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Common Mistakes When Planning & Financing Your Medical Spa
Everything starts with a business plan: If you don’t have one. Write it. A good business plan will help you get a handle on all of the things that get glossed over in the excitement of starting a new business. It’s also a usual requirement for getting financing.
Remember that this is a medical business and comes with special requirements. Non-physicians can not employ physicians, medical oversight, HIPPA compliance, and a host of other regulatory issues need to be addressed. Play fast and loose with these rules and you’re asking for trouble. (One of our local competitors in Utah was not providing adequate physician oversight. The state walked in one day, confiscated all of their technology and patient records and closed them down.) All lenders want to know how you’re going to handle these issues. ADVERTISEMENT
Financing is easy. Financing smart is hard: Speak the words “medical spa” as a physician and you’re everyone’s best friend. Banks, lenders, technology companies will all have big smiles on their faces and papers in their hands, ready to lend money or finance everything you need. If you’re not a physician it’s going to be harder.
If you need money or a line of credit for needs other than technology, a bank will probably be your first stop. Banks will provide the best rates but are the most rigorous in investigating borrowers and have the least tolerance for risk. Banks will require that you have spotless credit and that the entire loan is secured. In most cases, everyone who owns 10% or more of the business will be personally responsible for the loan and have to provide two or more years of tax returns. Be prepared for a blizzard of paperwork. Banks will want to see financial statements, cash flow, a business plan (although they don’t read it), and have a little visit.
The bank is going to want to know what the funds are intended to be used for. They want to see tangible assets that have a market and can be sold if the business fails or you can’t make the payments. They don’t want to hear that you need more money for marketing and advertising or salaries that don’t have any resale value.
The money that banks will lend you will take the form of a loan, or a line of credit. Loans have a set schedule and payments. A line of credit is somewhat different. The idea is that the bank extends a line of credit that you may draw on. Interest is paid only on the amount of money that is used. However, banks usually require that the entire balance is paid off and unused for one month every year to ensure that the business is liquid. If you can’t meet this requirement, the entire line reverts to a loan.
Some bankers are helpful and some are not. In one instance a branch manager told one of our accountants that wanted some information that “he didn’t need our business and we could just live with that”. Avoid these types if you can. A friendly banker can go a long way in securing loans and providing a little flexibility if things don’t go exactly as you planned. If you find a great banker, send him a Christmas card and some cookies once in a while.
If you are in the fringe of what a bank can tolerate risk wise, they will often suggest or apply on your behalf for an SBA (Small Business Administration) loan that’s partially guaranteed by the government. (www.sba.gov/financing)
Half of something is better than all of nothing: If you’re going to need more money than you have in assets, you still have a couple of options. These involve partnerships, joint-ventures, venture loans or equity.
Most start-ups involve some form of equity trade. Partnerships are a good example. Sweat equity in the early stages provides ownership in lieu of payment or salary. It’s very common for entrepreneurs to take little or no money, sometimes for years, until the business is on its legs. Sweat equity at this stage usually extends only to the founders but may extend to badly needed partners. When we started Surface, I took more than an 80% reduction in income.
Equity: The simple rule is; the more money you need and risk you entail, the more equity you’re going to give up.
Angels: This is the first stop for most entrepreneurs. Angel financing (also called seed money), is usually raised from friends and family or “high net-worth” individuals. In some cases you may find “Angel Groups” that meet together and look for investments. Angels are usually found a the early stages of a business and are often bought out when larger investors come in.
Venture Debt: A recent surge in venture debt has made its way into the market and is worth discussing. Venture debt is basically a venture loan. The lender charges a higher interest rate than banks are allowed to (often around 14%) and accepts more risk in return. In addition, you will have to give up a small percentage of your company in what are called warrants. This small percentage (usually less than 5%) allows the lender to share in any potential upside. Venture debt is worth considering if you’re sure of success and you don’t want or need to give up a large equity position in you company. But you’ll still be personally responsible.
Venture Capital: When most people think of raising large amounts of money, they’re thinking of venture capital. For most start ups, venture capital is not an option. VC money has some downsides though. It is hard to get and extremely expensive. When you add up the entire enchilada, you’re looking at about 80% compounding interest each year in return for that money. VC’s are looking for an investment term of three to five years and a ROI (return on investment) of 700% or more. Whew. You’re also going to loose complete control of your company and have someone constantly looking over your shoulder. There are cases where this actually makes sense. Many VC are extremely well connected and bring these resources to the table.
So, now you’ve got the money you need. What are you going to do with
it?
Most medical spas have grown out of an existing physician practice. The idea of having technicians producing revenue, low additional overhead, increased patient flow, and the feel that “I could do that” is attractive to a large number of doctors who are tired of the grind of medicine. (We’ve been approached by a surprising diversity of physicians looking to enter this market including; anesthesiologists, cardio-thoracic surgeons, and even podiatrists.)
Multiple Locations: After some initial success, many physicians and MedSpa owners attempt to open additional locations. (For some reason, these second-clinic startups are often opened by a relative, usually a wife or daughter.) These second locations never achieve the success of the first clinic for a very simple reason; their a completely different animal. If you’re thinking of opening multiple locations you’re work load just tripled. Multiple location sites are outside the abilities of most physicians and involve a much greater financial risk. Staffing and human resources, legal issues, medical oversight… most fail within the first year.
Successful multi-location practices are built around systems. If your first clinic doesn’t run without you there, you’re not ready for a second. Expanding to fast is a sure why to overextend your resources. Then you’re in big trouble. If you’ve closed a second clinic, lenders are going to be very wary of lending you money.
The Turn Key Solution: Franchises and consultants love to drop this phrase. The idea is an attractive one. Experts will guide your steps to financial glory. Marketing, financing, training, everything will be delivered in a nice little box with a bow on top. But, knowing a number of franchise owners and the problems they’ve encountered, I would give this advice; beware.
The current crop of franchises have a lot of problems. (One of them in California was shut down for selling medical practices to non-physicians. They’ve since reopened and are among the most aggressive advertisers.) Franchises are attractive because they claim to have all the answers. If you’ll just write the checks all of your troubles will be over. Not so fast. What you’ll really get are some manuals, pre-written scripts for sales, and bad ad-slicks. You’ll also get: locked into specific technologies that might be second-tier (the franchise gets kick-backs), spend money you could use elsewhere, and pay royalties on all of your income. (The franchises that offer a flat fee are an even worse idea. They have absolutely no motivation to help you.)
Big dogs eat little dogs. The next five years will see dramatic and disruptive changes in this marketplace. Large, well-financed medical businesses with smart physicians and high-quality care are going to open up next door to you. (You’re the corner store, they’re Wal-Mart) These businesses will be category killers and if you’re not well established with a broad market presence and multiple revenue streams, you’ll be gone.
The $80,000 towel dryers. Choosing the right technology is one of the things that will let you move ahead a step, or put you in cement boots where you stand. I always think of the way one physician described the pair of IPLs [Intense Pulsed Light devices] that he’d bought; as $80,000 towel dryers. Before you decide on which system to buy you’re going to need to crunch the numbers. How many shots will the IPL heads last for until they need to be rebuilt? How much support is included? What kind of training is provided? Does the device work better than its competitors? Before you sign your next few house payments away, make sure of your technology decisions.
Buy or lease. Leasing is the best way to go if you want to pay for your equipment as you use it while preserving your capital. Many of the technology companies have delayed payment plans as long as six months. Buying used equipment is often the best way to save money if cash flow is not an issue. (We purchase used medical lasers and IPLs online from a broker we trust and sometimes negotiate with our buying power for other physicians.) You can often save up to 40% off the price of a new machine if you have the cash on hand.
Don’t guild the lily: Cash flow is a problem many start-up medical spas face. Revenues and growth projections are commonly exaggerated in the excitement of a new business. Before you invest in embroidered leather treatment tables, make sure you can pay your bills. One medical spa startup spent $350,000 on build out and didn’t have any money left to attract patients. They were out of business in four months.
A few simple finance rules: • The Golden Rule is actually translated as: He with the gold makes the rules. • You will end up being personally responsible for the money: Physicians sometimes think that they can use equity in their medical practice or future earnings as security. Nope. • Be frugal: Take only the amount of money you need. It’s tempting to take as much money as you can get. Don’t. All the money you take will come with strings attached. • Take enough money: Lenders hate it when you need additional money. They worry something’s going wrong in the original plan. • Sometimes you can’t get there from here: Competition is fierce. If your market is already “owned” by a competitor, think carefully before going into debt to compete in a market you can’t win.
Tighten your belt: Financing is like anything else. In order to really find the best solutions you’re going to need to do some research. Find a mentor, someone who’s done it before and knows what to avoid. And remember, the most common reason that businesses fail is not lack of capital, its poor decision making.
Resource links for all of the businesses and information discussed in this article are available online at www.surface-med.com
About the Author
Jeff Barson Managing Partner Surface Medical Spas http://www.surface-med.com
and
Managing Editor Medical Spas Online Magazine
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