Financial rewards

Financial rewards for owners of private practices

Posted in Financial aspects of a growing practice

A practice owner I was consulting with said, “I am not tasting a lot of financial rewards as the owner of a practice.” His comment transported me back to the first 20 years of my ownership, the years of hand-to-mouth existence. I thought, “Yes, that was my experience too.”

But then I thought more deeply and recognized three ways that I eventually gained financial rewards for owning a mental health practice. But these were slow to emerge and late in the game.

Three ways owner gain financially in private practice

Let’s start by considering the multiple ways that ownership can add to the owner’s financial rewards.

1. A Salary

Yes, the first 20 years of owning my practice were financially tough. I did not get a salary. At the end of the month, I took home whatever was left after the work bills got paid. There was growth in my take-home pay through those years, but my work and family expenses increased as well. My wife and I constantly juggled between home and work bills. Whichever was more urgent got paid next.

Most of the time, between our juggling and my wife’s income, we were okay. But there were times that I had to ask for help. Sometimes I asked vendors for patience. I remember asking for and receiving scholarship assistance one semester for my two daughters’ music lessons.

Yet my take-home pay did increase. And during the last 20 years of ownership, I got a salary. The practice had grown enough for me to have a consistent paycheck. However, even then, we had some pay periods when we held back the leaderships’ paychecks for a few days. We needed to wait until one of the bigger insurance checks had cleared. As the years went on, the profitability got better, and so did our credit. In later years, we borrowed when we were short and then paid it back when we were flush again. Cash management got a lot easier.

(For more on some of the constraints on wealth in mental health see: Wealth in mental health: Why there isn’t more?)

So what am I saying?

That even when we got large, we still had times of tight money. Mostly the uncomfortable periods were of our own doing. For example, our choice to build out a new space could strain our finances for a time. But we had far more options as we went along.

Additionally, in the last 20 years, I maximized my retirement contributions to make up for all the years we did not build a retirement fund. I was 39 years old when we began saving for retirement. By my retirement at age 66, I was, in my view, highly compensated and had a financial margin both at home and at work. That was the first way I received a financial reward.

2. Owners creating an asset that is eventually sold

Obviously, selling a practice does not happen until the very end. And of course, it does not occur for every owner. One has to build the practice to where it has financial value without the owner’s contribution anymore.

Of course, the hardest part is finding someone willing to purchase your practice. Finding that person or entity depends on your practice’s value and how well it can function on auto-pilot, i.e., without the current owner’s ongoing guidance. In short, the more established the practice and the better the business functions, the higher its value. I have written about understanding the underlying principles of creating value in this post: Selling a practice: How practices become an asset.

3. Purchasing your office space

After 25 years of owning a practice, I was able to purchase the space that housed our biggest office. Becoming the landlord to my practice space would never have occurred without my owning the practice itself. (For some basics, see: Buying Commercial Property For Beginners: How To Start.) I did have to have to come up with a downpayment. In my case, initially, I used the sale of a 3-flat rental house that had equity in it. And later as I purchased the suites we expanded into, I borrowed against the cash value of a life insurance policy. Banks were okay with those approaches, even during the Great Recession. They want their risk protected, and using equity from other places works well.

In all likelihood, real estate values will accumulate more rapidly than the value of your practice, for several reasons.

First, there is less risk in purchasing real estate than a practice. There is a whole industry around establishing real estate values. They may not get it right every time, but real estate still is one of the less risky investments one can make. In contrast, setting practice values is more challenging than figuring out real estate values.

Secondly, managing real estate is less demanding than managing a practice. There are even companies one can hire to do real estate management. Not so for mental health practices.

Thirdly, the market for real estate is much larger than the market for mental health practices. Just think about how many real estate transactions occur in a year compared to the number of practices sold.

Purchasing space is not for everyone but it can be a nice way to leverage one asset, the practice, into value in another asset, the real estate.

So are there financial rewards for being an owner?

In my experience, financial rewards exist, but they come later in the process. The payoffs take time to develop. Ownership is not a “get rich quick” scheme. And in my view, the financial rewards should come quite a way behind more critical reasons for ownership. As I have said elsewhere (see Why create another mental health practice?), I believe that we ought to do this work primarily because we believe in the mission of our organization.

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