Feb 2017 4 Minutes
Due Diligence – Building Knowledge and Minimising Risk
Over the course of our lives we have many decisions to make about how we allocate our time and money. Often clients consider going into business and the first thought is to either start a business or buy one. Starting a medical practice has many risks, and often start-up businesses fail, or at the very least take a number of years to be profitable. Therefore on many occasions a decision is made to buy an existing practice as it is perceived to be a lower risk, there is a trading history, there is a patient base and there are systems to help new or inexperienced business owners run a business.
When buying or starting a new medical practice it is vital that you do your homework. Consequently for anyone deciding to buy a business we strongly recommend a due diligence process to ensure they are fully aware of how the business operates, the potential costs, and above all, does it make sense and does it suit their skillset, and lifestyle.
In essence, Due Diligence is the research and analysis of a business, or organisation done in preparation for a business transaction. Performing this type of investigation contributes significantly to informed decision making by enhancing the amount and quality of information available to a potential purchaser/decision maker.
More often than it should, we see business owners in financial difficulties because they did not do a proper amount of due diligence, or none at all, and were not aware of their obligations. Not only that, they had not considered all the potential issues that arise from time to time because they had not planned properly. This can result in overpaying for a business, or at worse a failed business.
It is important that from the moment you decide that buying a medical practice is what you are going to do, you need to start building your knowledge of that business, and the environment in which it operates.
Rose Coloured Glasses Effect
Too often we see people or business owners who suffer from the symptom we call “the rose coloured glasses effect”.
This is where the potential business owner for some reason or another has made a decision to buy a business where they have fallen in love with the idea of the business rather than ensuring it makes sense. It could be that their partner loves it and they can’t say no or they just want a change for no particular reason and they think there is a lot of money to be made.
The first thing you should do to minimise the “rose coloured glasses effect” is contact a health industry specialist lawyer, and accountant. They understand the processes that are needed and often bring you back to earth with a reality check that will highlight the decision you are making is serious and has wide ranging consequences.
Preparing a due diligence is a time consuming process, and should never be cut short. If you cannot afford to put all the information together and have a professional review it, you need to consider if you should be going into business in the first place.
When buying a medical practice, we always recommend that amongst other things, you make it subject to a due diligence. Depending on the results, you will have the opportunity to negotiate a lower purchase price, or not proceed with the purchase at all. We have had many instances where our due diligence process has saved our client (the purchaser) hundreds of thousands of dollars!
In summary, buying a business is a serious decision and one that cannot be taken lightly. It requires your commitment, drive and determination to ensure it works. When determining which business to buy these simple rules will help you build the information you require to be able to make a fully informed decision:
- Surround yourself with professionals pertinent to your industry.
- Ask as many questions as possible so you fully understand what you are getting into
- Prepare a plan and work with it.
Contact us to find out what steps you need to take before buying a business.