Given the frenzy over private equity that’s emerged over the past several years, many practices are at least considering a sale. One of the first questions asked is around figuring out how much the practice is worth. The answers to this are complex and involve more than calculating the free cash flow (normalized EBITDA) of the enterprise. Once that number is determined, the next question is, “How can we improve it?” as the math of PE becomes crystal clear. Every extra dollar of profit can mean anywhere from 4 dollars to 10 dollars of value in a transaction.
Many doctors start to think “cut, cut, cut,” as if cost reduction is the path to increased profitability. While I understand the intent, the impact here is usually negative. The one exception is to look at areas in the practice that don’t adversely impact quality of care but do save on the expense line, often by re-evaluating areas that have been neglected. I’ve covered six to eight “no-brainer” ideas in earlier blogs available on my website.
Rather than cut, it’s time to revisit how to grow. Patients that come to your practice are your customers, and your job in today’s robust economy is to make an offering so compelling that they are willing to spend more of their time and their money with you. Health care spending takes up nearly 20% of our economy, and self-pay health care is growing at a much faster rate than traditional reimbursed health care.
Indeed, consumers are willing to pay more for what they value. Just this morning at the gym, I heard two examples in the chitchat among the guys.
Going to the movie theater: “I’m happy to spend $20 to see a movie, as theaters have upped their game with great recliners and food brought to me. That’s a great experience.”
Paying $5 for a donut: “Yeah, it’s worth it. These are edible pieces of art, and the experience of going in and choosing a donut makes it worthwhile.”
The common thread: experience! I’ve been writing for years about how customer experience can be applied to the medical practice, giving you greater differentiation in the marketplace and greater value in the minds of your customers. People pay for what they value; many are willing to pay more for a unique and memorable experience. The more value they ascribe to your offering, the more time and money they will spend at your practice.
And that increased value translates directly to both the top line and the bottom line, making your practice worth more today and in the future.
Disclosure: As president of SM2 Strategic, Mahdavi can be reached via his firm’s website www.sm2strategic.com or office 925-425-9900.
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