[Editor's Note: Today's guest post was submitted by Dr. Sandra Weitz, a pain management specialist who grew her own practice to include 11 providers, a substantial clinic and ambulatory surgery center, as well as several other vertically integrated medical businesses. After retiring early she now teaches physicians how to maximize the earning potential of their own practices and business initiatives. We talk a lot on the blog about having an investing plan before you begin investing but haven't specifically discussed the importance of having a business plan before you start a new business. Like I always say, you need a plan! Here are a few tips for getting started. We have no financial relationship.]
In perusing social media, particularly various physician-oriented groups dealing with entrepreneurship, I have noticed that there is tremendous anxiety about starting a business—especially a private practice. And there always seems to be an intense discussion about the need for a business plan and how to write one. Many people either do not know the purpose of a business plan or do not know where to start and what the important components of a well thought out business plan should be.
Why is a Business Plan Important for Physicians?
In short, a business plan is a blueprint for transitioning from an initial stage idea to a profitable business. By writing one, the authors are obligated to think through and document their thoughts regarding all aspects of launching an enterprise: business model, positioning within the market, assessment of competition, income and expense assumptions, projection of a rollout and its financing, securing space and hiring employees, expected ramp-up to ultimate profitability, and last but not least, an exit strategy.
This may seem like common sense, but unless a person has launched at least one enterprise or has academic knowledge of the process, this approach is not familiar to most people. While it may seem incredibly intimidating at first, breaking it down to its smaller components can make this endeavor easily achievable even for those who do not have any formal training.
While any business plan makes some assumptions, carefully researching and understanding the gathered data will result in a plan that is reflective of the reality, mitigates risk and minimizes surprises. Furthermore, a well thought out business plan is mandatory for securing financing from banks or investors regardless of the type of venture involved.
Define Your Business Model
The simplest initial question is: “What is the business model of a particular enterprise?” This is a 30K-foot view. By outlining this, the physician entrepreneur can start thinking about the feasibility of the venture and how it fits in within the existing marketplace.
- Will the new business deliver a product or service for which there is an unfilled demand?
- Are there previous examples of same or similar business model, and if so, how successful are they?
- What are the barriers to entry?
- Does the expertise in the chosen field exist, and if not, how will it be acquired?
In the case of the private medical practice, such as the one I started, the business model has existed for at least a couple of centuries and in modern times is validated across multiple specialties and regions. On the other end of the spectrum is the untested business model, such as space tourism. The demand volume, operational safety, and associated income and expenses, and thus long-term profitability and sustainability in the near future are highly uncertain for a business model that is so new.
Once some of the answers to the above questions are provided, a physician has to consider the new venture’s position in the market, income and expenses, financing, employees, and even exit strategy.
Position in the Market
In the market space where competition exists, consider the following:
- Is there enough business to keep all parties busy and profitable?
- How will the new business differentiate itself from existing ones?
- What are the products/services that will be offered?
- What are the realistic number of products or clients that can be sold or serviced? At what price relative to competition?
Understanding your particular space and the operations of the competition can guide decisions regarding positioning within the market. The clearer your understanding, the better the decisions you will make.
Part of the consideration is understanding the demographics of the population that the new business will serve. Factors such as uniqueness of the product/service and population density will have a significant impact on the business plan. Well-recognized national chains such as Target, Costco, Whole Foods, and Bed, Bath and Beyond have specific demographic thresholds that need to be met or exceeded before they enter a particular market.
Even the same chain stores will not carry identical products—what is found on the shelves is driven by population density and demographic data. For example, Macy’s flagship store in New York City has different merchandise, particularly high-end luxury items, than Macy’s in a smaller, less economically diverse city.
In the case of launching my practice, I understood that, at the time, I was the only fellowship-trained, board-certified pain management specialist providing service in my geographic area. Furthermore, even though other providers practiced in the area, I was the only one who offered a comprehensive, multi-modality approach to pain management. This was in sharp contrast to the interventional procedure-only oriented practices that formed my competition. In addition, understanding competing physicians and their operations allowed me to draw a distinction based on availability and even the type and the breadth of the procedures that I could perform. Recognizing these differences and marketing them appropriately to referring doctors, attorneys and insurers guaranteed the success of my practice.
Income and Expense Projections
I think this topic is self-explanatory. You have to make a realistic assumption of number of goods or services delivered and income and expenses associated with that. It may be helpful to project at least three different scenarios for the steady-state function of the new business. You can project average success, but also look at less than average or better than average variants. You may even decide you want to look at the worst-case scenario to see if and how you may be able to mitigate and overcome unforeseen/uncommon but possible challenges that the business may encounter (examples: COVID pandemic, business interruption due to a natural disaster, economic downturn, etc.).
One has to be brutally honest with the assumptions in order to generate a projection that is reflective of reality. All aspects of the business plan should be data-driven, but this part particularly relies on specific numbers (which can be easily obtained and verified).
Just as important as the steady-state function, the plan should address and project the anticipated roll out. Rarely, if ever, does a business become profitable on day one. It is crucial to demonstrate progression from launch to profitability, especially if you are looking to finance the project through banks or investors. Even if you have the resources to fund the project yourself, this planning will illustrate when you can expect the return on your investment and the magnitude of such a return.
Based on this information you may decide that the anticipated return may or may not justify the effort and the risk that you are about to undertake. You can be sure that any bank or investor will go through the same calculation before deciding if they will support your venture. Having this information ahead of negotiations with banks or investors will allow you to negotiate either better financing terms or reduce dilution of your ownership stake.
In my case, within two years of launching my practice, I was ready to consider investing in an ambulatory surgery center (ASC) that, at least initially, would be driven by my practice alone. I understood the potential for revenue, but at that time I personally had no expertise in planning and developing a fully accredited surgery center. Thus, I hired consultants to do an initial feasibility study. Based on a detailed evaluation of my practice, they provided me with reliable estimates of revenue that could be generated by the ASC based on my own procedure volume. They also gave me a good understanding of the costs and timeframe needed to develop and start operating the ASC. Perhaps just as important as the actual numbers, the fact that their assessment was impartial provided me with a degree of comfort. Armed with this information, I could confidently approach the local banks for capital that I would need to make my ASC a reality. I could objectively demonstrate to the bankers and their loan committees that my proposals made sense and were financially viable. By demonstrating to them my ability to repay the loans, I secured the required funding. In principle, this process is not substantially different than applying for a personal home mortgage or a car loan.
In order to calculate the bottom-line numbers for the profit, by writing the business plan you will be forced to consider space requirements and manpower for your business operations. Having a realistic evaluation of the possible business volume will enable you to better determine the expense component of your projections.
The lease rates for various types of space can be readily established by speaking with your commercial real estate broker. They may help you to determine the optimal location and size of the space based on the type of business. It is crucial to use real numbers for lease rates in your projection. You may even build into your plan 3% incremental annual lease increases which are very common in commercial real estate.
The same principle applies to determining the number of employees and the skill mix that you will need to operate your business smoothly and efficiently. Keep in mind that the staff you may need during the ramp up may not be the same as what you will need during the steady-state of operations. Also, make sure to account for vacation time, sick leave, etc. for your employees in order to have an accurate assumption of your manpower needs. Once again, the closer your projections are to reality, the more credible your projections will be.
In my case, I made space projections at the time of the initial planning of the building. However, I did not take into account the growth of the practice over the two years that elapsed from the time I bought the lot, planned and built the building, and started practice and ASC operations in the new space. I realized that I was out of space early on. Fortunately, part of the building design included speculative lease space. Because of this extra square footage, I could accommodate the needs of the practice by expanding into the available space in the building.
This is one of the most overlooked parts of a business plan, but should be considered a very important aspect to include. Regardless of whether you plan to operate your business for decades, or you look to sell it once it is up and running successfully, you need to consider your exit strategy.
Building and running a successful business is both a significant financial and time commitment. At some point in the future you may decide that you want to recoup the investment that you made in terms of time, energy and money. Your goals or interests may change, or you may simply wish to retire. Planning for that transition is important in order to gain an optimal return on the investment that you made in your business.
You do not always want to share this part of the business plan with others, particularly banks and investors. By planning ahead, you should be able to exit the business when the time and the environment are ideal for you.
In my scenario, I started to think about the exit strategy as my lawyers and I were drafting an operating agreement for the ASC and the practice. While I was initially the only owner, I realized that bringing on additional partners to both entities would fuel continued success and growth. Plans for adding investors translated into a long-term exit strategy as I projected the progress of my businesses into the future. What became apparent is that even with a sound exit strategy shaped by my own desires and advice from experienced consultants, it would take well over a decade to execute my plan. Therefore, I cannot overemphasize the importance of early planning for an exit strategy that should be incorporated into the business plan.
How has having a business plan helped your business succeed? What else should a physician entrepreneur consider as they develop a business plan? Comment below!