Planning Your Medical Spa Startup
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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.
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.)
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.
More information is available online at wwww.surface-med.com