There is a MAJOR advantage to an established practice – an existing patient base — and just as important, an existing cash flow.
This instantly allows the buyer (you) to support the practice debt load, including your new loan payment, your salary and your personal expenses. Lenders usually look for the practice and doctor’s personal income to cash flow at a rate of 1.20%, which means the practice is expected to generate a $1.20 in revenue for every $1 spent between the practice expenses and the doctor’s personal expenses.
Lenders determine cash flow in much the same way, but there are variables, such as allowable expenses. For example, let’s say a seller has a $5k in charitable contribution that was being paid out of the practice, and the buyer decides they don’t want to continue contributing at that level. Or the seller was writing off $10k a year in entertainment expenses and the buyer may not see the need to entertain at the same level. By reducing these types of expenses, a lender may “add back” the expense into the practice’s profitability, which results in a higher cash flow.
Your lender can help you understand the most accurate cash flow, as well as other important metrics of your practice as you move forward. Always use a lender that has experience in the industry of the practice you are buying.