Don't Make This Mistake When Buying a Practice
Don't buy a job.
The fastest way to owning a profitable business is to buy one. Here are some ideas to help you think through your purchase.
Imagine you have two different offers. Offer one is $60,000 per year to work for someone else. Offer two is to buy a business for $600,000 and take home $60,000 per year. Many people take the second offer or something similar. They are just buying a job.
Why in the world would you pay money, go in debt, deal with risk, hire employees, and make the same amount you would make working for someone else? Hopefully you wouldn’t.
I created a course on how to have a more successful healthcare practice. I call it 20 – 20 Business Education for Healthcare Entrepreneurs. The idea for the course was to give doctors the business education they need to be successful in practice. A doctor can spend 20 minutes per day for 20 days (plus some homework) and at the end have a plan for making an additional $20,000 per year after tax.
The course is really multiple courses in one. It includes Mental Mastery, Business Basics, Negotiation, Marketing, and Business Valuation. One of the things I stress in the Business Valuation course is “Don’t buy a job.”
When you buy stock in a business, you expect to get dividends. The dividends are the return on your investment. You don’t have to work for that return. You are buying a business not a job.
Imagine you could buy a business that is a sole proprietorship. That means the doctor takes in money, pays expenses and what is left over is his income. Imagine the doctor is taking home $100,000. How much is the business worth? Most doctors would think that if they paid $100,000 the return on investment is 100%. They forget about their labor.
Imagine that you know a doctor who would be a perfect fit and is willing to work for $70,000 per year. You could hire the doctor and have $30,000 left over – without YOUR working.
What is the return on investment? If you paid $30,000 and made $30,000 per year, your return is 100%. Look at your investment in terms of pay back. If you paid $90,000 for the practice, in 3 years you would have your money back. Payback for many businesses is 6 years, which would be $180,000 in this example.
If you were the doctor willing to work for $70,000, you now have an idea of how to value a practice -without buying a job.