August 29, 2009 (Original publish date) • By Dennis Beaver
Being your own boss by going into business for yourself is part of the American Dream. It can also turn into the American nightmare. We’ve all heard the statistics about 70 percent of new businesses failing within the first three years. Today, those rates are even higher for many “start-ups.”
But suppose that you’re not going to actually “start” a new business, rather, you’ll buy one that is being run successfully, and has an established customer base. If what you pay is reasonable, then it should be smooth sailing, right?
That’s what a young “Dr. Dave” was assured by a knock-your-socks off enthusiastic, and personable, “Dr. Sarah,” who was about to make a career change at age 55 and needed to sell her medical practice quickly at a price of “only $150,000,” Dave related. Both he and Sarah are pediatricians in the San Jose area.
“I have family who can help me with the money, and Sarah says that she makes about $250,000 a year, so it seems like a really good purchase price. I really want to have my own medical practice. My parents have read your column for years, and they suggested that I give you a call. My wife and I will be driving to Los Angeles in a few days and would really appreciate meeting with you and getting your opinion, but frankly, it’s to make my parents happy,” the young doctor told me.
As I refer to Dave as being a “young doctor,” you might be wondering why I’m using that term. Should age have any bearing on a decision to buy Sarah’s medical practice? Before answering, the following personal information about Dave needs to be considered.
Fresh out of training
Dave is 31 and completed his residency in pediatrics less than one year ago and is now working for an HMO earning close to $120,000 a year. He has been married for less than a year to Carolyn, an absolutely beautiful gal from Texas who “likes nice things and doesn’t worry about going deeply into debt to maintain a certain image,” he explained to me over coffee at my office. While his wife did come into the office to say hello, she immediately left to go shopping, leaving her husband to discuss their financial future.
“I have to admit that my wife’s attitude toward money is quite different from mine,” he admitted. “I was raised with the notion that being in debt isn’t a good thing, and that if you can’t afford it, don’t buy it. When Carolyn and I were university students, she often got into trouble with her rent payments and credit cards, but as you’ve noticed, she is such a beautiful woman. I fell in love with her despite those minor shortcomings,” he commented.
“Dave, I agree, she is indeed lovely, but what you are describing isn’t minor. If a couple is not on the same page financially, this spells big trouble for the marriage,” I replied. He nodded but remained silent, listening. My comments were not exactly what he expected to hear.
“So, tell me about your job, do you like it?” I asked. He did, indeed, describing how great it felt to actually be working full time in pediatrics, “and when we are out shopping, or at the movies, patients and their families recognize me, come up and chat. I’m told that I have a good way with kids, and am so glad that I selected this medical specialty,” he said with a big smile.
What’s the hurry?
“Wouldn’t you agree with me that you are just now really sharpening your skills as a doctor?” I asked. He agreed, admitting that he still had a lot to learn. “Then, what’s the hurry to run your own shop?”
“Well, you can earn more money in private practice, and my wife feels this opportunity is perfect for us. Sarah has an established practice, and she’s only asking $150,000. As she made $250,000 last year, how could I lose? Also, she has made it clear that I really need to decide quickly — within a week at most — or she’ll offer it online and certainly get a buyer that way.”
“Dave, doctors are great at the practice of medicine, but, most lawyers will tell you that they often make poor business decisions,” I replied picking up the phone and calling my friend, Bob Hawkes, a business consultant in Southern California who has worked with a number of small business development centers across the state. If anyone had the credentials to advise Dr. Dave, it was “Doctor” Bob.
“When we take away all of the nice office furniture, exam tables, instruments, books, computers, all of it, what really does every sole medical, legal, or accounting practice boil down to, Dave?” he asked.
Bob answered his own question: “It’s that individual — it’s their name. Financial success is a direct result of the ability to attract and serve our patients or clients, to keep them coming back, and referring in new business.
“Never forget that the practice of medicine is a business. Patients and clients are your customers, and there’s nothing which requires the customer to keep on coming back when they learn that it isn’t Dr. Sarah their kids will be seeing, but some new guy, this Dr. Dave.
“In big city medical practice, when doctors want to retire, they will almost always bring in an associate, generally as an employee or on a “buy-in” basis, working together, to establish continuity. This way, once the new doctor takes over, most patients will likely remain.
“In rural areas — or where a physician becomes ill or dies — it’s different. There, with a basic shortage of medical services, a practice can simply be sold, and the patients generally have no choice but to remain,” he pointed out.
“Finally, Dave,” Bob counseled, “Let’s get real here. The pressure on you to buy within a week is a bad sign. You need the time to have an accountant review her books to see if what you are being told is true. Run the other way. You’ve got plenty of time before hanging out your own shingle.”
It was good advice.
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.