Most PT clinic owners have aspirations for growth - either in size or number of facilities. However, knowing WHEN to do a business expansion is the most important question to consider. Eric Miller of Econologics generated a checklist for clinic owners to use during expansions. He joins Nathan Shields to discuss how it can help them minimize risks and set up for success. If they have hit key statistics benchmarks, put finances in good order, made policy and procedures up to date, anyone will be well on their way to sustainable growth.
I've got Eric Miller from Econologics, on with us again. For those people who are like, “Nathan's got Eric on here all the time. There's got to be some financial compensation Nathan's getting.” I can assure you there's not. I bring on Eric, number one because many times it's not easy to get show’s guests and Eric is available but more than that, I think the stuff we talked about has been pretty good. I love the resource that you provide.
It's geared towards practice owners. You can find 1,000 financial gurus out there to get advice from but most of them don't understand how a private practice works.
I consider our meetings, our blog episodes to be rather valuable for any size practice owners but I appreciate you coming on. Hopefully, it's not a little overdone for people. I think we still get a ton of good content out there.
We'll keep it fresh.
This is going to be not necessarily part 1 of 2 but before the last blog episode that we recorded, we talked about a couple of future blog topics that we could talk about because we've covered a lot of stuff. One was about practice expansion and what owners should consider when they are looking forward to expanding and growing. That's what we're going to talk about is practice expansion but then there's also another part to it that can happen as you expand and that is bringing on partners. That's something that we will talk about in a separate blog episode. You can look forward to that one as well. Now, we're going to keep it simply down to expansion like when to consider getting a bigger space, bringing on a new PT or getting a second location.
Those questions come up especially if those are within the owner's vision. In the future, there are things they need to consider and things they need to plan for ahead of time. Eric has a great Practice Expansion Checklist that we're going to look over and break that down a little bit. Before we get into it, is there anything you want to say about it and maybe what brought you to creating this checklist?
I think everybody has the idea that when you get ownership, obviously, at some point, you need to expand and you want to expand. What ended up happening is that I started seeing practice owners that were trying to expand and then they would fall on their face. There were a number of reasons for that but they were trying to expand to solve a problem. Expansion is a great thing. I want everyone to expand. I want everyone to have clinics and employees, I think everybody wants that but you have to make sure you're doing it in the correct condition. There are indicators that you need to make sure that you're looking at prior to making the decision that you're actually going to expand.
That's where it came from. Like anything else, it usually comes from the school of hard knocks and things that we see that people diagnose the problem wrong or they're trying to solve a problem. Usually, it comes down to people try to expand it because they're trying to solve an income problem. “I don't have enough money coming in from my current practices. If I started this other practice over here then that would solve all my problems.” What ends up happening is all the reasons why your current facility isn't profitable, isn't solvent and isn’t running where it should? All those problems of why it's not in the condition that should be spill over into the new one. Now, you've got twice the problems. That's where it came from.
What I love about the checklist is many people might feel it's a good time to expand, “Things are going well, my bank account's looking good.” They're looking at some data that might not be a good indicator that it's time to expand or they're like, “This is going well over here. Let's do the same thing over there,” to fulfill a vision that they have or a goal that they have without making sure they've checked all the boxes before doing that. That's what I love about this checklist.
It's not like this is going to omit any problems, resistance or pushback that you're going to get when you expand because that's just got to happen. There are going to be things that are going to crop up whenever you decide to expand. That's the way that the universe seems to work. I want to make sure is that there's a better chance of your success and if these things are in place, you have a much higher degree of probability that you're going to succeed.
The first indicator, which I think is as we talked about your current facility should be at or nearing its capacity level. What does that mean? It means that your schedules are as full or pretty close to full as they could be. The space that you're utilizing is seeing the maximum number of patients possible. Cognitively it makes sense like, “Before I decided to expand, I want to make sure that my current facility is filled up to the brim.” That makes perfect sense to me but I've seen it not occur. That would be my first thing and you don't have to have people waiting outside but you should be pretty close to what your current capacity is before I would start deciding to expand.
There are two things about that. One is I've had some owners who have two clinics and they want to open up a third but one clinic is going strong. The second clinic is doing okay and they're thinking, “I want to take advantage of this opportunity over here.” This third space, maybe physicians approach them or there's a location that they know is geographically nice for the outlay of their company. I have to remind them, “You're one clinic is doing well. It's the lead horse, it's bringing in all the cash. Opening up the third clinic means that you're going to have a hard time making that second clinic get strong.” It's going to divert your attention. You're going to be distracted and that second clinic is going to either continue doing what it's doing or get worse because it's not getting the attention it needs. Let's focus first on bringing up that second clinic to speed and then look at the third clinic.
We know we're human beings and we get impatient. Business owners get impatient. That’s why I see where it happens but to your point, you have to have some level of patience and saying, “Before I start this other practice that these facilities that I do have a need to be at or near their capacity levels.” That would intuitively make sense.
There are two ways to measure that. You shared and I liked that you made sure that both the therapist's schedules and the space are at capacity. Those are two different things. Therapist's schedule, you can look at the number of available appointments the therapist has in a given week. A general rule of thumb, when you're talking about it's running near capacity, I would say 85%, 90% of all of those available appointments should be filled up on a regular basis, not just one week here and there but weeks at a time going on.
That should be a trend, for sure.
You've got to look at the therapist’s available schedule and a rule of thumb that Shaun Kirk laid out for us almost a decade ago was if it's a 3000-square foot space, the max capacity general rule of thumb is 300 visits per week. If you take 10% of the square footage, the general rule of thumb would be 300 visits for that size facility would be maxed capacity. I know it's different across many states. You then want to take 85 to 90% of that on a routine basis turning outpatients.
You are using the space to its fullest capacity. I ran into another PT who is starting to do massage therapy, bringing that service in because he's got space to do it. He's trying to use this space to full capacity. That's what I'm talking about. Looking at your facility and saying, “How can I squeeze the most out of this orange and how to do that?” You would be able to provide a lot of insight into that.
Running at capacity, I think that's a given but some people don't know what those indicators are as to what their capacity is. I'm glad we covered that.The more people you bring into your group, the more chances of having toxic individuals to deal with. Click To Tweet
The second one says business reserves, minimum maintained. What does that mean? If you're near capacity, that would be an indicator to me that the money is coming into the organization and it is enough so that you have reserves in the organization. I want to make sure people have at least two months of business expenses reserved in their business savings account to be able to handle any emergency.
When you're talking business expenses, does that include payroll?
Those are the expenses so definitely it’s going to include payroll. If your monthly expenses are $100,000 then I'd want you to have at least $200,000 sitting in the business savings account. It's totally fine. I think most people were quite frankly woefully underprepared for what happened and that hopefully knocked some sense into people like, “I can't be imprudent. I got to make sure production is at a high level so that I have the ability to have reserves.” I know Medicare's always squeezing reimbursements. I know all this stuff is happening but that doesn't mean that you still can't get a 20% profit margin. That would be an indicator is that if I have reserves, I am profitable.
Would you include your available line of credit as part of that reserve?
It'd be nice to have additional to that but I would probably still try to keep it as liquid as I possibly have.
These reserves, the way you're saying it, shouldn't be used to then fund the next location whether that's a down payment deposit or a capital to be used.
Potentially, it could. You could have an expansion and development account where you put money into for something like that but let's solve one problem here. If you have significant amounts of reserves then yeah. As you expand, there's going to be a significant expense to expansion. You may need to put a down payment. It’s likely you're going to have to do extra marketing or bring on employees and there's going to be a lag between when they produce and when you get the money in. You need to rely either on credit lines or reserves to be able to do that. It'd be awesome to have both.
That's why I look at that indicator. You want to have some reserves there so that you can rely upon that. There is that lag period of when the production actually starts to occur and you get the money in that you're not totally stressed out like, “I got like $20,000 in my business checking account. I'm just barely making payroll.” You don't want to have that problem. There's already enough stress in an expansion that you don't want to constantly have concerns about that.
I think some therapists would be surprised at how much it costs to do construction in a space. You're talking to $200 a square foot. If you're doing a significant amount of TI. If it's a shell, you're going to have to have bathrooms and walls and plumbing and architect designs. It costs more than you expect typically and you've got to be well-prepared for that.
Always assume that whatever expansion you're going to do is going to cost 20% more. It takes 20% longer than what you think is going to.
I thought you were going to say 50% and I still would have nodded my head.
I probably could but I think having business reserves is an indicator that you are profitable and that you have good control of money. If you don't and you're still towing the line of spending everything that you make and there are no reserves there then I would have a tough time recommending to somebody that they expand because you're going to have all the same problems. I've seen practices that do $10 million in revenue and still spend everything that they make. That's a matter of putting good control into the finances.
That would be a nice problem to have. What is the next one?
Business debt is minimal. If you got credit card debt, that's a bad indicator in the business. I'm not talking about using your credit cards to pay your expenses because that's a good idea, as long as they're paid off every single month. That's why I say it's minimal. Meaning that you don't have a ton of debt service already in place. Your equipment's paid off. If you have business loans that your credit lines are open. They're not all encumbered by debt. You want to have some factor of safety here as you expand because of the lag. The only debt that I would like you to have before you expand is the commercial if you own the building. You don't have to have that paid off. Everything else, we want to have it as minimal as possible.
Where would you put student loan debt in there?
That's more personal debt, I think. What I'm talking about here is the business debt. I would say student loan debt is going to be more on the personal side. I would like to have that paid off too but it all depends on when and how much.
It would be a healthy practice to have that completely done. You don't want the stress of that on top of this.
The amounts are just staggeringly high anymore and it's crazy. When I got out of college, it was like $15,000 or $20,000 in debt. Now, it's 8 to 10 times that amount.
I think it's routine what we're seeing in surveys for PT students to come out with $150,000.
I guess my advice to those people is you're going to have to continue to live like a college student for at least another five years and that's okay. Continue to do it. It will pay you back in spades by doing that. I've had too many stories of practice owners that the first thing they did when they got out of school was they bought the cars and the houses. I look at their condition several years later and it's not great as opposed to the ones that just said, “I'm going to attack and get it done.” They were in a much better financial position in that same timeframe. The effects of debt are stressful. The minimal amount of debt that you can possibly have, the better.
Would you encourage taking on commercial real estate? Is that something that you promote?Organizational charts help keep the flow of business smooth and avoid misunderstandings concerning seniority. Click To Tweet
I love for practice owners to own their buildings. I think you get a great tax deduction with that. When you decide to sell the business to somebody else, if it's a nice building, it's a nice facility and it's a staple of the community and who would want to move? Moving's a pain in the butt. It'd be an excellent asset for the households as an income source to keep the building. These buildings for practices are extremely valuable and private equity groups are starting to see that. I'm starting to see them buy buildings because they see the value that the leases that corporate entities are offering practice owners in their buildings are good.
I'm not exaggerating when I'm saying some of the real estate is more valuable than the clinics themselves.
They can be. It's a great asset. If you have the opportunity to get it 100%, get it. Whether to pay it off or not, that's situational but it certainly is a great asset for the household. I would go out of my way to acquire that.
These last couple of items on the checklist have been more financially related. I like the next few checkboxes to see outside of the financial stuff. Now what?
You're going to expand. You're going to need people. If you don't have a good recruiting system for staff and a good training system then all the problems that you have with hiring and staff right now, you're still going to have the same problem. I would certainly make sure that you have a good system for recruiting people, for onboarding them, for training them so that you have job descriptions, statistics, measurements and all the things that make you a good executive. As you hire people, you can hire people quickly. You can get them on posts. You can get them producing. That lag is reduced. I keep talking about that lag but that timeframe, you want to reduce time as much as you possibly can. Certainly, having a good hiring and training system so you don't bring on deadbeats.
It's important that you have some experience in finding what personalities that you're looking for. How do you filter out those people who are value-aligned during the interview process? Do you have a well-developed hiring process that is not sending a resume and have one interview and then send out the job offer? There should be multiple steps to that process to filter out people that will work in your clinic at this point.
Hopefully, as you're expanding from a single facility to a second facility or going from a smaller facility unit to a much larger facility, you have a hiring process that will make it easier to find the right people that fit in your company. On top of that like you're talking about, it's imperative that we have things written down such as job descriptions. How are we going to measure performance? How do we get these people to produce? This is how we train them to hit high productive numbers.
The last thing you need is for you to open up a second clinic and have a bunch of people doing their own things. If you think there's a lot of stress of owning a single clinic, add a second clinic that doesn't have any policy and procedures and you're going to be going nuts. Your head's going to spin like, “Why are these people doing what we did over at the first clinic?” That's because they have their own idea of how to do things.
This is where I think your lack of billing and executive team will be exposed too if you do that because of who's going to oversee. Let's face it. People are awesome but if you bring more people on, your chances are, you're going to bring in some people that may be toxic. You have to be able to withstand that and have a system to get them rooted out and evaluate them. That's where you'll find that your executive team is exposed if you don't have one as you expand. It's okay, we're going to learn things as you expand and that would be one of them.
You don't want to be generating systems after the fact. This is a crap show over here. I need to actually get some organization in place. You don't want to be in that position.
We didn't say it was going to be painless. We're trying to make it so that it is less painless.
That rolls into the next item.
Every organization needs to have, like we said, an organizational chart and who's doing what? What's my chain of command or the operational and policy and procedure manual? You can't be operating on outdated stuff that nothing's written down. The better that you have this grooved in, the easier it is to expand because you have a policy and procedure for everybody to follow. That organizational chart is being mapped out and you have these systems in place. It makes expansion easier.
It's important to recognize the value of that organizational chart because not only are you delineating where responsibilities lay within the organization but hopefully if people also understand that these represent communication lines as well. That gets missed when we were looking at organizational charts and I've referred people to traction. Gino Wickman's Traction lays out a number of different ways. You can organize a company. I'm sure there are more out there but Traction seems to be a popular book that's been read by small business owners and so they might have it on hand and they can look at it.
The last thing you want to do is and what I noticed is, me as the owner and we would tend to hire the physical therapists. At the smaller stages, we were hiring the therapists but we had some executives who would hire front desk teams, billers, that stuff. If we didn't properly hand off their oversight to the clinic director, they felt like they needed to come to us with HR-related issues because we were the owners so they're going to come to us directly and that handoff was imperative. Showing them the organizational chart, “You're down here as a therapist. The person right above you is the clinic director. When you have questions, now I have to hand you off to them. You talk to them. Otherwise, we were getting inundated with a lot of questions and concerns that should have been going to the clinic director and they bypass them.
I'm fascinated because wouldn't think, “I'm just answering a lot of questions here,” until you looked at the organizational chart, you're like, “Why am I answering all these questions? This is what this person's supposed to do.” It is amazing that once you have that organizational chart, it does allow you to say, “I'm going to direct the flow of traffic to this person.” You can show someone without making them think that you don't care or you're being disrespectful. It's like, “This is the person that is in charge of this, that be handling this.”
It's very common for owners especially if they're physically present going through different clinics that they might have. If they're passing by the front desk, the front desk person, “I got a question for you.” You're someone of authority. If you no longer want to be the answer man or woman, if you feel like everyone's coming to you all the time and you've got a handle on all the issues, it's probably because you haven't put someone in place to oversee them. They don't understand that the front desk person shouldn't come to me. They need to go up to either a front office supervisor, office manager, if you have it, administrative assistant, if you have that between you and the team or the clinical director there. You need to be directing them along those communication lines of the organizational chart.
I think that makes expansion possible in the first place and much easier. That's a big one. That's where I think having a good consultant can help you with those two right there, the hiring and the organization. That's why you would want a good consultant that can help you be efficient and be able to have a hiring and training system. I think that's imperative.
The last one there about legal compliance. It's something that I don't know if it's how we are but just forget that maybe we should lean on attorneys and make sure the legal stuff is set up first well.
Not only that but especially in a reimbursement game, which is what physical therapists are in. You got to make sure that you're keeping documents and you're billing correctly. I call those compliance issues as well because how easy is it for one of the reimbursers to come in and do an audit and find that you owe us $200,000 or you owe us $100,000? I've heard horror stories about that. That's one area, obviously. You don't want to try to build on chaos and your compliance lines. It includes making sure your contracts are in good order and that everyone's abiding by the rules of those particular contracts. It means internally and compliance because as you expand, you are going to get attacked. It's going to happen in some way, shape or form.
Either you're going to have an employee that tries to attack you, maybe a patient, maybe a slip and fall, maybe a competitor or whatever it is. If you're not getting attack, you're not expanding enough. It's going to happen. I tend to see where people get caught so to speak is because of the compliance lines. Either they didn't have good HR in place. Maybe they were doing a billing incorrectly and one of the rogue employees, “I got them now. I'm going to expose them for this.” That's what I'm talking about. You got to make sure that you're spending some time on defense, as well as trying to get new patients and trying to grow and expand.
You got to spend some time on defense and that also means making sure that from a corporate standpoint, your records are in good shape. You keep good minutes once a year and you update. You're paying your licensing fees and all this stuff that no one likes to do. It is the backbone of the business because it takes one regulatory board or authority to come into your business and find you not doing something right and they can shut you down.If you're not getting attacked, you're not expanding your business enough. Click To Tweet
Those weak spots get magnified as you grow if you don't have them in place. It's easy for an owner in their one facility with a few employees to make sure everything's running well. When you no longer have visual oversight, when you're talking about a 2nd or 3rd location and you're not physically present, a lot of stuff could go awry. If those things aren't short up, they will be exposed as weaknesses and the compliance board isn't going to care. They're just going to say, “You didn't do it so you owe us money.”
They definitely won't care. Let’s say, “We're going to withhold your pay because of that.” It's unnecessary but it is a key to expansion as well, is that you have to make sure that the defense of the organization is in good shape and that you are proactive in making sure that all the regulatory and compliance lines are or stringent. There's policy and procedure written on that. I think that's important.
You don't have to know all of the compliance measures by heart. There are third parties that will help you figure that out. You can find an attorney that can tell you how to maintain your LLC minutes annually. Honestly, Will and I, about several years into the business, somebody said, “Do you do your annual meeting minutes?”We look, “I don't know what you're talking about.” If you don't know, if you have an LLC, you should have annual meetings and annual minutes that can be shown at any given time.
Not just attorneys, there are companies out there, even those specific to physical therapy but healthcare professionals in general, that will teach you what you need to have on-site for compliance stuff. There are people who will review your documentation to make sure it's Medicare-compliant within billing and documentation. There will be people who will teach you what OSHA compliance looks like, what HIPAA compliance looks like. It's worth it to spend the money on those third parties so you don't have to find it all yourself.
It's probably a good idea to have someone like that come in and do a mock audit on you. Pay whatever the amount is to do it. I would do that before I expanded. I would make sure that way, I know everything is clean as we go into expansion. It gives you that confidence of like, “Okay” All these things are methods and indicators so that it makes expansion more possible. It makes the chances of success much higher because I got to think that if you're running at capacity, you got plenty of business reserves. You have very little debt. You have a good hiring and training system, you got your organizational chart mapped out and all your legal lines are in good shape. Other than an act of God, your chances of success are going to be that much higher.
One thing that I've noticed especially as I'm talking to physical therapy owners that have successfully expanded in the past, is when they're looking at a second location specifically, it's much easier when you expand from within. Meaning someone who has worked with you and for you for a long period of time shows the desire to expand with you, has shown an ability to produce significant and their purpose and value-aligned with you. The expansion comes much easier in that case. That could be a good segue into our next conversation about partnership and what that looks like. That kind of expansion goes much more smoothly than hiring an outside physical therapist to start a location and you haven’t vetted them.
You promote from within. You give people a chance to see that they're improving and they have a brighter future then the likelihood they're going to stay with you is much better.
Is there anything else that you can think of outside of this checklist that you’ve come across?
I'm trying to think if there are any other ancillary things that I've seen. I think you have to be prepared the pushback, the criticism and the resistance, that's all. I've met few people that we're able to expand without huge barriers and obstacles and you have to be able to have the ability to push through those things.
One of the things I was thinking of is once if a facility has vetted a successful marketing plan, that makes this much easier as well especially if they're going to another location.
I probably should add. That's a good point.
It could be any formula it could be. We send out these newsletters monthly. We make these visits to doctors. We send these postcards to the general community, right around the facility in a 5-mile, 10-mile radius or whatever. We have a good relationship with the local CrossFit gyms. We know how to do our Facebook ads and they've been successful for a consistent amount of time, over a period of months and years. Now we know we can plug and play that marketing plan into this other location and we will get new patients.
That nail trigger would kill me for not having that on here. That's 100% right. As a matter of fact, I'm going to add that. You have to have a robust marketing online presence plan because you have a new facility. You got to fill it up with people. You need new patients. I can't believe I omitted that. I'll put a little trademark right there and Nathan Shields on that. That is 100% correct, is that you have marketing and probably one of the most important things is the ability to have new patients coming in the door.
You got to get that dialed in. It's got to be detailed, written down and planned. This is what we do. This is what is successful and if it falls out, we know we're not going to be as busy as we were before. Having the ability to plug and play something like that would be a huge indicator of success in a second location. As always, Eric, thanks for your time. I appreciate that. If people want to get in touch with you, how do they do that?
Simple, you can go to Econologics.com and we have a number of assessments that you can take that will give you an idea of how your household finances look. Also, we have the ability to show you how ready you are to transition and the value of your practice potentially. We have downloads and all things that you can use that we built specifically for you as a practice owner and how that relates to your household. I can't stress that enough. Most financial advisors don't address the biggest investment that most practice owners have, which is their practice and showing them how to better utilize that, to achieve personal financial success. That's all we focus on.
As always, thank you for your time.
You are welcome.
Have a good day.
Eric Miller has been in the financial planning industry for over 20 years. He’s a co-owner of Econologics Financial Advisors – awarded an Inc. 5000 honoree for 2019. As the Chief Financial Advisor for the firm, Eric has had the good fortune to have over 10,000 financial conversations with private practice owners in various healthcare industry and helped guide them into a more optimum financial condition using a proven system.
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