How to protect your business (and keep it running) when you ARE the business (Part 1)

Elena Volkova, Esq. on March 14, 2016

There’s a common conundrum among licensed professionals…

The entire business model depends on your talent and your ability to show up for work.

I’m talking about physical therapists, dentists, CPAs, public accountants, architects, attorneys – any kind of talent for which you actually need a license to work in that line of profession.

I love working with these types of business owners because they tend to be incredibly dedicated to their service and their clients.

But I’ve also discovered that these talented professionals are so used to putting other people’s interests first, that they often forget to mind their own interests – like protecting their businesses and being of service to their own bottom line.

For example, let’s say you’re a physical therapist with your own practice.

Becoming a specialist in physical therapy requires a lot of learning and passion. And it takes a lot of work to build a successful practice of your own.

But if you’re a solo physical therapist and with no additional practitioners working for you – you can’t get sick. You have to work and keep your office hours, no matter what.

The number of clients you can take is limited, you are not always at liberty to go out of town, and complex arrangements have to be made in order to keep the practice going when you’re away or not feeling well.

How can you keep your business running when YOU are the business?

The trick is to find out how to raise the value of your business and to make sure it’s protected both during and after the time you remain in practice.

First, you need to understand where the money is coming from, and also where the liabilities (or the expenses) are located. Then, you allocate the work streams where you can also put legal documents around the money to make sure it’s all protected.

The first part of valuation involves looking at your revenue.

Let’s continue with our physical therapist example…

The way a physical therapist gets revenue is by having patients.

The way a physical therapist can build business value is by having predictable revenue.

Now, it’s not common in the physical therapy industry to have long-term service agreements with patients.

But I have noticed an evolution in the treatment model where the therapist provides an incentive for people to continue to be in touch with them regularly. This ensures both continuity of treatment for the client, and continuity of income for the professional.

So one of the first things a physical therapist might want to consider are contractual arrangements, especially when it comes to non-doctor prescribed visits. It also means the practice will generate more money without any additional marketing efforts – and it has a more predictable revenue stream.

You also want to protect all of your referral sources.

For a lot of physical therapists, having strong relationships with referring physicians and other holistic care providers is an important source of revenue. These relationships are often based on mutual respect and admiration.

But again, I see the field evolving a little bit. Formal referral arrangements are being entered into as a solid referral contract between two practices.

Either way, you want to have a written agreement in place if you want these relationships to add value to your business.

So now that’s the revenue side of business value.

There’s also the asset side of business value.

While your revenue is money that comes in every single day – assets stay in the business.

This valuation focuses on what’s in the bank, the value of your equipment, and any other long-term things that may be of value to potential buyers. So it’s helpful to step into the shoes of a buyer and see what they’re going to be looking at.

For example, some offices have equipment that would be very expensive for a newbie starting from scratch. So protect your equipment. Keep track of it, make sure it’s located in a secure location, and also make sure it’s accounted for properly for tax purposes.

Another example could be your distribution list, or your email list.

I knew a woman who had 15,000 people on her email distribution list and because of the type of newsletters she used to write to her audience, she had a very high open rate, and each time she sent a newsletter, she’d get an influx of people signing up for new sessions. She had a very dedicated, and loyal customer base. For somebody to step into your practice and acquire that, that is easily worth thousands of dollars.

Another important element of valuation is liability.

When a business valuation person looks at a physical therapy practice, they want to make sure there is both regulatory compliance in place and that all the medical, HIPPA, which is patient security information. They want to see everything in accordance with the law, and that there is no exposure for any potential regulatory action.

The other thing that’s important for some physical therapists is the lease of the space in which the therapy sessions are conducted.

Now, a lease could be both an asset and liability. If the terms of the lease are very favorable, it becomes an attractive valuation factor in many physical therapy practices. But if the terms of the lease are not attractive, it becomes a liability.

A valuation person will also look for business continuity plans.

They want to make sure that if they purchase someone’s practice, there are arrangements in place to make sure the business will continue.

A lot of practitioners do this by finding a friendly competitor who does comparable service in that same line of work, and who is willing to step in and service the patients to the extent necessary. That’s all covered in the business continuity agreement.

As you can see, there are many moving pieces when it comes to business valuation. And this is just the tip of the iceberg. In the next issue’s Part 2, we’ll continue this discussion by covering…

  • how to create a salable or marketable practice
  • how to protect your intellectual property (even if you think you don’t have any – you’ll be surprised at what you can protect, and how that adds value to your business!)
  • business partnerships – the benefits, as well as what you need to know
  • how business brokers can make this process even easier for you
  • the type of insurance you probably don’t have, but absolutely need if your business depends on YOU.

This material may be viewed as attorney advertising and does not constitute legal advice. This information does not create an attorney-client relationship between you and the author. This article strictly represents the personal views of the author on the date it was written and such views are subject to change without notice.

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