Why Growth by Acquisition is Prudent Business Strategy for Professional Practice Owners

Apr 11, 2017

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses.  The following blog has been provided by Rod Johnston of the Omni Practice Group (www.omni-pg.com):

Why Growth by Acquisition is Prudent Business Strategy for Professional Practice Owners

 Owning and growing a dental or veterinary practice can be challenging for an entrepreneur in the professional practice space.  New patient generation through advertising can be hit & miss and expensive.  A more effective path to customer growth, increased revenues, and enhanced profitability is often growth by acquisition through purchasing another professional practice and merging it into your existing practice.

The motivation for doing a merger is to get the revenue and current patients from the acquired professional practice without accruing the expenses.   In an acquisition of this nature, you don’t bring over the fixed expenses like rent, telephone, electricity, etc.  Those expenses are already paid in the operation of your dental or veterinary practice and don’t need to be incurred again when the two professional practices are merged.

The following example illustrates such a professional practice merger:

Doctor A owns a practice that collects $600,000 per year in revenue.  The practice has overhead expenses of $390,000 with 30% of the overhead in fixed costs – rent, utilities, insurance, etc.

Doctor B is retiring and has put his practice, in close geographic proximity to Doctor A, on the market for sale with a professional practice broker.  Doctor B’s practice is collecting $500,000 in revenue with overhead costs of $325,000 and fixed expenses again at 30% or $150,000.

Doctor A purchases Doctor B’s practice for $350,000 resulting in a monthly debt service payment of $3,500 per month.

Strategies are implemented, often under the guidance of an experienced & knowledgeable professional practice broker, to ensure a significant majority  of the patients of Practice B transfer to Practice A.

Practice A grows from $600,000 to $1,000,000+ in revenue.   Practice A incurs the variable expenses of the second practice in the merger, but does not incur the 30% fixed expenses of $150,000 because those expenses are already in the operating costs of Practice A.  In essence, Doctor A just increased the profitability of Practice B by $150,000, less $42,000 in debt service and dropped overhead below 60% of gross revenues.   Compare this with the time, energy, and resources required to grow a professional practice a similar amount through marketing and advertising.  Consolidation of professional practices, if done correctly, can provide instant revenue growth and income.  If a dental or veterinary practice is for sale near an existing practice, it is always prudent to evaluate the practice as a potential acquisition to facilitate revenue & profit growth and eliminate competition from the marketplace. Many lenders in the business community aggressively support professional practice acquisitions of this nature.

If you have questions related to any component of this article, Rod Johnston, MBA, CMA of the Omni Practice Group would welcome the opportunity to provide additional information.  Mr. Johnston can be reached at (206) 979-2660 or rod@omni-pg.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.