Buying or selling a professional practice is a major life event. Whether you’re the buyer or the seller, you need to be armed with the information that will help you make the decisions that are right for you.
When considering the purchase or sale of a practice, use the 1-2-3 approach:
- Articulate goals. Take a critical look at your current situation and write down your personal goals.
- Gather information. Do research about what comparable practices are selling for and what you can afford as a buyer, or what you should charge as a seller.
- Proceed carefully. For sellers, it’s important to preserve confidentiality so the practice is not disrupted. For buyers, it’s important to carefully evaluate the opportunities.
Using a “Business Broker”
For the seller, a business broker can be of assistance in valuing your practice, qualifying prospective buyers and managing the sale process. But of course, you will need to pay the broker for those services. Generally, a business broker’s fee is 10% of the sales price and the brokerage listing is for at least six months.
Sellers can save money by trying to sell the business directly with advertisements, word-of-mouth, and other means. If you decide to work with a business broker, be sure to check references and get a written agreement about the marketing plan. A broker can be helpful in qualifying prospective buyers, so that sellers don’t waste time with buyers who lack the resources to complete the purchase.
For the buyer, a business broker can be a helpful intermediary in addressing due diligence issues, helping with financing arrangements and negotiating the deal.
Buyers: “Due Diligence”
You wouldn’t buy a house without checking out the systems (e.g., heating, plumbing, septic) and the liabilities (title search). The same kind of systems and liability analysis (e.g., accounting systems, computer systems, payroll tax liabilities, liens) is important in buying a practice. Buyers need to have a clear picture of the value of the practice and the market potential. Buyers should not rush the buying process, since it’s important that the time is taken so a due diligence and financial review can be performed.
If this review turns up some problems or a history of poor financial performance, it’s important to think through how you would operate the business (e.g., “What will I do differently to improve the financial results of the practice?”) This can lead to thoughtful business planning, which is critical to the future success of the practice.
Sellers: “Be Realistic”
To the seller, the value of the practice can be charged with emotions. There are a number of methods for valuing a practice. The methods range from the value of the assets (net book value) to a variety of methods involving earnings, billings, client/patient list and other factors, including a comparison to comparable practices that have been sold. You can hire a professional appraiser to determine the value of the practice, work with a business broker, or make an assessment based on the sale of the comparable practices in similar geographies.
While you may hear lots of “buzz” about practice valuations, it’s important to be realistic about what your practice is worth.
Terms: Asset vs. Stock Sale?
Most deals are structured as asset sales so that the buyer is protected from any undisclosed liabilities of the seller. For the buyer, the asset purchase is advantageous from a tax point of view because the buyer gets a “stepped-up basis” (basis is the cost for tax purposes and gives the buyer a more rapid write-off of depreciable assets).
For the seller, a stock sale is more desirable from a tax point of view. In negotiating the terms, buyer and seller need to be flexible and get professional tax advice, since their allocation of the purchase price must be mutually agreed and reported to the Internal Revenue Service.
Negotiating the Deal
Buyers and sellers should talk candidly about what’s important to each in the transaction. Using a one-page “term sheet” (see sidebar, next page), or simply answering the questions: “Who? What? Where? How much?”, can help to focus the negotiations on what’s important to the parties.
Lawyers, accountants and other advisors can then review the term sheet and discuss the issues. Be wary of professional advisers who use lots of boilerplate, take extreme positions or use tactics that are adversarial. Strive always to keep the negotiations “win-win.”
The formal offer and Purchase & Sale documents should be clear (without gobs of boilerplate) and the agreement should include a provision to mediate any dispute. It’s customary for the seller to agree to “not compete” in the same business in a designated local area for a period of several years.
Managing the Transition
A smooth transition is critical to retaining patients. Sellers usually provide some training or assistance in transitioning the practice to the new owner. A plan should be detailed regarding how the ownership transfer will be communicated to employees, customers, suppliers and the public. A joint announcement, press release or other means of communications should be put together. Mutual cooperation is essential to a smooth transition of ownership.
The ultimate goal is to arrive at a deal that is fair and workable and an agreement that all parties understand. Good luck!
