How Amount is Determined

Project equity is usually defined as the amount of cash required to get the project up and running, and until it begins to cash flow positively on its own. The art of determining equity comes from a couple of factors and from the early stages of the development of a project.

In the first phase of the project, a feasibility study is undertaken either by the would-be owner or someone that person hires, the cost of which should be factored into the pre-development portion of the project. This is the time frame that involves assessment and analysis that results in a decision to go forward with a project or not. If someone is hired to produce such a report and it is determined not to go forward, then you have lost your equity. If the decision to move forward is made, then the cost ($25,000 to $50,000 or more) is added in to the equation as a pre-development cost and part of the upfront equity.

The next phase of the project, assuming the decision to move forward is made, is the development phase. There are numerous costs that need to be accounted for here. They include costs for consultants, lawyers, accountants, architects, engineers, equipment planners, equipment deposits, facility lease deposits (assuming you are planning to lease space in an existing building and not buy or build a new one, which would engender a whole other set of costs and equity requirements), leasehold improvement expense deposits, hiring of staff, etc. These costs can run into several hundred thousands of dollars and even millions of dollars.

Once a project is developed and the doors open for patients to be seen, there is always a period of waiting for accreditation, licensure, and approval from the various third party payors during which you cannot bill and collect. That usually lasts about three months; as a provider, you are building the business and patient flow. Even if you do start collecting cash in the fourth month, it is unlikely that the facility will be fully ramped, and so you need cash to cover this period of time as well. Often this cash is provided in the form of equity. It is also wise to have an established line of credit with a local bank or other credible source, as most businesses, do including private radiology practices.

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