5 key steps in buying a practice
By Deborah Green, Esq.

I want to buy an existing practice. What do you recommend I do?

In itself, buying a practice is an expensive proposition. And tax ramifications that may affect you and the seller can make the purchase transaction even more expensive if you do not handle it correctly. It is prudent to get help from a good accountant and lawyer before you sign any papers.

Here are some things you need to do when you buy:

1. Conduct due diligence. When you conduct due diligence, you carefully scrutinize business operations. Your due diligence should include:

• Spending time at the practice. Stop in unannounced to watch the patient flow. You don’t want to go when the seller knows you’re coming and has booked every patient she has for that day.

• Getting a letter of intent in place. This letter should prevent the seller from “shopping” the practice while you are performing your due diligence.

• Evaluating the purchase price. Acquire hard data and have an accountant with experience in the purchase and sale of chiropractic practices evaluate the information. If possible, get an accountant who performs business evaluations.

• Reviewing all existing contracts. This includes managed-care contracts, as well as other contracts the practice is held accountable for.

2. Understand what you are buying. Make sure all assets and goodwill of the practice are spelled out. You don’t want to pay more for a practice than it would cost you to start one from scratch. You also don’t want to buy receivables unless they are deeply discounted and aren’t more than 30 days old.

Most receivables will not be worth their face value, and you will have to write them off or have a collection agency or attorney try to collect. These collection efforts will eat into your bottom line.

Don’t buy the shares of the existing practice if you can help it; you will be buying its liabilities as well. Buy only the assets. Not buying the shares means you will need to get credentialed, but that can be a lot safer than assuming potential liabilities which have not yet been brought to the attention of the seller (such as a malpractice lawsuit). If getting re-credentialed is not practical, make sure to get an indemnity bond in place to cover you in the event a liability arose after you purchased the shares that were caused by activities performed before you purchased the shares.

3. Arrange for a ‘float.’ Most businesses fail because they do not have sufficient capital for startup costs. You will find yourself needing money for malpractice, liability, theft, fire, health and other types of insurance; stationery; newer equipment; parking; and legal and accounting fees.

You will also need to get credentialed, obtain provider numbers, get onto various panels, and wait at least three months before any money comes in from Medicare.

Make sure you have enough money in the bank to carry the practice (and your personal expenses) for at least six months. This money should be in the bank and accessible — not rest on a promise from your brother-in-law to help you out in the event you run short of cash.

4. Consider payment options. Try to negotiate a leveraged buyout. This means you pay for the practice with the income and/or assets of the practice.

For example: Assume the purchase price of the practice is $150,000. Let’s further assume the seller tells you the practice generates $200,000 per year, of which 50 percent pays for overhead, thus leaving a profit of $100,000.

Instead of paying the seller full purchase price at the time of the sale, offer to pay $15,000 to $30,000 upfront and the balance throughout a period of five years (or as long a term you can get) at an interest rate at prime or one or two points above prime.

The seller benefits from this type of leveraged buyout because she sells the practice and is quite likely to get tax benefits if the payments are structured properly. You benefit because you don’t need to come up with a large amount of cash at the time of purchase, and you don’t need to pay a higher rate of interest to a bank.

Most important, if the seller made verifiable false representations to you concerning the value of the practice, you are in a much better position to renegotiate. (Note: If you are the seller, always try to get as much of the purchase price upfront as you can!)

5. Negotiate transition assistance. Ask the seller to sign a letter prepared by you and addressed to all his patients, advising them you are coming into the practice.

Make it part of the deal that the selling doctor has to be there for a minimum period of time to intro-duce you to patients and make sure everyone is comfortable with you.

The selling doctor should be paid for her services for the time period she is there after the sale. It has to be clear to the selling doctor you can fire her at any time.

Include a noncompete clause in the sales documents. Do not rely on the representation the doctor is going to retire: The seller’s daughter may be in professional school and planning to open a practice down the block from your new practice. You don’t want your seller assisting her daughter in a way that could detract from your practice.

Deborah Green, Esq., practices law in New York and Florida. If you have any questions concerning legal healthcare issues, e-mail her at healthattorney@aol.com or call 954-923-0923.

DISCLAIMER: This column is provided for educational purposes only. The information presented is not as legal advice and no attorney-client relationship is hereby established.