For sale by owner: Buyer beware?
By Steven Conway, DC, DACBOH, JD, Esq.

I am thinking about buying an established practice, but what should I look for to ensure I get a good deal? I thought it would be easy to buy a practice, but I am beginning to feel overwhelmed.

Buying a practice does not have to be difficult. It is, however, a major decision and you should handle it with care. It is often the little details that can lead to large and even devastating consequences later.

These "little details" add up, so this column addresses the basics of what to look for in buying or selling a practice: Demographics, nondisclosure agreement, and due diligence.

DEMOGRAPHICS

Practice demographics include more than the locality's population. They also include the actual practice environment.

It's important to understand these demographics so you fully comprehend the potential barriers that may be in place for the clinic's growth. Knowing the barriers should not stop you from buying a practice. Rather, the knowledge allows you to make an informed decision and prepare a battle plan for success.

To assess demographics:

1. Review the laws and regulations of the state. Does the state have a scope of practice law that allows you to treat patients the way you want to practice? Not all states are identical. Some states have restrictions on modalities, adjustment of extremities, use of acupuncture, or nutritional supplementation and counseling.

Some states also have restrictions on workers' compensation reimbursement or accessibility.

Each state has specific insurance laws that help you understand the policies and practices of insurance-reimbursement practices. Become acquainted with them.

Find out how managed-care works in the state. Is it favorable to chiropractic? Do managed-care organizations (MCOs) use gatekeepers or other methods to discourage chiropractic access?

This information will help you see if the environment within the state is favorable to chiropractic.

Do not hope for the laws to change or think you can practice "under the radar" and violate state laws.

2. Consider the viability of the city. The size of the city may be of little consequence, but you should consider its viability.

Is the city's economy stable with realistic expected growth patterns noticeable or is it an economically weak city with no real future expectations of a turnaround? Does the city base its economy on service, industries, or a combination of both?

Don't let the number of chiropractors in a locality be a deciding factor. Although "competition" is a factor, the real evaluation point is saturation rate — the ratio of chiropractors to population base. This gives you a better understanding of the availability of patients to access your office.

3. Assess the practice's demographics. The third step revolves around the actual practice and its associated demographics. Is the practice in a location that is visible and viable? Is the city growing near this practice or is the growth in other areas?

NONDISCLOSURE AGREEMENT

A nondisclosure agreement (NDA) is a form you sign to get information from the seller on the practice. It primarily protects the seller from the buyer misusing the information gained in the process.

As a buyer, make sure the NDA is specific enough to give you the necessary information to make a buying decision about the practice, but not overly broad to prevent you from starting a different practice in the city, should you decide not to buy the practice — such as a noncompete clause.

Nondisclosure forms are usually very straightforward, but if you find you do not understand the language or feel uncomfortable signing, take the form to your attorney for review before signing.

DUE DILIGENCE

Do your due diligence. Do not overlook the importance of this step. While due diligence has different meanings, for our purposes it refers to a process involving the performance of an investigation of a business or person.

In some cases due diligence is a legal obligation, but generally it applies to voluntary investigations. The purpose behind doing a proper due diligence is to learn everything possible about a business before signing a purchase agreement.

A due-diligence investigation should expose improper financial situations or arrangements, pending lawsuits, managed care or other key contracts, contingent liabilities, liens on assets, leased assets, and employee agreements or contracts you would have to assume.

You can insert clauses into your purchase agreement that allow you to back out based on an unsatisfactory outcome of your due-diligence investigation.

To perform proper due diligence, obtain from the seller:

1. All financial information including tax records for the business;
2. Any and all contracts, including such contracts with managed-care organizations, vendors, software, practice management, and leases on building and assets;
3. Any litigation-related documents;
4. Practice statistics, including patient-visit average (PVA), new patients, reactivation rates, number of total files, and number of active files;
5. Copies of random billings for coding analysis;
6. All employment contracts; and
7. Documents pertaining to the legal structure of the practice.

Once you obtain the information, review it with your accountant and attorney to see if clarification of any document or agreement is necessary.

These three initial steps will dictate whether you move on to the next phase of purchasing your new practice or not. If any of these areas suggests problems that your accountant or attorney cannot find a solution for, search for a different practice to purchase.

Steven Conway, DC, DACBOH, JD, Esq., is a partner in True North Chiropractic Consultants LLC, which provides guidance and ethical solutions to the barriers found in chiropractic practices. He can be contacted through truenorthchiropracticconsultants.com or by e-mail at chirolaw@aol.com.

DISCLAIMER: This column is provided for educational purposes only. The accuracy or timeliness of the information presented is not warranted. The information is not presented as legal advice and no attorney-client relationship is established.