This next series will address several key points in the overview of managing your practice to create value in the future. Many doctors do not consider these points until they are forced to leave practice, or simply desire to slow down and retire from practice. By that time, it’s too late to change many of the features that a potential buyer would find either objectionable or desirable. We’re got to think ahead!
Practice life cycles
Over a 30 year working lifetime, a typical doctor will see the practice go through 3 distinct phases: early, middle and late careers. 30 years is an arbitrary number, of course, but we have to start somewhere. The needs and value creation aspects are different for all of these, naturally, but the point is that the next phase must be anticipated and planned for.
- Early phase: This phase is usually characterized by either being an associate, renting space from another provider, purchasing and existing practice, or starting from scratch. The important things in this stage of practice are to set normal (to the degree you have control over this), establish your reputation, and become financially solvent. The financial solvency part can be easier said than done, but it’s still a basic and fairly urgent requirement. The length of time of this phase is usually 4-5 years, roughly corresponding to Gladwell’s theory of 10,000 hours being necessary to become excellent at any skilled occupation.
- Middle phase: This phase constitutes the bulk of a practice lifetime, typically about 20 years, and is usually characterized by relationship building, referral base building, technical knowledge accumulation, business knowledge accumulation, streamlining and simplifying practice procedures. In a healthy practice planning for retirement and practice transitions begin here, because it takes years of effort and accumulation to be able to leave practice in a condition of financial fitness.
- Late phase: This phase can take several forms, some healthy and satisfying and some not so much. Healthy forms are characterized by having well trained, loyal staff including an associate doctor or two, and auxiliary providers including massage therapists, exercise trainers, etc. In a healthy environment, the office has procedures for all routine interactions, and they are administered and adhered to. The office can run effectively, at least for a period of time, without the senior doctor’s physical presence. In an unhealthy form, the doctor is being forced from active practice due to health problems, financial problems, licensure problems or personal problems. Smooth, fair-value transitions in this situation, without planning during the middle phase are difficult at best and impossible at worst. It may be hard to anticipate a life-altering problem when there is no evidence of it today, but you can still plan for a transition so you are not in a scramble when and if it does happen. Healthy forms can take 5 years to complete; unhealthy forms can be abrupt and chaotic.
The first step in this process is to objectively determine where you are in the practice life cycle. The above scenario is abstract and idealized, and many practices do not follow this “flat-pyramid” shape. Still, you can ask yourself a few pertinent questions to gauge your position and roughly estimate where you are and what sort of planning would make sense. Here are some points to consider:
Early phase (less than 5 years)
- How much latitude do you have in determining case management if you are an employee? How much control over your earnings do you have as an employee?
- If you own your own practice, are you solvent? Have you passed the break-even point on practice and home minimum expenses?
- Are you satisfied with the community you live in and do you want to stay there for the bulk of your practice lifetime?
- Do you have a plan for debt retirement and are you moving towards that end in a measurable way?
If you do not know the answers to these questions, or it’s a qualified “no”, you are not nearing the end of the early phase no matter how long you have been in practice.
Middle phase (5-25 years)
- Are your finances healthy, with surplus earnings to put towards debt retirement or wealth accumulation each month?
- Is your staff stable, or are you plagued with higher than normal turnover?
- Is your community growing, well employed and stable?
- Are you reasonably happy and satisfied with the actual work involved in operating your practice, including personnel and financial management?
- Have you been able to grow or at least remain flat in gross collections, rather than declining?
Anything other than qualified yesses to these questions mean that you still have infrastructure work to do, and you are still in the earlier part of your middle phase.
Later phase (25+ years)
- Have your debts been retired other than primary mortgage?
- Do you have younger professional staff in place?
- Are they largely happy, satisfied and productive?
- Are you looking for opportunities to take time out of the office?
- Is practice physically wearing on you?
- Have you used a financial calculator to determine what a feasible retirement date might be without your present practice income?
These features should all be satisfied or close to it in order to be able to begin a successful practice transition. If some of these factors are here, but not others, at least you know what you need to pay attention to!