Refer to Chapter 9 on page 115 and then answer the following questions:
You have decided to open up a medical practice in Fort Lauderdale, Florida to lease to surgeons to perform surgeries. There are 3 partners (including yourself). Consider the capital structure required to start-up your business and answer the following questions:
1. Will you mostly take out loans (debt) to finance your business, look for investors (equity), use savings, etc. Justify your answer with resources (textbook or outside resources).
2. List at least 2 potential risks the practice will face due to your capitalization decision.
Chapter 9; pg 115
Capitalization Structure Planning
Capital structure is the mix of debt and equity financing a business
needs to accomplish its strategic mission. In a healthcare practice, capital structure planning starts with its strategic plan, the owner’s roadmap of services that the practice will offer, the payers it expects to work with, and the amount of third-party insurance payment involved. An
evidence-based, feasible practice strategy is essential for sound capital-structure planning. Once the practice has defined its strategy it can assess the costs associated with start-up and the first-year financial requirements. Start-up costs include acquiring fixed assets such as
medical equipment, office property, office furniture, and systems for
billing, medical records, practice management, accounting, and communications. Start-up analysis also must consider staffing levels and
116 CAPITALIZATION STRUCTURE AND INVESTMENT PLANNING
the amount of wages that will need to be paid before any revenue is
received. Additional costs associated with the start-up period include
those for establishing business ownership and governance structure, start-up accounting, business licenses and permits, affiliation and hospital credentialing, and malpractice coverage, which may include coverage for providers joining from other practices that did not provide
“tail-claim” coverage. Many practices hire consultants to assist them
in managing these start-up complexities. Consultants can also assist
with strategic planning, or they may only focus on the mechanics of
establishing a practice that has already defined a strategy. In either case, funds for consultant fees should be included as an expense when planning capital structure.
The sources of funds define the initial capital structure of the practice. If a practice decides to borrow to cover start-up costs, it is important to identify investors of equity capital because lenders usually do not consider a start-up proposal without capital from investors. The conditions under which the investor provides capital will concern any lender because the investor’s expectations and rights impact the practice in many ways. For example, if an investor expects some voice in governance or a limit to the amount of debt, these expectations should be agreed to before the investor’s funds are accepted. If the practice owners are the primary investors, careful discussion should still occur so that all owner-investors are satisfied with the management strategy and agreements. Practice ownership, governance, compensation, and profit-sharing arrangements all need to be defined carefully. Failure to do so can lead to serious situations later, particularly if the practice’s finances present challenges for the partners to resolve.