Orthotics/Prosthetics

Reimbursement dollars are shrinking while rents, utilities, employee insurance and wages are all rising. Margins are tighter than ever before, leaving less latitude for error. There is a belief in the O&P profession that the value of a business is related to size. More satellite offices means an increased number of revenue streams, which will eventually lead to an extremely valuable company. Unfortunately, nothing is further from the truth. There is a difference between being busy and having a good business.

“It is like that old joke in the retail business: I sell suits for $99 and I lose money on every one, but I make up for it in volume,” Barry Smith, Esq., owner, Lloyds Capital Inc., told O&P Business News.

Define valuable?

According to Smith, volume, revenue or the number of expanded offices, have little to do with valuation. Valuation is driven by profitability — the bottom line, not the top line. Valuation has little to do with sales.

	© iStockphoto.com/LDF

“I just looked at a company with six offices doing $3 million in volume,” Smith said. “I estimated the value of that business at less than $1 million. The offices were not profitable and there were compliance issues. Whenever a company expands to more offices on a remote basis, you have compliance problems. The company is paying six rents, with six receptionists and each office even has its own central fabrication area. Plus, they billed from all six offices. It was just a horrible business model.”

A valuable company is one that has two major costs under control, according to Smith: labor and goods. Those two items account for usually more than 50% of the total expenses. According to Smith, labor costs should be in 25% to 30% range, while costs of goods should be around 25% as well.

“Companies I routinely see are running at 60% to 70%,” he said. “Those are the companies that need fixing. And the fix is relatively simple, although painful. It means firing people. And most business owners are loathe to do that because they have relationships or friendships with staff in these small intimate mom-and-pop-companies.”

Growing your way out of the financial mess is certainly not the answer. Expansion increases rents, adds new employees and revenues rarely come in as expected to cover those additional costs.

“They should really take a long hard look at labor costs and costs of goods,” Smith said. “Make sure those are in line.”

Mike Schlesinger, vice president of corporate business development, Hanger Orthopedic Group, believes that a company can be considered valuable and worth acquiring even if labor costs and costs of goods are not in perfect order.

	Mike Schlesinger

“Just because they do not have profitability, does not mean we are unresponsive,” Schlesinger told

O&P Business News. “We may be interested in a company with lower profits because they have quality clinicians. Maybe the company focuses on developing their staff through education and residency programs versus another company that has a high profit margin, but they are not educating and developing a staff for growth … One business may have higher profit, but the other company could be more valuable.”

Schlesinger said it does not matter how favorable the purchase terms are for both parties involved in an acquisition; if there is not a good cultural fit between the two organizations, both the seller and the aquiring company will be disappointed in the long term.

“Beyond price and profits, the two organizations need to have a similar level of dedication to customer service, patient care delivery, compliance and quality,” Schlesinger said.

Strategic value

The advantage in acquiring a competitor or a new business is that you get a known volume of business right away, rather than opening and building it, which could take a long time. But there are major business risks to this approach.

“You are taking on a business with unknown liabilities, so there are business risks,” Smith advised. “Secondly, acquiring a business versus opening requires more cash. If an owner is interested in buying a million dollar business versus building a million dollar business, that owner would need cash on the front end. This is why most try to expand on their own because they do not have the cash.”

Prospective buyers look at strategic value — whether the business has more opportunity for growth. Schlesinger researches the location, demographics and other competitors in the potential region.

“In the financials we can see whether the business owner has invested in the company’s future,” Schlesinger said. “Businesses who grow their company for the future — those businesses are attractive to us. Big picture thinking, not just the short term.”

Schlesinger cited compliance as an additional factor that a potential buyer should investigate. Has the business owner simply cut costs to maximize profits? Is it a compliant company?

“If the client is not up to date or does not consistently execute a compliance program, that sets off an immediate red flag for us no matter how good everything else is about the company,” Schlesinger said. “It is not a transaction we can be part of. Compliance is critical.”

Is now the time?

It is not a mistake to open additional offices, but Smith warns that business owners should venture into expansion with extreme caution. Business owners must check their egos at the door and ask for assistance.

“You have to be judicious before you expand,” Smith said. “The old adage of ‘build it and they will come’ needs to be replaced with something more modern like ‘let’s create a business plan before we sign that lease.’”

	Dennis Clark

Dennis Clark, CPO, president, Orthotic and Prosthetic Group of America (OPGA) acknowledged that O&P practitioners have no problem bringing in experts to help them learn about microprocessors or upper extremity prostheses, but when it comes to their business, they go it alone.

“I tell people all the time, you need someone to help you,” Clark told O&P Business News. “[Business owners] may be spending $30,000 a year to get the kind of support they need, but if they do not get that expertise, it may cost them a million.”

Still, Clark believes now is a great time to expand your business.

“O&P is merging into maybe the greatest times in this profession and I have been actively employed since 1968,” he said. “We are an emerging technology. We have an opportunity with outcomes data to show the value of what we bring to the rehabilitation team. If you manage the company well, make decisions based on good data and take your time, expansion can be incredibly successful.”

According to Smith, all of the uncertainty in the health care profession has caused more business owners to try and sell, creating opportunities for those looking to buy or expand their business.

“There is a real question mark hanging over the future,” Smith said.

Conservative approach to expansion

Despite those question marks, Clark’s private practice, Clark and Associates P&O, has opened four new locations in a little more than 4 years. Although it sounds like Clark is quick to expand, he actually is conservative in his approach to expansion. Clark only expands to places that have invited him in. His practices do not force their services onto the market.

“You are always growing patients from a certain radius around your main location,” Clark said. “People at the fringe of that radius would mention how convenient it would be for them if we had another office. Sometimes a referral source would ask us if we would be willing to open a new location in their area.”

Smith agreed with Clark’s approach.

“The way to expand is to find a hospital or a group of doctors who you know will refer your business,” Smith said. “Do not rent a 4,000-foot location with its own central fabrication lab. Get a satellite or a telephone booth until you see that the plan is working. Sign a short-term lease, rather than long-term lease. I see people who routinely sign a 10-year lease. How can they see 10 years down the road? And if the business is successful, it is easier to get new, bigger, nicer space. It is difficult to deal with that space if you have no customers.”

Conduct a clinic

Rather than leasing a property in the new area right away, Clark and his team visit potential areas and communities for expansion and conduct a clinic. He finds space, either a shared space with a physical therapy or physician group, and sees patients in that community. Clark’s practitioners are limited in that setting, but they can still deliver many types of orthoses and can do prosthetic deliveries, measurements, evaluations and casting at the remote clinic.

“Then we come back once a week and manage those patients in that way to see what kind of volume is there and to see how we can interface with additional referral sources,” he said. “We give that generally 6 to 12 months and if enough volume is there we start going twice a week.”

This gives Clark and Associates P&O a chance to compete with local providers. Clark can measure a patient on a Tuesday and deliver a prosthesis on a Thursday. The clinic would offer the same turnaround time as the competition, as well as offer a glimpse into potential volume, revenues and profits.

“If that is going well, we will open a location, but a very small location with minimum tools and still just commit our staff 2 days a week,” Clark said. “But by offering a location there, we can do little things like minor adjustments on site, and so our level of service increases even though our out of main office commitments do not. By doing that, we can really see what it’s like in that marketplace.”

The right staff

If the potential expansion reaches this point, Clark is already looking to recruit a practitioner to manage the new location. The recruitment process could take anywhere from 6 to 12 months.

“By then we hope to have a clinician identified and ready to move into that location,” Clark said. “When that clinician steps in, there is already a foundation for referrals and recurring patients. That person has a real opportunity to have an office to manage and share in the profits of that office as a staff person. Plus, we can still support the new office as needed, based on the skill set and comfort level of the new practitioner in that marketplace.”

Clark has overseen a number of expansions in his career in the O&P profession spanning 4 decades. He told O&P Business News the biggest threat to an expansion is the hiring of a staff. One way to hire the right staff is by monitoring the patients that you will see on a daily basis.

“Without question, the hardest thing is always hiring the staff and finding the right practitioner,” Clark said. “We make that commitment to do what it takes to cover an office until we find the right person again. It is not worth hiring the wrong person and having to replace them.”

Clark would rather take an extra year to find the right person for his new office, than hire someone who may not meet all of his expectations and qualifications.

“Everyone coming out of school is saddled with student loans and expect six-figure incomes and they have yet to treat their first patient,” Smith said. “Compensating people in this field, especially the young, eager practitioner is a real challenge. The number of practitioners is so limited that getting good staff is probably the biggest hurdle that I hear routinely. The wrong personnel can destroy a company. A business cannot grow without the right staff. The right staff is a rare commodity. You can lease a building, equip it and get contracts but staffing may be the biggest headache yet.”

During his last expansion, Clark stood firm in waiting for a practitioner with extensive pediatric lower extremity orthotics experience.

Before hiring the specialized practitioner, Clark’s company was open 4 days a week with two different practitioners traveling to the location. Since the hiring, the business is now open 5 days a week with more than a 20% increase in revenue.

“It makes no sense to recruit someone who does prosthetics only, if 70% of our volume is orthotics,” Clark said. “That’s a specialized person, but it was an exact perfect fit for our location.”

Embrace a new role

A business owner on the verge of expanding must understand that once the business grows to more than one location, his role as owner will most certainly change.

“One of the most important realizations for a business owner is coming to grips that he or she can no longer be a hands-on practitioner all the time, which is what their skill set really is,” Smith said. “They need to be a manager, compliance officer, trainer and psychiatrist — all of those skill sets, and still keep up production. There is also human resources, IT, cash flow, banking, legal, accounting, all of those issues that start to sap the strength of the owner/practitioner, who may have none of those skill sets.”

Clark’s formula for expansion tries to eliminate the headaches. By creating clinics in the potential marketplace and staying there for 6 months to a year, his team already knows the revenues and potential salary requirements for practitioners. He already knows what inventory he will need and the number of staff on location.

“When working in a new city, consistency is incredibly important,” Clark said. “We tell our staff and our patients that we will be at the new location maybe twice a week in the beginning. But we also inform them about the process. Everyone knows what is going on and then we break our backs to meet those expectations.” — by Anthony Calabro