How to Evaluate an Internal Medicine Practice Before Buying
Buying an established internal medicine practice can be a major financial and professional decision. Before agreeing to a purchase price, physicians should carefully evaluate the practice’s financial performance, patient base, operations, staff, equipment, location, and future growth potential.
A thorough evaluation can help a physician understand what they are actually purchasing and determine whether the opportunity makes financial sense. It can also help identify potential financing needs before completing the transaction.
For physicians considering internal medicine practice financing, evaluating the practice before making an offer can be an important part of preparing for an acquisition.
Here are seven areas physicians should consider when evaluating an internal medicine practice before buying.
1. Review the Practice’s Financial Statements
Financial performance should be one of the first areas a physician reviews when considering the purchase of an internal medicine practice.
Important financial information may include:
- Annual revenue
- Net income
- Operating expenses
- Payroll costs
- Accounts receivable
- Existing business debt
- Cash flow
- Historical financial trends
Reviewing multiple years of financial information can help reveal whether revenue and profitability have been relatively stable, increasing, or declining.
Physicians should avoid evaluating an acquisition based solely on gross revenue. The practice’s expenses and resulting cash flow are also important when determining whether the business can support the proposed purchase price and financing.
2. Understand the Patient Base
The patient base can have a significant impact on the long-term value and stability of an internal medicine practice.
Physicians may want to evaluate factors such as:
- Total active patients
- New patient volume
- Patient retention
- Patient demographics
- Referral sources
- Appointment volume
- Historical patient growth
A large patient base does not necessarily guarantee future performance. Understanding the quality, stability, and trends of the patient base can provide a more complete picture of the opportunity.
3. Evaluate the Practice’s Expenses
Revenue is only one part of the financial picture. Physicians should also carefully review the practice’s operating expenses.
Expenses may include:
- Employee payroll
- Office rent
- Medical supplies
- Insurance
- Technology and software
- Billing expenses
- Utilities
- Equipment maintenance
- Marketing
- Professional services
Understanding these costs can help a prospective buyer determine how much cash flow the practice generates after its normal operating expenses.
4. Review the Staff and Practice Operations
Employees can be an important part of an internal medicine practice’s operations and patient experience.
A physician evaluating an acquisition should understand the practice’s staffing structure, including the number of employees, their roles, compensation, benefits, and tenure.
It can also be useful to evaluate how dependent the practice is on specific employees or providers.
Understanding how the practice operates on a day-to-day basis can help the buyer identify potential staffing or operational changes that may be needed after the acquisition.
5. Evaluate Equipment and Technology
Medical equipment and technology should also be reviewed before purchasing an internal medicine practice.
A physician may want to determine:
- What medical equipment is included in the sale
- The age and condition of the equipment
- Whether equipment is owned or leased
- Whether equipment will need to be replaced
- What technology and software systems are currently used
- Whether additional technology investments will be needed
Equipment that appears to be included in the purchase price may still require significant investment if it is outdated or approaching the end of its useful life.
6. Consider the Location and Real Estate
Location can be an important factor when evaluating an internal medicine practice.
Physicians should consider the surrounding population, accessibility, parking, competition, visibility, proximity to hospitals and other healthcare providers, and the overall characteristics of the local market.
If the practice operates from a property that is also being purchased, the commercial real estate should be evaluated separately from the operating business.
The physician should understand the property’s value, condition, expenses, and any potential improvements that may be required.
7. Determine Whether the Purchase Price Makes Sense
After reviewing the practice’s financial and operational information, a physician can better evaluate whether the proposed purchase price is reasonable.
The purchase price should be considered in relation to factors such as:
- Revenue
- Profitability
- Cash flow
- Patient base
- Assets
- Equipment
- Location
- Growth potential
A professional valuation may also be appropriate depending on the size and complexity of the acquisition.
Physicians should avoid assuming that a practice’s asking price automatically reflects its fair market value.
What Financial Information Should a Buyer Request?
Before moving forward with an acquisition, physicians may want to request financial and operational documentation that provides a clear picture of the practice.
This may include:
- Profit and loss statements
- Balance sheets
- Business tax returns
- Accounts receivable reports
- Revenue reports
- Expense information
- Existing debt information
- Equipment lists
- Lease agreements
- Other relevant business records
The specific information required will depend on the transaction and the buyer’s advisors.
How Practice Evaluation Can Affect Financing
A thorough evaluation can also help a physician determine how much financing may be appropriate.
The financing requirement may include more than the purchase price. A buyer may also need capital for working capital, equipment, renovations, technology, or other eligible acquisition-related expenses.
Understanding the practice’s financial performance before applying for financing can help the physician develop a more realistic financing request.
Why Due Diligence Matters Before Buying a Practice
Due diligence can help a physician identify potential financial, operational, or legal issues before completing an acquisition.
A buyer may work with professionals such as accountants, attorneys, valuation specialists, and other advisors to review the practice and transaction.
The goal is to understand what is being purchased, identify potential risks, and determine whether the acquisition aligns with the physician’s financial and professional objectives.
Final Thought
Evaluating an internal medicine practice before buying is an important step in the acquisition process. Physicians should look beyond the asking price and carefully review the practice’s financial performance, patient base, expenses, employees, equipment, technology, location, and growth potential.
A thorough evaluation can help a physician determine whether the practice is a good fit and how much capital may be required to complete the acquisition and operate the business after closing.
Whether you’re evaluating your first internal medicine practice acquisition or expanding an existing medical business, understanding the financial and operational details before purchasing can help you make a more informed decision.
