Six months ago I made my final loan payment to the bank and shredded a dozen file boxes of medical records. It had been 5 years since I had closed the doors on my house calls medical practice. The hidden pitfalls of buying an existing practice can be its downfall, and the lessons I learned were costly.

Buying the Practice
Let's start with a brief overview of how I came to buy the practice. Two physicians who had started a house calls practice in a metropolitan area and surrounding rural communities hired me to work as a nurse practitioner. After I worked for them for barely a year, they decided to close the practice to focus on their other business ventures.

I entered into negotiations with the physicians and their attorney, and we came to an agreement that I would take over the practice including the primary loan to the bank, all loans for diagnostic equipment and the portable x-ray van. The physicians would remain silent partners with 51% of the shares and I with 49% until the bank loan was paid off.

I asked the office manager and the part-time x-ray technician to stay on; they had been with the practice since its inception. I hired one of the physicians to be my supervising physician and paid him a monthly stipend. I maintained the contract with the billing service but dismissed the accountant who was charging a significant monthly fee for "balancing the books." This was my first mistake.

Lesson 1
Every practice needs a good accountant or financial manager to handle the flow of money, the business payments and the bottom line. Since the practice was small, I initially chose to manage the books in-house, and since the office manager was already handling the monthly bills, payroll and accounts receivable with the billing service, I let her continue in this role. I would eventually hire an accountant, but only after the damage was already done. This led to the next lesson.

Lesson 2
When purchasing an existing practice, have an independent accountant review the financial records very thoroughly for hidden losses and potential financial risks.

There were still accounts receivable coming into the practice, and a portion of this money went to the physicians as part of the original practice income. Malpractice tail payments were the responsibility of the practice, so those payments were coming out of the monthly receipts. As time went on, I would also discover that questionable personal expenses had been billed to the practice in the past and had depleted assets. The next lesson combined finances and assets.

Lesson 3
Overhead for diagnostic equipment and supplies can chip away at the bottom line. I inherited two ISTAT machines, a Coaguchek, and a Chevy van equipped with a portable x-ray machine and film processor. All of these required licensing, insurance, upkeep and specific supplies.

With a small practice, the upkeep expense was triple the reimbursement for the use of the equipment. From a patient-care perspective, having the diagnostics available in the home was invaluable for a quick diagnosis, but the cost of operation would quickly outweigh the benefits.

The practice needed to grow to help the accounts receivable and offset the overhead. I obviously knew I could not draw a salary and needed to see patients to make money. I chose my marketing strategies carefully, and in no time the patients came quickly and easily. I relied on my staff to manage day-to-day operations.

Lesson 4
Supervise your staff closely, and physically review all records and transactions. If I had done this from the beginning, the office manager may not have taken advantage of the independence she was afforded. As a consequence, the practice was placed in jeopardy by a significant bank overdraft at a critical time of the year. A review showed that she had used business accounts for personal use, paid herself overtime and a bonus, and was using her business cell phone for personal use.

This ongoing drain of funds and the overhead led to a critical decision. I took out a personal loan to cover the overdraft and another month of expenses and moved forward by hiring a nurse practitioner.

The next year saw continued growth in the number of patients. The essential accounts were being paid, as well as my employee's salaries and health insurance. I hired my personal accountant to assist with the taxes and the financial records. I actively began to search for capital to sustain the bottom line and accommodate long-term stability. Everyone turned me down since the practice was showing marginal gains and the outstanding debt was unchanged.

Lesson 5
Know when to let go. The x-ray technician resigned, and I chose to contract with a large portable x-ray company rather than maintain the overhead of the van. The nurse practitioner resigned, and I tried to maintain the practice while trying to find a replacement. With no salary and accounts receivable dropping, I had to finally close the practice or file for personal bankruptcy.

So what was the final outcome? I gave the required 30-day notice to my patients; held a yard sale for the office equipment, medical supplies and furniture; sold the diagnostic equipment online; and stripped the van and sold it. The process took a year, and the money I made on the sales barely covered the last month of expenses. I continued to make malpractice payments for 2 years and loan payments for 5 years.

Final Lesson
If you are going to purchase an existing practice, obtain the patients and their medical records and select equipment and supplies within your start-up budget. Do not assume the debts and liabilities of the previous practice; these should be the responsibility of the previous owners. Have enough working capital to purchase the practice and maintain expenses for at least 1 year. Hire your own staff unless you can thoroughly interview and screen existing staff members. Use a trusted accountant to manage all financial transactions, and monitor the records personally.

These simple steps may have prevented a significant financial loss for me and my family, kept a viable practice open and allowed an underserved population to still receive medical care.

Nanette Lavoie-Vaughan, NP,  is the former CEO of Housecall Physicians. She currently is the owner of Nurse Nan Consulting, which meets the diverse needs of geriatric professionals and caregivers. For more information visit her Web site: www.nanettelavoie-vaughan.com.