety. What mistakes have you seen as far as where people have tried to cut corners and it just does not work? These are not money-saving tips. These are like, beware do not do this, this will backfire.
Jay: Before you go in, if you’re going into a first-generation space, you have to have an architect and the architect is going to create the design. You’re going to need to pull permits for everything. Now, for those of you who say I don’t need to pull permits for everything, I’m not going to disagree with you. However, I would disagree with you because you don’t need a permit until the permit maid comes. All right, and then you’re going to get shut down. Like Mara just said, there is fire, there is plumbing, there’s mechanical, there is safety. What may have been when the building was built, may not be the same today.
For example, when I went to sell our practice, I also owned the real estate in the offices that we were practicing in. You can own real estate, and we owned the real estate in all the places that we were. So, therefore, as just a businessman and I was the landlord, renting back to our medical practices. What I’m trying to get at is, I then opened up another business called South Florida Medical Specialists. Now I opened that business within real estate. Now, the owner or the renter changed, it was no longer the MD, or PA of the medical practice that was renting out of it because we sold the medical practice. It was now another practice, and now the city made me get all new permits in order to get a certificate of occupancy. So now you’ll have to go through the plumbing, the fire, the safety, the mechanical, and plan, and all of those again.
What we noticed, or when the inspector came in, is that we did not have these generators or these power supplies in every room, that if you lose power, the spotlights come on. I said, “Why do I need those?” They said, “Well, if you’re in the middle of a procedure, and the power goes off, you need to have lights that come on, what will you do if the power goes off?” I said, “I’ll open up the windows or the blinds” Well, naturally, you can’t do that if you’re operating the laser because you can’t have mirrors or the glass or anything like that. What they’re afraid of is that if in the middle of a procedure, and you can’t see some lights had to come on. So we had to redo our electrical in every one of the rooms where we’re going to be doing treatments before we could get our certificate of occupancy.
What I didn’t realize is they were going to come in and do a new air conditioning inspection. They’re going to do all the exit lights, inspections, and everyone has to have the new batteries and everything like that, it became a nightmare. So by nightmare, I just mean it costs 1000s of dollars to redo something that didn’t have to be because you were grandfathered in. So be very careful, because then they get all the inspectors that come in, they sign off on it, and all the permits that you’re going to have to do. However, once you get your certificate of occupancy, then you have to go to the city and then you got to be careful because each one of your providers has to have maybe an occupational license in that city that you were not aware of. Then be careful because then you’re going to need sales and tax licenses if you’re going to be selling products, and then you’re going to have that payroll. Then you’re going to have to have Texas Workforce if you’re in Texas, or unemployment compensation, have a payroll provider. I mean, we’re jumping ahead of ourselves, but there are a dozen things that you’re going to have to do.
Having Your Operational Plan and Organization Down Pat:
Mara: One of the mistakes slash opportunities for improvement, missing pieces, parts, all of those things are just not having the operation and organizational part of the running of the medical practice down pat. So everything from making sure all of your contracts, all of your agreements are in writing, your offer letters are in writing, your partnership agreement, a buy sell agreement, Jay and I even have a father-daughter agreement. We are business partners, of course, we’re father-daughter first but we are business partners when it comes to Shorr Solutions. We even have a buy-sell agreement, and we have a partnership agreement, legal, notarized all of that good stuff. You want to make sure that you have this in place, you want to make sure you have a contingency plan in place as well.
Let’s say there’s a giant snow or ice storm or freakishly cold weather that comes in and shuts things down. It’s a hurricane. It’s a pandemic, it could be anything along that it could be that there is a tragedy that happens next door, pick a thing, anything, right? You want to think about what happens if your practice has to shut down for a day, a week, or three months. I think we’re all much more aware of what that plan would be.
Other things that we find that are just not in place are job descriptions for every person that you are hiring, that you plan on hiring, and protocols for every single thing in the practice. It is literally from how do you greet a patient? How do you use a piece of equipment? How do you enter a procedure into your EMR system? How do you run follow-ups? I mean, Jay, I know could go on and on, especially on the OR side, but it becomes every single thing. You want to make sure you have a protocol and a procedure on how to hire somebody and how do you let somebody go, there needs to be specific protocols and procedures. We find that a lot of times those things are missed.
Jay: We’ve had clients where we have found locations and you’re not going to believe this, but it literally took almost the upside of a year of negotiations of the lease, sometimes back and forth, and three different locations and some of them have fallen through. Assuming you’ve found your location, now you want to do your tenant improvement build-out because until you get the official lease, we cannot complete the business plan. One of the most important parts of your contingency plan is presenting it to a bank is where are you going to work out of and the bank wants to see the actual official lease of the letter of intent with all the terms and conditions for it. Now you’re going to need, what type of a phone system are you going to have for people to answer the phone? Let’s even go before the phone rings. What kind of a website are you going to have that drives the marketing to make the phone ring? Now you need staff to properly answer that phone? And where are you going to get the people who are going to train them? It’s an ongoing process, and then the person walks in the door, or even before they walk in the door after the phone rings, you need a practice management software to enter the patient into and that’s not all. Once they come into the procedure and have the procedure, then they want to pay you what type of a payment system do you have? How are you going to enter it to check them out?
Mara: It sounds overwhelming to most people. I will say the difference is that and the reason Jay and I can just rattle these things off is because this is what we do all day every day. When you are looking to open up I would say that the number one, if I could give you the number one mistake or opportunity for improvement, that we see is that people don’t ask for help soon enough. This isn’t a pitch for Shorr Solutions. This is just saying if you have questions, we are here as a resource. We are doing this all the time. We’ve had two clients open up a location this year alone, we have several others in the works. If you are wanting to start a practice or buy an existing one, do not hesitate to use us as a resource!