7 Questions to Ask Before Buying a New Plastic Surgery Practice
Before buying a plastic surgery practice, ask these 7 critical questions about finances, patients, staff, and taxes to avoid costly mistakes.
Buying an existing plastic surgery practice can be a smart shortcut to an established patient base and revenue stream. But it also comes with hidden risks, especially around taxes and financial liabilities. To protect your investment, you need to ask the right questions before you sign. Here are the 7 questions you must ask, with practical steps you can take this week.
1. What Is the Practice’s True Tax Liability?
The seller’s tax returns may not reflect the full picture. Ask for the last three years of federal and state tax returns, including all schedules and K-1s if it’s an S-corp or partnership. Look for:
- Unpaid payroll taxes, which can become your responsibility if you buy the entity’s stock.
- Sales tax collected but not remitted, common in med spas selling products.
- Tax liens or audits in progress.
Action this week: Hire a CPA who specializes in medical practices to review the returns. Expect to pay $1,500 to $3,000 for a thorough review.
2. Are You Buying Assets or Stock?
This choice dramatically affects your tax basis and future depreciation. An asset purchase lets you depreciate equipment, furniture, and even goodwill over time, reducing taxable income. A stock purchase gives you a higher basis but often less depreciation benefit.
Action this week: Ask the seller which structure they prefer. If they insist on a stock sale, negotiate a lower price to offset the lost tax benefits.
3. What Is the Real Patient Retention Rate?
A practice might have 2,000 active patients, but if 80% are one-time visitors, your revenue will drop. Ask for the number of unique patients seen in the last 12 months and the percentage of repeat patients. Also, check how many new patients come from referrals versus paid ads.
Action this week: Request a de-identified patient list with visit dates. Run a quick analysis in Excel to see the retention trend.
4. How Are Current Employees Compensated?
Staff salaries and bonuses are a major expense, and they can also trigger tax liabilities. Ask for a list of all employees, their W-2 wages, and any independent contractors. Misclassified contractors can lead to back taxes and penalties.
Action this week: Ask for the last three months of payroll reports. Verify that all staff are properly classified and that payroll taxes are current.
5. What Is the Condition of the Equipment and Lease?
If the practice leases its building or equipment, you’ll inherit those contracts. Check the remaining lease term, monthly payments, and any escalation clauses. Also, get a professional appraisal of the equipment’s value and remaining useful life, which affects depreciation.
Action this week: Request copies of all leases and service contracts. Have an equipment appraiser give you a written estimate, typically costing $500 to $1,500.
6. Are There Any Pending Lawsuits or Claims?
Malpractice claims, patient complaints, or vendor disputes can drain cash and create tax headaches. Ask for a list of any pending or threatened legal actions. Also, check if the practice has malpractice insurance with tail coverage, which can cost $10,000 to $30,000 or more.
Action this week: Ask for the last five years of insurance claims history. If tail coverage is not included, factor that cost into your offer.
7. What Is the Tax Basis of the Practice’s Assets?
You need to know the seller’s tax basis to allocate the purchase price correctly. This allocation affects your depreciation deductions for years to come. Ask for a depreciation schedule from the seller’s tax returns.
Action this week: Work with your CPA to draft a purchase price allocation that maximizes depreciation on equipment and minimizes tax on goodwill. This is a standard part of a purchase agreement.
FAQ
Can I negotiate a lower price if the tax records are messy?
Yes. Messy books indicate higher risk. Use that as leverage to reduce the purchase price or ask for an escrow holdback to cover potential tax liabilities.
Should I buy the practice’s entity or just the assets?
In most cases, an asset purchase is safer for you, because you avoid inheriting unknown liabilities. However, an asset purchase may be more expensive upfront due to sales tax on equipment. Discuss with your CPA.
How long does it take to complete the due diligence process?
A thorough review of financials, taxes, and contracts typically takes 4 to 6 weeks. Don’t rush it, even if the seller pressures you.
What if the practice has unpaid payroll taxes?
If you buy the entity’s stock, you may be personally liable for those taxes. If you buy assets only, you can avoid that liability. Always have your CPA verify that all payroll taxes are paid before closing.
The Bottom Line
Buying a plastic surgery practice can be a lucrative move, but only if you do your homework. The 7 questions above will help you uncover hidden tax liabilities, retention issues, and equipment problems that could turn a good deal into a bad one. Start with the tax review and asset allocation, because those have the longest-lasting financial impact. Take action this week: contact a medical practice CPA and request the seller’s tax returns and depreciation schedules. A few thousand dollars in due diligence now can save you tens of thousands later.