Buying An Existing Practice:
Mara: Welcome back to another episode of Shorr Solutions The Podcast, today’s episode is going to be a great one. We have a special guest today, we’re going to be talking about buying or selling a practice, increasing the chances it’s a positive and profitable experience, so hang on, you are going to hear me introduce our amazing guest today, Dr. Jonathan Kaplan. As always I am joined by our very own Jay Shorr. Today, we are going to be talking about buying and selling a practice, increasing the chances that it is a positive experience, because we know it’s frustrating. I always equate it to buying a house you love and in the beginning, you’d love it once you’re rocking and rolling and living in it but holy moly in the middle it’s a little frustrating. With us today is Dr. Jonathan Kaplan, he is a plastic surgeon in the Pacific Heights area. With that, we are going to go ahead and we are going to get started, that first question, Dr. Kaplan, is why did you choose to buy an existing practice, instead of starting one from scratch that already existed?
Dr. Kaplan: A little bit of background before I officially answer that question. I was born and raised in Alexandria, Louisiana. I am the youngest of seven kids, I did my medical school in general surgery at LSU in New Orleans, finished general surgery in 2005, and then went to the Cleveland Clinic, for plastic surgery training from 2005 to 2007. Then in 2005, because of the biggest natural disaster ever Hurricane Katrina happened right after I left New Orleans to go to Cleveland.
When I was looking for jobs in 2007 an opportunity came up that I would have never existed before because so many of the people in New Orleans were displaced to Baton Rouge that shifted a lot of the health care to Baton Rouge. Our lay to the lake hospital which had at that point, been just a community-based hospital, has now become the largest private hospital in the state. They have a lot of graduate medical education now, and the plastic surgery fellowship programs from LSU and Tulane which were based in New Orleans, they shifted to Baton Rouge. In 2007 I’m coming out, and they’re looking for a plastic surgeon they had never had a need to employ a plastic surgeon before and so they needed somebody to help formalize the rotations for the plastic surgery fellows from LSU. They needed somebody to help with taking facial trauma call things like that. I go from being a trainee and fellowship on one day in 2007 to the very next day, I’m the master teaching the trainees in Baton Rouge, so that was quite the transition. Since I was the first plastic surgeon they treated me really well I kind of felt like it was my own private practice.
Then I was there for you know, six years, and again they treated me well but over the course of those six years, I wouldn’t do as much reconstruction I’m starting to do more and more cosmetics. I realized that you know I wanted my own operating room to provide these cosmetic patients a little bit more of a VIP experience. Five years out, I started thinking, what are the other options, I was thinking about just leaving the hospital but staying in Baton Rouge and starting my own practice with my own operating room. Then I also started looking around the country and I ended up finding, and at that point I was married and my wife was from Connecticut, so I think she was always itching to be in a bigger city than Baton Rouge, and I really kind of always thought my whole life I would just be in Louisiana. I was totally satisfied with that. Then, I went to a wedding in La Jolla, California a couple of years before, and I’m at the top of the hotel looking out onto the water and thinking, why don’t I live here, you know, like why can’t I live here. So that was probably the first inkling that maybe I didn’t have to be in Louisiana the rest of my life even though it’s a great state.
Anyway, so I found on the American Society of Plastic Surgeons job listings board that there was a plastic surgeon in San Francisco that was retiring and he had his own accredited operating room so we flew out here in February of 2013, checked it out, all looks legitimate it was an accredited operating room. It was a view overlooking the South Tower of the Golden Gate Bridge in Pacific Heights, it was beautiful, too good to be true. That’s when I started thinking about okay well this would be a lot easier to just take over an existing practice, rather than going through the process of building my own practice, and at that point, I didn’t even know what building on a practice or building my own operating room would entail but I knew it would be a lot harder than just taking over an existing operating. When you start thinking about that as far as building your own operating room, you don’t even know everything that it will entail, but that was the beauty of this is that this was accredited and it would just change, not so much ownership but the doctor could just change the medical directorship from his name to my name, and it really was that easy to do that. That’s how I’m starting to do decided to take over the existing practice.
The Right Price Point:
Jay: What you just said by changing the medical directorship that it was acquired as an accredited operating room because that’s one of the simple ways that you can do that. The question I have is that when you were in La Jolla and you’re saying why can I be here from Louisiana. When you were thinking about opening up or buying an existing practice. Did you have a price point in mind before you even knew what that price point was?
Dr. Kaplan: Yeah, that’s actually a great question, it brings up a point. That’s something I learned earlier on I kind of skipped over this is that when I was looking for a job out of the Cleveland Clinic in 2007 of course I ultimately took the job in Baton Rouge. There was a doctor that was retiring in New Orleans, that was looking to sell his practice. And so that gave me an idea of what number was appropriate what number wasn’t appropriate. What he was offering me in New Orleans, 2007 was his office, which was on the fourth floor of a medical office building, so he didn’t own the building, he still had to pay rent which I had to pay rent here now so that wasn’t really an issue. The office didn’t have an operating room, and the office didn’t even have a bathroom, you had to go down the hall to use the bathroom so that was annoying right off the bat. But then he offered me all of his Plastic and Reconstructive Surgery past issues, articles or issues, you know, dating back 30 years you can have all this and I’m thinking, I’m not looking at any of these journals and first of all, at that point believe it or not in 2007, they had already transitioned all the articles on an iPad, so you don’t even have to have the paper version.
Mara: Jay, I think that’s the first time someone’s tried to put a price point on 30 years worth of printed journals in their office.
Dr. Kaplan: 90% of it is outdated, what they’re talking about. The number he wanted was $450,000, and that was for this office space that I’d have to pay rent for whatever equipment he had, no operating room, journal articles, and this was a much older doctor so his patients were much older too and most likely not ever going to come back to see me and I don’t even think he had much of an injectable practice so you don’t even have that kind of recurring revenue.
Jay: Let me stop you there because Mara and I are in the middle of four or five of these right now, we did a couple last year, and we actually got involved helping doctors to negate a sale. As we represented the buyer because the seller wanted something that we considered to be egregious now. $450,000 means nothing unless you know what the $450,000 represents because let me go through something here. There is a net profit, and there’s a button, which is your earnings before interest, taxes, depreciation, and when we do an evaluation of a medical practice, and you either do X amount of times of earnings of gross revenue or a multiple of earnings of your EBITDA. Bottom line, so if you have a 3 and a $4 million practice, $450,000 is not a lot of money. If you’re earning half a million to a million dollars at 20% 25% of net. All right. Oh, gross, I’m sorry. So, how did you determine that 450 was a lot of money? Other than you’re probably a couple of $100,000 in debt for medical school unless you’re one of the lucky ones. I mean what turned you off?
Dr. Kaplan: It was based on nothing that number was completely taken out of thin air. I showed it to my accountant and he’s like what is this based on and he showed me his total revenue which was like $1.1 million for the previous full year. So the numbers just made no sense. I was truly getting just goodwill, which is so worthless to some extent. I guess I was getting a phone number, but I wasn’t even getting a bathroom. I wasn’t getting any for sure patients, I was definitely not getting an email database. It was all paper charts. I was getting literally almost nothing for this, I didn’t need an accountant to tell me that that was like, ridiculous. Now, that being said, I wouldn’t necessarily have known that $450,000 was meaningless and that that wasn’t a good number, because you know if you don’t have all the facts, you don’t know but it just didn’t make any sense. I don’t know if I’ve never really got over the fact that there wasn’t even a bathroom in the office so that wasn’t even convenient for the patient and wasn’t convenient for me. It just seemed like a really silly thing like at the end of the day I couldn’t tell what I was paying for is bizarre.
Documentation Is Key:
Jay: Dr. Kaplan, having being Licensed in Louisiana and now you have to get licensed in the state of California, and then you may have to have hospital privileges to get delineation of privileges for what he’s going to do. If you have your own or certain states like Florida, you have to be within 30 minutes, unless you have transfer privileges which are very difficult to get today. You have to get permits and so that can take several months, all right now, are you buying the real estate gap and they settled it so I want to say your initial due diligence is going to be the better part of a couple of months when you take into consideration. I’ll tell you where this is nothing against the herders because they do their job, but attorneys tear apart agreements because one attorney sends it over the other attorney has to review and they go back and forth.
We did one in the Houston area that took several months and that was a very attorney-friendly transaction. Whether it’s a stock sale, or it’s an asset purchase agreement, and you have to determine that we can get into that later because we’re going to find out what Dr. Kaplan did. Then you have your letter of intent, and you have to get financing, and then you have to have hospital privileges, unless you’re going to just get privileges at a hospital, and not have an in-house OR. It can take anywhere from three months to a year. We were negotiating one last year that fell through because it was a real estate, out-of-practice operation, and it fell through because the potential buyer didn’t want to be on call at the hospital and therefore he didn’t get privileges at the hospital.
Dr. Kaplan: When we came out here in February of 2013, as I said before it looked like totally legitimate, he had an accredited operating room, and the difference with the valuation in that situation is that he actually had a game plan of how he was going to evaluate and what he decided was, he looked at the patients that were more likely to be recurring revenue, the injectable patients and so he said okay that in one year I brought in this many patients who got injectables Botox fillers, what have you. Then he subtracted out the cost of the fillers, and then he did a two times multiple I still don’t understand why people do multiples but it’s just kind of an accepted thing. It was about multiple of net, after he subtracted out the cost of the Botox and fillers, he did a multiple of net injectables for the year, and that magic number came out to be $191,000. That’s what he wanted for the practice, and because it had been an accredited operating room which I have since found out that building a new operating room in San Francisco would cost about $600,000.
Then in there, I was like okay 191,000 versus 600,000 get an accredited operating or getaway to actually start making money immediately. This is a good deal, this seems like a really good deal. He didn’t base it on surgery patients because he just felt like they weren’t going to be coming back. Luckily they did end up coming back, and then I turned all that over to an attorney and an accountant and they looked through all of it. They looked at the last three years of tax records and he was willing to give that over to us. I was very much open communication so that was a very good feeling from the get-go.
Looking back on it, none of this was hard, it was not a struggle. I didn’t have to keep asking him for things that would have been a red flag. Turning over the three years of tax records I handed it over to the accountant, the attorney they looked at it and said this looks too good to be true, but it looks true unless he’s forging all these documents. I’ll never forget that I was like okay great, I guess we’ll move forward with it, and the attorney sent me the bill for all the due diligence and looking through everything between him in the account. The bill was, I guess at this point I’d already had fears of huge numbers like San Francisco costs, and I got the bill from the attorney for all the work that they did, and it was like $2,000. I paid it immediately because I was very relieved that I paid somebody, I didn’t just get a friend to do it and it’s actually also an attorney that specializes in contracts for doctors, including buying and selling practices.
Jay: I want to make a point here that, for those who are listening, whether it will be on the video, or after the streaming in or on the podcast, please don’t expect $2,000 in legal fees. Maybe that’s the original retainer but that’s not a typical legal fee. Now, one of the things that beyond doing that a multiples and you’re doing the three years of tax returns, we evaluate three years of tax returns and three years of P&Ls as well.
Dr. Kaplan: Again we can look at all the operating room equipment and then we can come up with a value for that, and based on my brother’s recommendation, he said to just ask him if he can just include all that into the $191,000 number that way you don’t have to go through all of that difficulty. Luckily it was just our equipment we were dealing with, we weren’t dealing with any equipment like lasers and things like that that had ongoing mortgages and payments like that, so that made it a lot cleaner. I think also the good thing about it is that he was a really nice man, but he wasn’t a famous doctor, and I think that helps his practice was definitely on the downswing, you can see that from the tax records, not because he was bad or anything like that it’s just, he was getting less busy. I think that’s the other big benefit is that he was somebody on the downswing of their practice.
Also, the fact that I had already been out for six years, so maybe he felt a little bit less willing to see if he could try and screw me over as far as like, I was right fresh out of training that maybe I didn’t know as much, granted I didn’t know that much more but I think that made that him more confident knowing that I had a few years under my belt.
Biggest Difficulties When Analyzing A Practice:
Mara: I am going to chime in with another question over here. What did you find most imperative to analyze prior to making that offer?
Dr. Kaplan: I looked up on the website to make sure whether he was like a real board-certified doctor, looked up to see if he had privileges with the hospital. I looked up to see if the operating room really was accredited by quad ASF these are all things you can look up online now. I wasn’t trying to find anything bad about him because once he leaves then that’s kind of the way it is.
I did start doing some research on, as far as like marketing as far as like the website where his website ranked. The website was under his name, and I noticed that all the plastics are noticed there were seven other plastic surgeons in this building. I noticed that they all named the practices after themselves after their name and I’m thinking, well, when I come there nobody’s going to be looking for Jonathan Kaplan. So I realized that you have eight plastic surgeons in a building in the middle of Pacific Heights, and nobody has taken the name Pacific Heights Plastic Surgery because I’m thinking about this from a Google search location standpoint local search, and people are naturally going to want to type in plastic surgeon and Pacific Heights or Pacific Heights Plastic Surgeon and so that was one of the first things I was going to do. That was the research I was doing aside from the valuation and doing the background and due diligence on him. I’ve already had my state medical license so there are a lot of little other things that you have to be thinking about, especially when you’re going into a practice where you’re not getting a referral of network patients from an insurance network.
Jay: Let me ask you, did you do an asset sale or did you do a stock sale and let me explain the difference. When you do a stock sale you’re actually taking that doctor’s physical corporation, as he files with the IRS, inclusive of the federal identification number, you assume that and you buy it, you buy the assets you buy the receivables, you buy the payables, you buy the liability as well. Otherwise, you might do it as an asset purchase agreement where you’re only buying the equipment. Alright, because when I sold ours, I did it as an asset purchase agreement so I sold the real estate, and all the equipment in it because mine was a different story.
Dr. Kaplan: Like you said, when you buy a practice as a corporation you buy everything including the liability. That’s why we did not do that because we didn’t know what liability was out there. We went through everything in the office and looked at everything, appreciated value, and things like that. Again he was thinking things were more valuable. I was thinking things were less valuable, but that was 100% an asset purchase.
Advantages and Disadvantages of Investing in Your Practice Before You Sell:
Mara: I want to move on to another quick question that we had. From a seller’s perspective, and this is actually so it’s a question for both of you, but from a seller’s perspective versus a buyer’s perspective, why is incorporating techniques and technology to improve the practice before it goes on the market important? Why is that essential because often what we see is that, and I will share with you that this has changed dramatically in a pandemic year, because we have found more and more practice owners that had thought about possibly retiring in one to five years, and they say you know what I don’t want to go through the opening and closing due to COVID. We have others that are still saying you know what I want to sell in the next six months to a year. So, what are the advantages of taking the time to go from paper charts, for example to an EMR, to making sure that their website SEO is up to snuff, making sure that they are active on social media, what is the advantage? Jay, I’d love for you to answer this first and then Dr. Kaplan you from that perspective as well.
Jay: That’s a very interesting question, because I’ve always said this doesn’t hold true in the practice sale, but many years ago I had my house up for sale. When they came to do the inspection, they said, you may love your kitchen but the kitchen was beautiful when you bought the house. Alright, the roof needs to be redone and I’m thinking, why am I going to spend $30,000 on a roof for somebody else when I’m not going to have the enjoyment of it.
Dr. Kaplan alluded to that earlier when he talked about the paper charts and an old website. I come from the days where I spent $12,000 to$15,000 a month in Yellow Pages. You may laugh, but it worked. If you have one of the most up to date technologies, Dr. Kaplan whomever is going to buy it, and it’s up to date, the name of the doctor doesn’t mean anything, because really the EMR is the patient base and the practice management is your patient base, and your financial database. That says a lot, versus, I was shocked when there was a very famous doctor that still has paper charts. He’s still using iCal to make his appointments, I’m not going to get into the HIPAA liability of any of this. It’s just that you’ve got to do the right thing to make it most appealing and legitimate.
Dr. Kaplan: With this particular doctor yeah he had iCal and things like that so I knew we were going to have to switch from that. I had been using email marketing and newsletters back in Louisiana, and I knew I wanted to build up my email database so the first thing I looked at is like okay he’s been in practice for 30 years I realized that he wasn’t collecting email databases since 30 years ago, but he only had 200 email addresses. His database was like 200 and it was way too low for me to do anything with that. Then I started going through his charts and noticed that he didn’t start collecting email database of email addresses in his intake paperwork until 2001, and it’s kind of funny because back then, not everybody would fill it out because he would feel like their email address is too personal, they’ve given you their home number but they wouldn’t give you their email address.
So I went through his chart and then I was able to bring up that email database that he had from 200 up to about 791 I believe. I realized, well we’ve got to do something to build up the email database quickly I can’t just wait on the patients to come in collecting their emails, I need a lot of leads. The thing is that if I ever decided to sell this practice to somebody, instead of me trying to sell them a practice of 791 leads. Now, if I sold it today, I’d be able to sell them an email database of over 13,000 email addresses and the reason email addresses are so critical is because email addresses are forever. This can be better for my next sale so that’s why it’s important to really focus on that.