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Top 3 MedSpa Money Myths

October 1, 2007 |

The baby boomer generation—some 76 million strong—represents the largest single sustained growth of the population in U.S. history, according to AARP. Every 7.5 seconds, the organization reports, someone turns 50. And every day, more than 11,500 Americans hit the big Five O.

As physicians in age management medicine, you have a unique opportunity to help this generation age the way it wants to–with health and wellness. To do so, many of you may consider expanding your existing practice into a medical spa. But it’s not an easy venture. Pitfalls exist—one of which is financing–and you must be properly prepared.

The following top 3 myths are common misconceptions physicians have about financing med spas.

Myth #1. Opening a medical spa is easy money.

Expanding into a medical spa will cost you two valuable things: time and money. Because the medical spa industry is relatively new, you’ll need to spend time up front answering questions such as: Where is the right location? Who are my customers? What treatments will I offer? How many treatment rooms do I need? How much retail space do I need? All of these issues have a strong bearing on the success of your operation. So you need to do your research.

When it comes to money, you’ll have just as many questions: What will a med spa cost? How much cash will I need? What can I finance? When will I break even? The following should help figure you these things out.

Cost. Medical spa developments can range from $200,000 to $8 million, with an average cost ranging from $300,000 to $400,000. If you’re going to add more equipment-intensive procedures, such as orthodontics, or focus on expensive upgrades, such as marble flooring, the price can jump dramatically from the average cost I’ve cited.

Cash. How much cash will you need? A good guideline is about 25 percent of the total cost. Be sure to budget for enough working capital to carry the medical spa for six to nine months. This includes having enough money to make payroll, inventory, rent and equipment lease payments.

Financing. You shouldn’t have a problem financing all of the equipment and furniture for a med spa. Be aware, however, that splitting your financing among several banks and vendors can cost you money. By using one financing source, you can combine your equipment purchases with a working capital request. This will give you a lower cost of funds, while simultaneously preserving your cash.

Break-even point. Your breakeven point will depend on many things, from the facility’s design to the types of procedures you’ll perform. It’s also going to be drastically different if you put $400,000 cash into the medical spa, or finance a large portion. The more you use your strong credit history and existing practice, the faster you’re going to get to the break-even point. From my experience, a well-planned medical spa starts making a profit in nine to 12 months. Depending on how you market your facility and use the different financing options, you may hit a positive cash flow in two to three months.

Don’t even consider a med spa unless you create a business plan. This plan must have specific details, such as equipment and furniture costs, building costs, pro-forma financial projections, marketing plan, timelines and an overview of the management team. Once you finish the business plan and see the numbers, you’ll better understand what’s needed for a successful opening.

Myth #2. The bank will give me all the money I need.

Your banker probably will be more than happy to give you some money for your new medical spa. But banks often want you to put in 25 percent to 30 percent of your own money. Keep this in mind as well: Banks are generally collateral lenders. Therefore, you may have to put up your house as collateral. Whenever someone asks you to place your personal property or investment portfolio on the line, you need to act with extreme caution. It just may not be worth saving 1 percent to 2 percent on interest if you have to put your personal property up as collateral.

Lines of credit should only be used for emergencies (i.e., payroll crunches, short-term financing, unexpected expenses). It’s especially important to have this extra cushion during your first year of operation. Remember, the bank will not give you an unlimited pot of money. So you’re going to need to watch it very carefully.

Be aware, too, that under-capitalization is a significant indicator of business failure. You need to have access to cash. Therefore, you must clearly identify the money you’ll need to open a new medical spa, and budget for any unexpected expenses.

Leasing is another financing option that helps preserve your cash. One of the biggest benefits is low startup costs, which often allow you to hit your break-even point much faster. For example, it would be much easier for you to match your medical spa’s revenues to a $10,000/month lease payment vs. a $500,000 cash investment. If you have a true lease, it can be treated as a tax-deductible overhead expense. Therefore, you can immediately write off your payments, rather than have to depreciate the cost over five to seven years.

What are lenders going to look at when determining how much money they’ll give you? First, they’ll look at your ability to pay. Where is the money coming from? Then, they look at your stability. How long have you been practicing/employed? Finally, they’ll assess your willingness to repay, which is shown with your credit history. This information comes from your credit bureau report, personal and corporate financial statements, and tax returns.

Generally speaking, it’s not wise to use cash to purchase depreciating assets. You want to get the greatest return for your cash, so carefully weigh the costs and benefits of leasing equipment vs. buying it. I recommend saving your cash to purchase assets that appreciate—rather than depreciate—in value.

Myth #3 I have an accountant. I don’t need to know how to read financial statements.

You’ll have many duties and challenges running a new medical spa, but don’t let that pull your focus from the bottom line. As in any business, cash flow is the lifeblood of your operation. To understand your cash flow, you need to be familiar with the following three financial statements:

The balance sheet is a snapshot of your assets and liabilities at a specific moment in time. This indicates your stake in the business, as well as the current health of the company.

The current ratio, which is calculated from the balance sheet, is often used by lenders; it shows how quickly you can pay your bills. It’s calculated by placing your current assets (i.e., cash, inventories, prepaid expenses, receivables) over your current liabilities (i.e., accounts payable, short-term notes payable, income tax payable). For example, if you have $100,000 in current assets and $50,000 in current liabilities, your ratio is a healthy 2:1. Know your current ratio. If it dips below 1.25:1, this could be a sign that you won’t be able to pay your bills.

The Income Statement (or Profit & Loss Statement) lists your income, expenses and net income (or loss). The income statement gives you the bottom line and tells you whether you’re making money.
The income statement will show trends, allowing you to adjust accordingly. For example, are hair removal treatments outselling microdermabrasion treatments by 3:1? If so, you may want to invest in another laser for hair removal.

The income statement is important for lenders, since it indicates your ability to pay for any new debt you take on. For example, if you have a net income of $100,000 and want to borrow $500,000, a simple calculation will show the lender that you can’t make the monthly payments.

A Cash Flow Statement can be a difficult statement to understand. Nevertheless, you’ll need to focus on how much money is coming in and going out every month. Make sure your cash flow is increasing every month. More clients should equal more money. If it doesn’t, you’ll need to figure out where the money is going. Think of your cash flow statement as your early warning indicator. It shows how much cash is available to keep your medical spa running.

Your accountant is the best person to help you read and understand your financial statements. He will direct you to the right line locations on each statement, allowing you to quickly get the information you need.

There is no doubt, that as physicians in age management medicine, you have a great opportunity to use your expertise and credibility to build a profitable medical spa. As you explore all the possibilities open to you, keep in mind the three main points we’ve talked about here. Myth #1 Medical spas are easy money. Although the potential is huge, there is also a great deal of money to be lost, especially if you haven’t taken into account all the costs associated with opening a medical spa. This is where a well thought out business plan will be invaluable. Myth #2 The bank will give me all the money I need. You need to understand all of your financing options, including all their pros and cons. The worst thing that can happen to any new business is to be under-capitalized. Myth #3 I have an accountant. I don’t need to know how to read financial statements. You may have a wonderful accountant, but you still need to know how to read your financial statements, understand the cash flows, and key ratios. These will indicate trends, therefore helping you avert any downturns that may affect your med spas profitability.

Once you make the decision to open a med spa, you will become a business owner. You will find the business skills required in opening and running a med spa are quite different than for a standard medical practice. Once you understand the business side of the med spa, you can focus on what you truly enjoy – fighting father time!

Jeff Russell
www.IAPAM.com

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