The Equipment Equation for Physician Owners
Starting out an urgent care business requires a great deal of capital for the urgent care building alone. However, equipment is also a massive chunk of the equation that physician owners, especially newer ones need to keep in mind. The Ambulatory M&A Advisor provides a look at the value of purchasing versus leasing equipment, refurbished equipment and the importance of vendor relationships over time for a business.
Michael Boyle, MD with Schumacher Clinical Partners says that on owning versus leasing, the biggest thing when deciding on owning or leasing medical equipment in urgent care is that physician owners do not need to have the up front cash for the down payment. There are ways to raise capital from lenders that will allow a provider to purchase their equipment forthright, and leave them with the loan to pay off over time.
“I do hospital affiliated facilities, and in those types of situations leasing or owning equipment is not something that is usually an issue. If the physician is just starting out their urgent care practice and is not affiliated with a hospital health system, Burke says that the best way for that physician to go about obtaining equipment would be through a vendor that offers refurbished equipment,” Boyle says.
Jim Lobel, CEO, of Intermed Healtcare Centers Inc. says that being theoretical, if an owner thinks they have plenty of money and know it is going to cost them 800 to 900 thousand dollars to open up a 4,000 square foot modern upscale urgent care.
“I recently bought a full DR X-Ray system which blew my mind. The last time I looked a couple of years ago, they were 125 thousand and up. I got it brand new from a major vendor, installed, with a service agreement for 65 thousand dollars. The numbers are falling. Outside of X-Ray equipment, the rest of your equipment is simple to pay for. Leasing isn’t nearly as efficient as buying whether you borrow the money to buy it or not,” Lobel says.
“My answer to the question of buying versus leasing is very specific. I would pay cash if I had the money. This is bearing in mind that if you pay 100 to 150 thousand dollars in equipment and you haven’t done the financial management that is needed to understand where the business is going to be six months from opening, then that changes the equation.”
Lobel says that as a speaker for a number of years at urgent care conventions, his particular topic was start-up, financials, and decision making. The answer is reasonably simple to this concern of buying versus leasing because most urgent care centers that fail run out of money at the six month point.
“If you are sufficiently funded to get way past that point to last a year, and that includes paying cash for everything…that is what I would do,” he says.
If an owner owns multiple centers, and have providers and staff rotating through the various clinics, Bruce Latourelle, Regional Sales Director with Soma Technologies says that refurbished equipment is the best way to go.
Latourelle says that there is plenty of equipment out there, so owners can go with an item that would be the same at every facility so that staff doesn’t have to worry about trying to get trained on different models and pieces of equipment at each location. This is where refurbished equipment really has an opportunity to shine. Companies that have seen refurbishing sales take off have started having their own models come back, according to Latourelle.
“Those older models will be cheaper than new coming directly from the manufacturer, as they try to break into the refurbishing market,” Latourelle says.
Boyle says that an owner can currently get a DR radiology system significantly cheaper than new with a refurbished piece of equipment.
“It is just as good, just lightly used. That is the route I would suggest. As for other systems, you don’t need a whole lot else. I am not a big fan of an extensive lab in urgent care, but certainly you have got to have the basic equipment,” Boyle says.
Boyle says that establishing a physician, vendor relationship is important, especially in the refurbished equipment situation because the biggest thing there is that if the practice owners have problems with equipment, there will have been long-term maintenance contracts previously arranged with a trusted vendor.
“Most of the time they function fairly well, but there are going to be issues,” Boyle says.
When looking at refurbished equipment, Lobel says the matter really depends on the equipment itself. He says X-Ray equipment would be the most expensive of investments, but current technology is changing at a very rapid pace.
“Obviously, if you can buy a very sophisticated machine for half price than what it was three years ago, who knows what it will be later on. When I bought my first digital processor it cost me almost 50 thousand dollars. Five years later I bought a more capable processor for 21 thousand dollars. When you get into refurbished equipment you have to get into the specifics,” Lobel says.
“If it is a year old refurbished, that is fine, but the prices of new keep coming down so I am inclined to lean towards new. You get better technology and better warranty coverage. That said, if you have to buy other equipment like computers, for example; you have to buy 20 or 40 computers and you are only going to use it for bookkeeping. All of the computers today are designed for kids that want to download 15 movies at the same time. Looking at these stats, I imagine that going refurbished on this type of equipment is the way to go.”
As far as vendor relationships in general, Lobel considers established vendor relationships to be critical. Lobel says it is imperative to be loyal to vendors and everything in general from legal counsel and beyond. However, he says there is one caveat.
“There is a tendency for vendors across the board to start taking a loyal client for granted. It is just business. The familiarity can sometimes breed contempt when you start seeing prices creeping up that you did not know about. Then you look back a year later and your costs for the same things you have been purchasing have gone up 20 to 25 percent. You have to stay loyal, be loyal, but really hold their feet to the fire if prices begin to creep up unexpectedly,” Lobel says.
When purchasing urgent care medical equipment, business owners have the options to buy, lease, or lease-to own.
Latourelle says if owners finance and lease-to-own, they can get tax benefits that can offset costs and get an increase for y income therefore promoting success.
Latourelle says that if owners plan on leasing a piece of equipment, it would be better just to purchase it. However, that may not always be the best move.
Latourelle says if owners just add up the monthly lease payments over the lease term and compare that to the purchase price, they may think it would never make sense to lease. However, it must be considered that repair and maintenance costs come out of your practice’s cash flow when equipment is purchased up front.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.