Buying a Nephrology Practice: What Should You Consider?
Buying an established nephrology practice can give a physician the opportunity to take over an existing patient base, staff, operations, and revenue stream rather than building a practice from the ground up. For physicians considering nephrology practice financing, evaluating the practice carefully before completing the purchase is an important part of the process.
Understand Why the Owner Is Selling
Start by understanding why the current owner wants to sell.
Retirement, relocation, a career change, or a desire to reduce administrative responsibilities can all be reasonable reasons for a sale.
Understanding the seller’s motivation can also help you better understand the expected transition and the seller’s potential involvement after closing.
Review the Practice’s Financials
The financial performance of the practice should be one of the first areas you evaluate.
Review several years of financial information when available, including:
- Revenue
- Operating expenses
- Profitability
- Cash flow
- Accounts receivable
- Existing debt
- Owner compensation
The goal is to understand how much cash the practice actually generates and whether the financial performance has been consistent.
Look Beyond Revenue
A practice with high revenue is not necessarily a better acquisition than one with lower revenue.
Expenses, staffing costs, physician compensation, payer mix, facility costs, and other factors can significantly affect profitability.
Understanding the relationship between revenue and cash flow is particularly important when determining whether the practice can support acquisition financing.
Evaluate the Patient Base
An established nephrology practice may have significant value in its existing patient relationships and referral network.
Consider factors such as:
- Number of active patients
- New patient volume
- Patient retention
- Referral sources
- Patient demographics
- Geographic concentration
- Growth trends
A stable patient base can provide a stronger foundation for a new owner.
Review Payer Mix
The practice’s payer mix can have an important effect on revenue and cash flow.
Review the proportion of revenue coming from Medicare, Medicaid, commercial insurance, self-pay, and other sources.
You should understand not only how much the practice collects, but also how reimbursement patterns affect the timing and predictability of cash flow.
Analyze Accounts Receivable
Accounts receivable should be reviewed carefully during due diligence.
Look at the age of outstanding receivables and identify whether there are significant balances that may be difficult to collect.
A practice can report strong revenue while still experiencing cash flow pressure if collections are slow.
Evaluate the Referral Network
Nephrology practices often depend on relationships with referring physicians and other healthcare providers.
Consider how much of the practice’s patient volume comes from individual referral sources.
A highly concentrated referral base may represent a potential risk if one relationship changes after the acquisition.
Review Staffing
The employees of an established practice can be one of its most valuable assets.
Review:
- Physician and provider staffing
- Nursing staff
- Administrative employees
- Billing personnel
- Employee compensation
- Benefits
- Turnover
- Staffing shortages
You should also understand which employees are expected to remain after the ownership transition.
Understand the Physician’s Role
Determine how dependent the practice is on the current owner.
If the seller personally handles a large percentage of patient care, referrals, administrative responsibilities, or other critical functions, the transition may require additional planning.
A practice with a strong team and established systems may provide an easier transition for a new owner.
Review the Facility and Lease
The practice’s location can have a significant impact on its long-term operations.
If the property is leased, review the lease carefully.
Consider:
- Remaining lease term
- Renewal options
- Current rent
- Future rent increases
- Assignment provisions
- Tenant improvement responsibilities
- Parking and accessibility
If the real estate is also being sold, evaluate the property separately from the practice itself.
Examine Equipment and Technology
Medical equipment, technology, and office systems should be evaluated before completing the acquisition.
Determine the age and condition of major equipment and identify anything that may need to be replaced or upgraded.
You should also review existing equipment leases and financing obligations to understand what will transfer as part of the transaction.
Review Contracts and Business Relationships
Existing contracts can affect the value and operations of the practice.
Depending on the practice, review agreements involving:
- Employees and providers
- Vendors
- Billing companies
- Equipment
- Property leases
- Technology providers
- Hospitals or healthcare organizations
- Other business relationships
Understand which agreements will continue after the ownership change and whether they can be transferred.
Perform Financial and Operational Due Diligence
Due diligence should go beyond simply reviewing a profit and loss statement.
The buyer should verify important financial, operational, legal, and contractual information before completing the transaction.
This can help identify potential problems before they become the new owner’s responsibility.
Consider the Purchase Price
The purchase price should be evaluated in relation to the practice’s financial performance and future prospects.
Consider whether the price is supported by:
- Cash flow
- Profitability
- Patient volume
- Referral relationships
- Equipment and assets
- Growth opportunities
- Existing liabilities
A professional valuation can be useful when determining whether the proposed price is reasonable.
Think About Growth Opportunities
An acquisition should not only be evaluated based on where the practice is today.
Consider where it could go after the acquisition.
Potential opportunities may include:
- Adding another nephrologist
- Increasing patient capacity
- Expanding office space
- Adding locations
- Investing in technology
- Improving operational efficiency
- Expanding services
Growth opportunities can help determine whether the acquisition fits your long-term goals.
Determine How You Will Finance the Purchase
Before agreeing to a purchase price, understand how the acquisition will be funded.
Depending on the transaction, financing may potentially cover the business acquisition and other eligible project costs.
The financing structure should be evaluated based on the purchase price, practice cash flow, buyer qualifications, existing debt, and other transaction details.
Don’t Forget Working Capital
A buyer should avoid using every available dollar to purchase the practice.
The business will still need cash after closing for payroll, supplies, rent, technology, equipment, and other operating expenses.
Planning for working capital can help provide a financial cushion during the transition.
Plan the Transition Carefully
A successful acquisition involves more than signing the purchase agreement.
The transition may involve transferring systems, communicating with employees and patients, changing ownership records, updating contracts, and establishing new operating procedures.
A clear transition plan can help reduce disruption for both the practice and its patients.
Final Thoughts
Buying a nephrology practice can provide a physician with an established patient base, operating infrastructure, employees, and revenue stream. However, buyers should carefully evaluate the practice before completing the transaction.
Financial performance, cash flow, patients, payer mix, staffing, referral relationships, contracts, equipment, real estate, and growth opportunities should all be considered.
A thorough evaluation can help a physician determine whether the practice is a good fit and establish a more realistic acquisition and financing plan.
