Every experience—whether it be a success or a so-called failure—is a learning opportunity. It’s a chance to grow, a chance to know more about yourself as well as whatever it is that you’re trying to accomplish. That being said, I’m all about tipping the scales in the direction of success—and that often entails absorbing all I can from those who have embarked on a similar journey before me. So, in the spirit of sharing wisdom, below are five things I wish I’d known sooner about running a private practice. May they help you tip the scales in your favor.
1. You don’t have to stay in-network.
I always thought it was best to be in-network with payers. After all, that’s where all the good reimbursements rates are, right? Turns out that’s not always the case. Many clinics actually thrive on an out-of-network model, because it affords them the flexibility to price their services according to the going market rate—not what the insurance company deems appropriate. In other words, they’re able to charge their patients what their services are actually worth. They also have more flexibility in how they handle patient collections, because there’s not a standing contractual agreement they must honor. So, out-of-network providers have the freedom to implement payment plans that work for both their clinics and their patients.
2. Collecting copays upfront is crucial.
Did you know that—according to a 2013 study—only 21% of patient balances that aren’t collected at the point of service are ever collected? That means you can pretty much kiss goodbye any money you don’t collect while your patients are in your office. And with the rise in high-deductible health plans (HDHPs), patient payments are making up an even bigger piece of most clinics’ revenue pie. So, in addition to implementing a solid patient payment collection policy—and enforcing it—many practices have also found success in incentivizing front-office staff based on the percent of patient payments collected. And it’s not just the front office’s responsibility to keep an eye on patient collections; everyone in the clinic—including therapists and techs—must be diligent in ensuring a patient has payed before beginning treatment. After all, patient collections could mean the difference between keeping the lights on—or not.
To learn more about collecting copays up front—and demonstrating your value in such a way that all of your patients (even those with HDHPs) will be willing and happy to pay—check out this recent webinar I hosted with WebPT CEO Nancy Ham. It’s free.
3. Accrual accounting is better than cash accounting.
If you're wondering about the difference between cash and accural accounting, here's the lowdown: accrual accounting—which, according to Entreprenuer.com is an “accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged”—is the preferred method for therapy private practices, mainly because insurance payments don’t always come in during the same month as the date of service. With cash accounting, this delay makes it really difficult to keep accurate books on a monthly basis. That being said, if you’re running a cash practice that receives payments at the the time of service, cash accounting can work—although payment plans definitely make things more challenging.
Now, if you’re thinking accrual accounting seems more complicated, you’re right. But it’s still the better option in most circumstances. QuickBooks can be a great tool to help keep things organized (we actually used QuickBooks Online at WebPT during our startup years). And organized, clean, accurate books and accounting practices are a must—especially if you’re considering raising private equity money or selling your practice. Maintaining accurate financial records will also prove crucial come tax season. Speaking of taxes, there are many tax breaks and incentives that businesses may not be aware of—and handling your business taxes is very different than doing your personal ones.
4. It pays to know your business’s valuation.
The valuation of a company usually derives from a calculation based on a multiple of profit numbers or revenue. To give you an idea of what’s common in service-based industries like PT, here are three formulas from Viking Mergers that I adjusted based on current PT market trends:
- 60–75% of annual sales
- 2–3x net income
- 2–3x EBITDA (earnings before interest, tax, depreciation, and amortization)
But, valuation depends on so many factors beyond a formula—and you can raise your valuation rate by ensuring:
- Your practice’s run rate—which is a prediction of its future financial performance based on current financial figures—is increasing as opposed to decreasing.
- You have established processes and a solid management team.
- You have a good grasp on your business—backed up by metrics and data—and an understanding of the industry, your community, and opportunities for growth.
- You have solid, reliable referral sources.
Most people have a skewed perception as to what their practice is worth. Preparation and corporate hygiene are critical to ensuring an accurate assessment. That means your accounting books are clean—as I mentioned above—as are your employee agreements, leases, equipment, and insurance contracts. Additionally, any debt that your practice owes should be clearly documented.
5. The terms of the agreement trump the valuation.
When it comes to selling your practice—or making any type of change to financial stakes—it’s not just the valuation that’s important. In fact, to get what you want out of any kind of financial arrangement, you must first understand the terms of the agreement. And with regard to sales, there are many options, including: partial sale with continued ownership, full sale, financial partnership agreement, equity partnership with voting rights—and the list goes on. That’s why it’s imperative that before you enter into any type of agreement—really, before you even begin thinking about a potential decision to change the structure of your company—you give some thought to what you want out of the situation. What’s your goal? To cash out, or to grow your practice? To remain heavily involved, or to move on to another challenge?
Selling a practice is a big undertaking. As such, it requires a some serious legwork and determination, but you don’t have to do it alone. In fact, you shouldn't, because that legwork is going to take you away from your core business, and the last thing you want is to allow your numbers to slip during this time. Instead, rely on a team who not only knows the business side of things, but also knows you—and what you want out of the arrangement.
What do you wish you knew sooner about running a private practice? Share your wisdom in the comment section below.