Owning a practice means guiding your own financial destiny. Although, this is not without risks, the rewards can be great. The more risks you minimise – whether it be staffing issues, the economy, location, competitors or legislation – the greater chance you have of success.
The overall aim is to manage your practice, so you can focus on the core activities required to achieve success. Successful businesses reduce risks by documenting, planning and budgeting; or finding a practice manager, bookkeeper and accountant that can assist.
This article outlines the six key steps, which can help your practice stay profitable and reduce associated risks with setting up a practice.
Step one: have trusted advisors
Before committing to any type of investment opportunity, it’s essential to get the right advisors. There are two main advisors whose relationship and guidance can have a significant impact on the operation of your business – accountants and solicitors. It’s important to realise that not all accountants and solicitors are the same. In many cases, they have different specialisations, skills and knowledge. For example, the qualifications and membership to professional bodies between a public accountant, a tax agent and a Chartered Accountant vary widely.
It’s a good idea to speak with potential advisors to determine if their skill-sets are going to be compatible with your requirements. You need to be sure they understand the goals and objectives of your business and are someone you feel comfortable working with. It’s also imperative that you set out your needs with your advisor from the beginning, so that they can lay out their requirements from you. Having a quote up front or scope of work and a fee proposal, will ensure communication remains open and expectations are met.
Step two: complete thorough due diligence
The best way to ensure success is to get things right at the start. When it comes to purchasing a business, the due diligence process will focus on the investigation of the business and financial information. It not only reviews the figures of the business but undertakes a detailed review of how those figures are made up and if they can be supported by a paper trail. It involves reviewing bank statements, patient fees reports, wages records, and invoices. It should also involve looking at lease agreements, supplier agreements, and doctor contracts.
When you come to the point that you find a practice that you are interested in and want to start the process of purchasing the practice, you will need a contract of sale. An essential clause to have in the contract, is the purchase is subject to the completion of a successful due diligence. Allow for 21 days for the due diligence to be completed.
As your business grows, it is important to undertake your own due diligence efforts, particularly as you look towards new avenues for growth or plan for succession. By keeping accurate records, you are more likely to be able to secure funding for your growth plan and maximise the value of your practice.
Step three: choose an appropriate business structure
The next step to business success, is to regularly review your practices legal structure, to ensure maximum benefits. Significant costs, such as taxes may be unnecessarily incurred where sufficient planning is not undertaken in relation to the structuring of the business. There is not a one size fits all approach when deciding on the structure for your business and it will be reached once you have reviewed your personal goals and circumstances.
The structure of your business will affect the;
a) Income tax payable on any profits from the business;
b) Your ability to access profits from the business;
c) Ability to access capital gains tax concessions on the sale of your business;
d) Availability to utilise any losses made from the business to offset any other income; and
e) Personal liability of the principals involved to financiers and creditors.
In selecting a structure, it is important that you understand why you are using this trading vehicle and the rules relating to its operation.
Generally, the use of a sole trader or partnership of individuals is discouraged for the business entity as it minimises the opportunities for income and capital gains splitting and there are issues with legal liability. The most common structure commonly being used for practices is a trust with a corporate trustee to own and operate the business and, if the freehold land and buildings are being acquired, a separate trust with a corporate trustee to own the real property asset to ensure asset protection.
When investing in a business, you should be looking for a return in the form of profit and capital growth. That is, an increase in the value of the business, from when you purchase or established it, to when you ultimately come to sell it. It’s therefore important that the structure owing the asset offers access to a wide range of capital gains tax concessions and flexibility in the taxation of any gains made from the sale of the business.
Step four: have a business plan
A business plan’s implementation is crucial to the success of your practice. It’s a process by which owners and managers of a business outline the goals, philosophy and direction that the business principals wish the business to take. These take time to develop, require additional input from outside professionals, and the commitment of key stakeholders in the business.
Before you start writing down the plan for your business, it’s crucial to consider these factors;
- Patients/Billing model:Review your patient list to gain insights and understand any trends. This includes geographical location, their pricing levels and required services. This will help determine which segments are the most profitable and what are the most profitable products or services provided. What billing method will you utilise private, bulk billing or mixed billing.
- Resources: Resources should be assessed to determine whether they will meet the expanding needs of your business. Resources includes people, capital, and patients.
- Unique qualities: Look at what services offered by your practice are not offered by your competitors, or how can you differentiate to ensure your service stands out? This can offer you sustainable competitive advantage.
- SWOT analysis: A detailed review of the strengths, weaknesses, opportunities and threats attached to your business as well as action plans for how to implement them.
Do not get overwhelmed by the process of the business plan – to be worthwhile it needs to be done properly. Break the process into pieces and set a goal to complete the plan over a period.
Step five: have written agreements
When entering business with others you may consider the relationship is infallible, it’s still essential to have written agreements.
Such agreements include:
- A lease for rented premises
- A restraint of trade clause, if you purchased a business
- Contracts with doctors and other service providers
- A written unitholder/shareholder agreement (if you have partners), that refers to the business plan.
Step six: review and monitor your performance
A practice has two businesses; the medical practice with its individual doctors; and the service entity, which provides services at a mark-up.
It is important to review both parts of the business regularly to ensure you are on track.
Monitoring performance of the service entity may include reviews in the form of quarterly meetings, assessing financial reports, and benchmarking. It’s also important to get feedback regarding individual doctor’s motivation, such as their views on their financial return; their work-life balance, as well as efficiencies and deficiencies in the business.
Forget easy, quick and fast. Maintaining a successful practice will require money and substantial effort to maintain and enhance it. Although, these should be viewed as an investment rather that a cost. Careful documenting, planning and budgeting will ensure success from establishment, growth, right through to succession.