Should You Start Your Own Practice or Join an Existing One?

G ven the opportunity to open your own practice, start a practice with a partner, or join a practice, which is the best for you? Any way you look at the equation, there’s a risk and reward ratio, similar to financial investing. The greatest risk (starting a private practice) provides the greatest reward (ownership, income, freedom), while the lowest risk (employment) provides a decreased reward (income). The middle ground: 1 to 2 years of employment in a vibrant established practice with an opportunity to buy into the practice or to take over a practice for a dermatologist who is transitioning, has been the preferred option for many. It makes good business sense to limit the downside and maximize the upside potential.

Starting Your Own Practice
It takes years to develop a well-established practice with good patient throughput and efficient operations. Additionally, you must have an entrepreneurial spirit, though it can be counterproductive to try to recreate the wheel. However, private practice can reap the highest rewards — personally and financially. One of the initial setbacks with starting your own practice is start-up costs. Actual costs involved in starting dermatology practices vary tremendously, as one would expect, even within close geographic proximity. Some of these differences are related to local economic factors including office lease expense and wage rates. Others are more influenced by the type or “style” of practice desired. For example, a new practice that emphasizes cosmetic or surgical dermatology treatments, will have start-up costs significantly greater than a practice that’s medical-dermatology based because more equipment needs to be purchased for the cosmetic practice. Income expectations and work hours will also affect costs, as will community competition with related practice marketing expenses. Another, often-overlooked expense is that of the cost of capital. If the practice is going to be capitalized, or paid for, out of savings, inheritance or lottery winnings, then there’s no direct cost of capital in the form of principal and interest payments.

Beyond this, there’s the issue of revenue generation, or lack of such, in the new practice. Typically, when a dermatologist joins an existing practice, the practice’s patients and operating insurance contracts essentially provide an immediate ongoing revenue stream. In contrast, a new practice has to develop both an ongoing flow of patients and prepare for delayed third-party reimbursement issues. These issues can become significant, although not insurmountable, barriers to success. Combined, these factors can produce a drain in working capital, necessitating a line of credit from a bank in order to meet ongoing overhead expenses such as office space rent, employee salaries and benefits and medical supplies.

Your Return on Investment
When you make the decision to start a new practice, the process of identifying, describing, and analyzing the associated costs involved is referred to as capital budgeting. This process is a means of assessing your needs for space, equipment, furnishings and income, and then examining this assessment with the following considerations: financing options, payback terms and costs, tax considerations and cash flow impact. One way to determine your investment payback is to compare the amount of earnings from a private practice to an “average” salary in an employed position. Take that difference and utilize this “investment return” to determine the payback period for your own investment into starting your own practice. For example, if an employed dermatologist earns $200,000 per year, and you earn $300,000 from your own practice, then the return is the difference of $100,000. If the practice start-up costs were $500,000, then all other things being equal it will take 5 years to achieve your return on investment. Of course, this is a simplified calculation, and you should consult an accountant to determine the actual numbers.

Predicting Cash Flow
When attempting to predict future cash flows, all assumptions are educated guesses. The reality of a new practice is that nothing is for certain, especially the cash flow. While this is true for every new business, the issues are somewhat more complicated with the addition of third-party payers. Issues such as delay and denial of payment combined with varying discount rates can cause significantly lower account receivables. Ongoing accounts payable and staff salaries can quickly deplete cash reserves, leaving you with negative cash flow and nothing to cover expenses. Although predicting cash flow is essentially an estimated guess, it does give you the ability to budget to goal. If you’re not meeting your goals, you can make adjustments. At least you have provided some framework for operating. Cash flow is something especially worthwhile to analyze if you are considering starting a practice with a partner.

Developing and building a new practice takes time. During this start-up time especially, stressors are high, but it is an endeavor that is probably best taken alone. Expecting enough patient flow into your new practice to support both you and a partner could be unrealistic. When starting a new practice it’s easy enough for one dermatologist to starve, let alone two. If you want to work with someone else, you may be more suited for joining an existing practice.

Joining a Practice
Joining a practice, rather than starting your own, can alleviate many concerns regarding cash flow problems. You have the benefit of being a part of an established practice with established patients and a guaranteed salary. You should assess the opportunity cost of not acquiring ownership and weigh it against the up-front increased earnings potential. Combine this with decreased financial risk and more freedom from administrative tasks. Before you join a practice, though, make sure the decision and practice is the right one for you.

Frequently, dermatologists will take a position based purely on their need to pay off medical school debts, meet family obligations or for the security. When negotiating an employment contract, consider not only the monetary factors, but also other aspects of life that you value such as your personal time, your family life, and geographical location. Factors of consideration should also include the practice environment and mindset of the other doctors. This is especially true if you are going to have a buy-in option. It is extremely important that you share similar priorities with regard to running the business. Learn the history of the practice. Talk with the employees and other physicians to determine the strengths and weaknesses of the practice. Review accounting ledgers. Do your due diligence to determine that the fit with that practice is right for you.

The Buy-In
In this scenario, you have initial increased earnings with less risk because you have a guaranteed salary. It’s probably the reduced risk initially, combined with the potential future opportunity for increased earnings that makes the buy-in option so attractive. Your employment contract will include a buy-in option after you work as an employee for a set amount of time. This timeframe averages from 1 to 5 years. This is a great opportunity because it allows you to build your practice without the worries of ownership and cash flow problems, and then receive the benefits of ownership later once your practice is established and solvent.

Today, buying into a practice is quite simple. Typically, you buy-in to the physical assets of the practice including any real estate. You will receive 100% of your net revenue stream, which is a huge benefit. You also can buy into the revenue streams of mid-level providers. In the past goodwill was a factor in a buy-in, but no longer. Goodwill previously was the amount paid for the intangible assets such as practice reputation.

The Buy-Out Option
An ideal situation beyond a typical buy-in is the “buy-out” of a dermatologist who is transitioning. A transitioning dermatologist is someone who has a well-developed, vibrant practice who is simply ready for a different stage of his or her career such as focusing his or her time and energy on consulting, lecturing or research. A transitioning dermatologist is not winding down his or her career toward toward retirement — but rather the practice is still dynamic. The buy-out situation is similar to the buy-in option with regard to the physical assets of the practice. There is a difference regarding to the revenue streams of the mid-level providers. An option here is a tiered “phase-in” rather than outright purchase. How this works is that the purchasing dermatologist does not pay anything for the mid-level revenue streams. As the purchasing dermatologist, in the first year of ownership, you receive only 10% of the net profit from the mid-level. The remaining 90% goes to the transitioning dermatologist. The second year, you would receive 25%, the third year 45%, fourth year 70%, and fifth year 100%. This scenario is a win-win situation. The purchasing dermatologist does not need as much money initially, and the transitioning dermatologist temporarily continues to receive a revenue stream.

Making the Decision
Before making your decision, make sure you’ve done due diligence in determining the best fit for you. If you decide to enter into an employment contract at first with thoughts of private ownership in the future, that works too. The options are many, and with a bit of research you can find the fit.