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Common Mistakes When Planning Your Medical Spa
Everything starts with a business plan: if you don’t have one. write it down A good business plan will help you handle all the excitement of starting a new business. This is a usual requirement for obtaining financing.
Remember that this is a medical profession and comes with special requirements. Non-physicians cannot hire physicians, need to address medical oversight, HIPPA compliance, and many other regulatory issues. Play fast and loose with these rules and you’re asking for trouble. (One of our local competitors in Utah wasn’t providing adequate physician supervision. The state moved in one day, confiscated all their technology and patient records, and shut them down.) All lenders want to know how you’re going to handle these issues. Advertising
Financing is easy. Smart is hard to finance: Say the words “medical spa” as a doctor and you’re everyone’s best friend. Banks, lenders, technology companies will all have big smiles on their faces and documents in hand, ready to lend money or finance anything you need. If you are not a doctor, it will be difficult.
If you need money or a line of credit for needs other than technology, a bank is probably your first stop. Banks will provide the best rates but are the strictest in scrutinizing borrowers and have the least tolerance for risk. Banks require that you have impeccable credit and that the entire loan is secured. In most cases, everyone who owns 10% or more of the business will be personally liable for the debt and must provide two or more years of tax returns. Be prepared for a blizzard of paperwork. Banks will want to see financial statements, cash flows, business plans (even if they don’t read them) and do a little visit.
The bank wants to know what the funds are 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 payments. They don’t want to hear that you want more money for marketing and advertising or a salary that has no resale value.
The money that banks will lend you will take the form of a loan or line of credit. A loan has a schedule and payments. A line of credit is a little different. The idea is that the bank extends a line of credit that you can draw on. Interest is paid only on the amount of money used. However, to ensure that the business is liquid, banks usually require the entire balance to be paid and unused for one month every year. If you cannot meet this requirement, the entire line will revert to the loan.
Some bankers are helpful and some are not. In one instance a branch manager told one of our accountants that he wanted some information that “he doesn’t need our business and we can just live with it”. Avoid these types if possible. A friendly banker can go a long way in securing a loan and providing some flexibility if things don’t go as you planned. If you find a good banker, send him a Christmas card and some cookies.
If you know what the bank can tolerate in terms of risk, they will recommend or apply for an SBA (Small Business Administration) loan on your behalf that is partially guaranteed by the government. (sba.gov/financing)
Half of something is better than nothing: If you need more money than you have, you still have options. These include partnerships, joint ventures, venture debt or equity.
Most start-ups have some form of equity trading. Partnerships are a good example. Early stage sweat equity provides ownership in exchange for payment or salary. It is common for entrepreneurs to take little or no money, sometimes for years until the business stabilizes. Sweat equity at this stage usually extends only to the founders but can extend to partners who need it badly. When we started Surface, I cut more than 80% of the income.
Equity: The simple rule is; The more money and risk you take, the more equity you’ll be giving up.
Angel: This is the first stop for most entrepreneurs. Angel financing (also called seed money), is usually raised by friends and family or “high net-worth” individuals. In some cases you will find “angel groups” that meet together and look for investments. Angels are usually found in the early stages of a business and are acquired when larger investors come in.
Venture Debt: A recent surge in venture debt has entered the market and is worth discussing. Venture debt is basically a venture loan. The lender charges a higher interest rate than banks allow (often around 14%) and in return accepts more risk. In addition, you must give up a small percentage of your company called warrants. This small percentage (usually less than 5%) allows the borrower to share in any potential increase. Venture debt is worth considering if you are confident of success and don’t want or need to give up a large equity position in your company. But you will still be personally liable.
Venture Capital: When most people think of raising large amounts of money, they think of venture capital. For most start ups, venture capital is not an option. VC money has some disadvantages. It is difficult to obtain and extremely expensive. When you add up the whole enchilada, you’re looking at about 80% compounded interest per year on that money. VCs are looking for an investment term of three to five years and an ROI (return on investment) of 700% or more. wow You’re going to lose complete control of your company and have someone constantly looking over your shoulder. There are cases where this actually makes sense. Many VCs are extremely well connected and bring these resources to the table.
So, now you have got the money you need. What are you going to do with it?
Most medical spas have evolved from existing physician practices. Having an earning technician, low additional overhead, increased patient flow and an “I can do it” feeling is attractive to a large number of physicians who are tired of medicine. (We have been contacted by a surprising variety of physicians looking to enter this market including; anesthesiologists, cardiothoracic surgeons, and even podiatrists.)
Multiple Locations: After some initial success, many therapists and medspa owners look 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 simple reason; Its a completely different animal. If you plan to open multiple locations, your workload is triple. Multiple location sites are beyond the capabilities of most physicians and carry enormous financial risk. Staffing and human resources, legal issues, medical oversight… most fail in 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 at a rapid pace is certainly a reason to overextend your resources. Then you are in big trouble. If you have closed another clinic, lenders will be wary of paying you.
Turn Key Solution: Franchisees and consultants like to drop this phrase. The idea is a fascinating one. Experts will guide your steps towards financial glory. Marketing, financing, training, everything will be delivered in a nice little box with a bow on top. But, knowing the number of franchise owners and the problems they face, I would advise this; be careful
The current crop of franchisees has a lot of problems. (One of them was a medical practice in California that was closed for selling to non-physicians. They have since reopened and are among the most aggressive advertisers.) Franchises are attractive because they claim to have all the answers. If you just write a cheque, all your troubles will be over. Don’t go too fast. All you really get is a few manuals, pre-written scripts for sale, and crappy ads. You also get: locked into certain technologies that may be second-tier (franchisees get kick-backs), spend money you could use elsewhere, and pay royalties on all your income. (Franchises that offer flat fees are an even worse idea. They have no incentive to help you.)
Big dogs eat small dogs. The next five years will see dramatic and disruptive changes in this market. Big, well-financed medical businesses with smart physicians and high-quality care are about to open in your neighborhood. (You’re the corner store, they’re Wal-Mart) These business categories will be killers, and if you’re not well-established with a large market presence and multiple revenue streams, you’ll be gone.
$80,000 towel dryer. Choosing the right technology is one thing that will allow you to take a step forward or leave you with cement boots where you are standing. I always think that a doctor prescribes a pair of IPL [Intense Pulsed Light devices] He had bought; $80,000 as a towel dryer. Before deciding which system to buy, you need to crunch the numbers. How many shots last until the IPL head is rebuilt? How much support is included? What kind of training is provided? Does the device perform better than its competitors? Before you sign off on your next few home payments, check your tech decisions.
Buy or rent. Leasing is the best way to pay for your equipment as you use it while preserving your capital. Many tech companies have delayed payment plans for up to six months. Buying used equipment is the best way to save money if cash flow is not an issue. (We buy used medical lasers and IPLs online from brokers we trust and sometimes negotiate with our purchasing power for other doctors.) If you have the cash, you can save up to 40% on the cost of a new machine.
Don’t Gild Lily: Cash flow is a problem many start-up medical spas face. Revenue and growth projections are usually exaggerated in the excitement of a new business. Before you invest in an embroidered leather treatment table, make sure you can pay your bills. A medical spa startup spent $350,000 on build out and had no money left over to attract patients. His business was closed within four months.
Some simple finance rules:
o The golden rule is translated as: He rules with gold.
o You will be personally responsible for the money: Doctors sometimes feel that they can use it as security for their medical practice or future earnings. No.
o Be thrifty: Take only what you need. It is tempting to take as much money as possible. don’t want All the money you borrow will come with strings attached.
o Borrow enough money: Lenders hate it when you need extra money. They worry that something is going wrong with the original plan.
o Sometimes you can’t get there: 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. You really need to do some research to find the best solution. Find a mentor who has done this before and knows what to avoid. And remember, the most common cause of business failure is not lack of capital, but poor decision making.
Resource links and information for all of the professions discussed in this article are available online at MedicalSpaMD.com
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