Valuation of Practice for
Purchase / Sale / Buy-in
Negotiation of Terms
Expert Witness & Litigation Support
Frequently Asked Questions About Brokerage
Of interest primarily to sellers:
Of interest primarily to buyers:
Buyers have a greater trust in practices that are professionally represented. The evaluation and participation by a neutral third party lends credibility to the worth of the practice. This is especially important if the buyer is seeking funding through a financial institution.
Additionally, licensed professionals know the proper procedures to assure an equitable and binding transaction. As a seller, you want to be sure there are no lingering liabilities, and as a buyer, you want be sure there are no surprise creditors that could make a claim against you. All large businesses use the services of professional brokers and/or merger-and-acquisition consultants, not because their transactions are necessarily more complex, but because these businesses recognize the value of an objective expert to direct the process and assure that all issues are appropriately addressed.
In every-day life your home and your automobile are typically your largest assets. However, when it comes to practice ownership, the practice value often takes first or second place. You want to secure the best possible advisor for the sale or purchase of such a large asset.
The process of buying or selling can be time consuming. Licensed brokers have the experience and specialized education required to pass the regulated licensing requirements, so they can navigate the process of buying or selling a practice and guide you through it. Even more important, licensed brokers know how to properly value practices and structure terms to ensure that both parties are getting a fair deal.
In addition to the above, a broker…
- makes it easier for you to maintain confidentiality. Every potential buyer must sign a Confidentiality Agreement prior to receiving information beyond what is in the publicity text. And, of course, there are no potential buyers calling your office.
- knows what’s needed, and gathers the appropriate information.
- properly recasts financial statements for use by potential buyers and lenders.
- understands the value of goodwill.
- has marketplace and valuation knowledge.
- provides an overview of tax consequences prior to the parties consulting with their own accounting professionals.
- clarifies what is being sold. This sounds obvious, but it too often can become a sticking point.
- has a database of prospects.
- has an understanding of various financing options, and contacts with appropriate specialists and lenders familiar with the broker and clinical transactions.
- uses negotiating skills and an understanding of the emotional issues of the parties to guide them to a fair arrangement.
- acts as the buffer between the parties, thereby allowing the parties time to make reasonable decisions.
- has the experience and expertise to better control the issues that arise.
- coordinates and facilitates seller and buyer activities regarding the lender, landlord, accountants, attorneys, insurance agents, and the escrow/closing firm.
- is not emotionally tied to the business, so he can maintain objectivity during the entire process.
Selling a practice is not as simple as putting an ad in the trade publications. It’s a complex, legally binding transaction with potential repercussions far into the future. Just as you would turn to a real estate professional when it comes time to sell or buy a home, turn to a business brokerage professional to sell or buy a practice.
Medical Practice Brokers LLC is the brokerage partner of MedicalPracticesUSA.com.
We are occasionally asked how it can be fair to represent both buyer and seller, as we do in almost all transactions.
We are members of the International Business Brokers Association (IBBA). As such, we abide by standards that include the following. “A business broker should conduct all business with integrity, honesty, care, good faith, and fair dealing.”
In our role as dual agent, we seek an equitable and fair transaction for both parties. If we represent only one of the parties, the negotiation could become adversarial rather than mutually beneficial. Frankly, we think it’s better for our business to have both parties claim the transaction was fair, than to have just one of the parties happy and the other party dissatisfied.
In many states it is required that, if one party is represented, the other party must have an opportunity to be represented. In the residential real estate marketplace, where there are many brokers, the likelihood of the same broker representing both buyer and seller is small. It does happen, but it’s not prevalent. In business brokerage, there are very few firms who specialize in clinical businesses, and Medical Practice Brokers LLC is one of these. Since most buyers are responding to our advertising, it stands to reason that, by default, we become their representatives as well.
If price is your concern, we have to set the transaction amount where financial institutions will fund it; they are truly independent and if the price is too high, they won’t provide the money. And if the practice doesn’t sell, we don’t get paid anything.
Although price is the obvious issue, there are many other considerations that go into a business transaction.
So, without having to pay a fee, our buyers get professional support and guidance from the start of their search through closing of a transaction. If you still don’t want us to assist you, you may decline our representation by printing and completing a waiver form (Medical Practice Brokers LLC is the brokerage partner of MedicalPracticesUSA.com) and submitting it to MedicalPracticesUSA.com along with your completed Confidentiality Agreement.
Price is the value of the transaction in total. As an example, a practice that sells for $200,000 plus inventory of $30,000, has a price of $230,000. Price usually excludes accounts receivable, accounts payable, and cash in accounts; the seller keeps them. It also assumes that the seller pays off all equipment leases and other liabilities. Price, then, is the “clean” transfer value.
Financing is how the money changes hands. It may be seller financed (often called a take-back note), bank financed, or a mix of lending arrangements. Financing also includes adjustments to the price that reflect the buyer handling carry-over items. For example, if there is an equipment lease that will continue with the new owner, the value of those future payments (that the buyer will be paying) will reduce the amount of cash that changes hands at closing; the buyer has agreed to make those payments in return for consideration (putting up less cash) at closing.
Transferring ownership of a business requires many licensing, tax, and regulatory criteria to be satisfactorily documented. Medical Practice Brokers LLC processes its transactions through licensed escrow/closing parties as a safeguard for our clients. This assures that there is no lingering liability for the seller, and no surprise liabilities for the buyer.
Fees for business sales are higher than for real estate transactions. There are several reasons, but the most significant are as follows. Business transactions are more complex, requiring the business broker to be much more involved in the process itself, working with the sellers and buyers, escrow firms, lenders, sometimes landlords, and other “interested” parties. Business brokers must also have a much greater knowledge of business in general and the legal and financial aspects of the businesses being sold; it frequently takes several years for a business broker to acquire this knowledge and expertise.
Escrow/Closing – Based on the size and complexity of the transaction, the total may be as little as $2,000 or may be as high as $8,000. We can estimate the fees based on our knowledge of your transaction. These fees are usually split equally between the buyer and seller.
Professional Expertise – Fees for your own legal and/or financial advisors, if you choose to use any.
Medical Practice Brokers LLC is the brokerage partner of MedicalPracticesUSA.com.
As part of a sale transaction, the buyer and seller must agree on how the value of the transaction is to be treated for tax purposes. Only your own tax advisor knows your particular situation and the details regarding IRS and state taxing authorities regulations; as a general rule, the following may be useful.
If Seller is a Proprietorship, Partnership, or S-Corporation – You will pay income taxes on any profits from the sale that are RECEIVED each year. Seller financing spreads out the seller’s tax liability over the life of the financing. However, recapture of depreciated assets may occur in the year of the transaction, regardless of the financing terms.
If Seller is a C-Corporation (including PC or PSC) – The following chart does NOT apply. In this case, you may get money out in the form of dividends and/or use longer-term strategies to minimize your tax burden. Seek expert assistance! Yes, Medical Practice Brokers LLC can refer you such an expert.
|Capital Gain||Ordinary Income|
|Covenant Not to Compete|
** No tax up to basis, ordinary income tax up to original cost, and capital gain over original cost.
Buyer -The buyer will reduce his/her income tax liability based on these deductions.
|Trade Name||15 years|
|Patient Records||15 years|
|Leasehold Interest||as paid|
|Leasehold Improvements||39 years|
|Covenant Not to Compete||15 years|
|Equipment||up to 7 years|
The visit to a practice by a potential buyer is usually a casual event. The buyer sees the practice location and layout, and chats with the selling doctor. Here are some suggestions and a few rules.
For the seller…
- Provide a tour of the office.
- Introduce the visitor to any staff members you cross paths with. No need to explain who this person is, or simply say this doctor is interested in seeing our facility.
- The visitor has already received from me quite a bit of information about the practice, include financial reports. There may questions about those reports. Feel free to answer any questions that you are comfortable answering, except questions related to a transaction.
- Any question you feel uncomfortable answering, you may simply decline, or you may say something like, “That’s Gary’s job, talk to him.”
For the buyer…
- Be on time, but not more than a few minutes early; the time of the visit may be such that the seller is waiting for staff and patients to leave.
- Don’t speak to anyone unless your host introduces you. Even then, keep in mind that the seller’s staff may not be aware of the potential sale, so guard any conversation accordingly.
- Ask whatever you want that relates to your consideration of the practice. Please don’t discuss any aspect of a potential offer.
- Don’t ask for documents. Detail or backup documents will be part of due diligence after you have made an offer and the seller has accepted it.
- Please remember that, except at the visit itself, you have an obligation NOT to contact the seller. Don’t hesitate to ask me any follow-up questions.
For both buyer and seller…
- Unless noted otherwise by specific arrangement, per the terms in your buyer’s Confidentiality Agreement and seller’s Listing Agreement, I represent both of you as what is termed a dual agent. So, enjoy your visit and remember that I am available to answer questions and assist both of you.
- I ask that you call or email me after the visit to let me know how you feel the visit went.
Just like a residential real estate broker, we want to assure that, if we do our work, expend our advertising dollars, and finalize a transaction, that we will indeed be paid our full commission fee.
Unlike residential real estate brokers, there are very few brokers working with “the three O’s” of optometry, ophthalmology, and optical shops. Many potential buyers contact all such brokers. You would likely find several of the same names in each broker’s database. So, if we “have” the listing and we have the buyer, we are due our full commission. We don’t want to get into an argument with other parties about who has the right to the commission fee.
Although we have the Exclusive Right to Sell, we do appreciate the assistance that others may provide in sourcing a buyer. That’s why we are happy to co-broker with other reputable brokers; another broker may have a buyer candidate who we don’t have, and we will work with that broker and split our fee with him/her if some standard conditions are met.
Lastly, we are happy to pay a Finder’s Fee to parties who are not brokers but who provide the name and contact information for someone who in turn becomes the buyer, assuming of course that person is not already in our system. All the “Finder” needs to do is give us contact information about a potential buyer, then we’ll do all the work. If a transaction is finalized, the Finder gets a cut of it.
There are two schools of thought regarding notifying staff of the practice being for sale. One view favors telling your staff early, helping them become comfortable with the event, and preventing them from finding out about it inadvertently from another source, such as a frame sales representative. The other view is to wait as long as possible to tell staff. This approach prevents staff from seeking other jobs before they even know whether or not they will like the new owner.
One of the primary assets the buyer buys is goodwill, and much of that goodwill resides in the staff. The job security of the staff is very high; the buyer wants that stability for the transition. Staff needn’t worry about losing their jobs because of the transition. Of course, they will still need to perform adequately.
Telling the staff early also makes it easier to show the practice to prospective buyers. It can be shown during the workday, subject to other scheduling considerations, so the potential buyer can see it in operation.
Finally, it’s simply more honest and it demonstrates trust in your staff if you tell them early. Waiting often leads them to feel betrayed and angry.
So, as you can tell, we strongly recommend telling your staff very early in the process. How do you do that? Something simple, like the following.
“As trusted employees I want to share with you some plans I have. I hope to retire in the next several months and, as part of that plan, I have contracted with a broker to sell my practice. I wanted you to know about it early for several reasons.
“First, I want to assure you that your jobs are secure. One of the primary assets the buyer buys is goodwill, and much of that goodwill resides in you, the folks who will continue to make this practice run smoothly.
“Second, I didn’t want you to hear about it accidently, from anyone but me.
“Third, I need your assistance for a smooth transaction. There may be potential buyers visiting the practice and I would be comfortable if they wanted to speak with you about it.
“Although you now know about it, and you are free to chat about it amongst yourselves, I need you to keep this confidential from our patients (no reason to make them nervous about their care), and from everyone else outside of us. It may take as long as a year to sell. We will continue to operate as we have in the past, and our day-to-day lives will not be affected at all.
“If you have concerns or questions, either now or as we move forward, please don’t hesitate to talk with me, or contact my broker directly. He obviously has been involved in many such transitions, and he is happy to talk with any of you at any time.”
First it is important to recognize the distinction between price and financing. See Are Price and Financing the same thing?
Determining the price is much more complex than most doctors realize. Many want a simple percentage-of-gross figure. Others want to simply multiply the net by some factor. Both of these can be done in the general sense, but neither is accurate for a specific practice. It takes experience, expertise, and knowledge of the marketplace to determine a fair price.
In short, a practice must demonstrate economic reasonableness as both an investment AND a livelihood.
The short answer is Yes. Unless you absolutely must have full payment at close of escrow, there are several advantages to you carrying the financing, assuming, of course, we have a qualified buyer with a reasonable down payment.
The buyer is going to pay interest to somebody, why not you? In today’s investment marketplace, where else can you get a better-than-average rate on a safe investment? And, in conjunction with the tax deferral explained below, you can earn this interest before you pay taxes on the transaction!
In raw dollars, carrying a note dramatically increases the amount the seller receives, with no downside to the buyer. For example, a 7-year note for $100,000 at 6.0% brings an extra $22,700 to the seller.
The tax consequences of carrying the note are usually favorable. You will pay income taxes on any profits that are RECEIVED each year; seller financing spreads out your tax liability over the life of the financing, usually to years where your tax bracket is lower than it is today. Consult your tax advisor for more details; also see How does selling or buying affect my tax situation?
Carrying a note opens up your practice to buyers who may not be able to secure conventional financing but are still “safe” borrowers. This is especially applicable if your practice is small and/or cannot demonstrate (because of creative tax returns) sufficient profitability; it may be impossible for any buyer to secure conventional financing. Your willingness to carry the note demonstrates to the buyer your confidence in the practice.
Seller financing is also fast. A conventional loan may take up to a couple of months to arrange, whereas financing through the seller may be arranged in a couple of days. If either you or the buyer is in a hurry, this is the way to go.
Seller financing can be creative. You don’t want any significant payments until next year? That’s fine. You want to help the buyer with lower payments for a year? Not a problem. You want the payments made to a different entity? Okay. Anything that the parties are agreeable to and that’s legal, can be arranged.
Are there downsides to carrying the note? Yes, but they are very small, especially in relation to the benefits. You will need to service the note, meaning that you will need to keep track of payments and go through a collections process if payments aren’t made. Ultimately, of course, there is the risk of default resulting in the seller getting the practice back after it has been reduced in value. For transactions that are priced properly and structured properly to begin with, this risk is very, VERY low; but it’s not zero. If the worst does happen, you will have received the down payment and some number of monthly payments. Although certainly not pretty, after re-selling the practice there is a good chance you will end up getting most of the money you originally anticipated.
In summary, seller financing is a way to put more dollars in the pocket of the seller, without any additional cost to the buyer.
This can be the most unsettling aspect of selling your practice. Although many buyers are looking for practices, we need to make a match with the right person. He or she may see our ad right away, and the practice could be sold quickly. On the other hand, a buyer that wants your location, your size practice, your style of practice, your practice’s look and feel, at a price they can accept, may not yet be ready to buy. It could take many months for the right buyer to begin his/her search.
In general, up-scale urban and suburban practices tend to sell in the shorter time periods. Less desirable urban locations, and all rural locations, tend to take longer.
Once a buyer is found and a deal is struck, the process leading up to actual transfer of ownership typically takes six to eight weeks. There are documents to prepare and sign, notices that must appear in newspapers in some states, financing arrangements to be established, lease terms to be settled, tax and lien clearances must be received, and many other tasks that take some time to finalize. During all of this activity, the buyer needs to be performing due diligence, without disrupting the day-to-day operation of the practice.
Most practice sales take the form of a bulk sale (also called an asset sale). The seller may be a sole proprietor (including husband and wife joint ownership), a partnership, or any form of corporation. In the case of a partnership or corporation, that entity sells the practice; the partnership itself is not sold nor is shareholder stock sold in such instances.
This depends on the desires of the buyer and the financial ability of the practice to support both the buyer and you for a period of time. For a small practice this can be very difficult.
If the buyer is seeking funding from the commercial lending arena, your financial statements and tax returns will need to demonstrate the ability of the buyer to make the loan payments. Additionally, of course, the buyer needs to be creditworthy as an individual. (Recent OD graduates, even though they have substantial debt related to their education, are usually credit worthy in the eyes of most lenders.)
If you are considering financing part of the transaction, this obviously will affect you even after the transaction closes. See the related topic Should I carry part of the financing?
Sadly, no. When a landlord assigns a lease, they almost always keep the assignor (you) on the lease as backup. It’s almost universal. The only thing you might do is ask that you be taken off after a year. Some landlords (not many) will do that once the assignee has a track record.
If the landlord will not release you after a year, you should request written assurance that your name will be removed from any renewal or extension of the current lease. All landlords will accommodate this, but you should mark your calendar to remind them.
To ease your mind about this, it is extremely rare that a doctor defaults on a lease. In fact, I am not aware of a single case, from all of my transactions, where the landlord has even contacted the assignor after the transaction has closed.
Most practice sales are asset purchases (as opposed to stock purchases), so any trailing liabilities follow the seller.
If your current liability insurance is an “occurrence based” policy (meaning it covers you for occurrences happening in the policy period even if the claim happens years later) you are okay. If your current liability coverage is a “claims made” policy (only covering claims made during the policy period), then you would want to get a “tail” added to that to cover you for a couple years, in case there is a suit or claim for something that happened when you owned it. Most policies today are occurrence coverage, but you should check to be sure.
We recommend you also get a “business tail” policy for premises and personal liability for a couple years.
There is a separation of information between that used to DECIDE about making an offer, and that used to VERIFY the facts you were given. The offer contract would include a contingency that lets the buyer out of the contract if the results of the verification process are not satisfactory.
Due diligence is that verification process; it’s an investigation that serves to confirm all material facts regarding a sale. It includes reviewing financial and practice operations records to satisfy the buyer that what he/she was told as the basis for the offer is true. The buyer may review any records the practice has: checkbook statements, invoices, day sheets, 3rd party payment reports, etc. If this analysis shows that the financial information the buyer was given is substantially different, the buyer may retract the offer and get back his/her deposit.
Keep in mind, however, that this process is not for decision-making regarding interest in the practice. Due diligence takes place after an offer has been made and accepted, and it’s purpose is verification.
As an example, it is reasonable to see the tax returns to understand the reported revenue and expenses. You, as a potential buyer, will use that information as part of the basis for making an offer. But you don’t need to see the bank statements at that point; you presume the tax return is correct. After a deal is signed, then you may look at the bank statements to verify that they approximate the revenue and expenses claimed; that is part of due diligence.
Why isn’t this data shared earlier in the process? For four main reasons, as follows.
- The seller doesn’t want to share such details with a number of potential buyers so that, in effect, anyone who expresses interest may grab the data. A nearby competitor may play the role of an interested buyer, only to try to get detailed competitive information.
- It can be a significant time burden on the seller and we don’t drag him through it unless we have a deal to sell the practice.
- This process usually includes some documents that show patient names; access to such documents needs to be minimized.
- It can be a significant time burden on you, too. And possibly expensive if you engage others to assist you. We don’t want you to waste those resources if the seller isn’t yet bound to the deal.
One of the protocols is that the potential buyer is not to contact the seller directly. Contact from potential buyers can become a time burden on the seller. Part of our job is to let the seller concentrate on running the practice, while we handle all buyer contact except, obviously, during an on-site visit that we arrange.
More important than the time issue, is the potential for misinterpreted comments or unmet expectations. Long experience has confirmed that the parties are both better off not having direct communication.
If the buyer does not buy the seller’s Accounts Receivable, the buyer has a responsibility to forward payments that belong to the seller as those payments arrive. Both buyer and seller need to keep track of this activity. At the same time, since most money arriving shortly after the buyer takes over belongs to the seller, the buyer needs a significant amount of working capital to pay the bills. Finally, although the buyer must forward what comes in, he does not have responsibility to try to collect funds; the collections process remains with the seller.
By buying the A/R along with the practice, all of these hassles are eliminated. The buyer simply keeps the money coming in, proving working capital. The buyer doesn’t need to keep track of or forward payments. Likewise, the seller doesn’t have to track them and doesn’t have to worry about trying to collect delinquent payers.
Typically the buyer acquires all receivables, but pays 95% of the less-than-90-days amount. The seller gets the cash immediately and avoids all of the record-keeping and collections activities. Note to sellers: The A/R buyout is not subject to our commission percentage; it all gets passed along to you.
Also recognize that this has nothing to do with payables. The seller maintains responsibility for payables for services or items received prior to close of escrow, regardless of when the bill shows up.
Getting prequalified doesn’t help you much. It’s not a question of how much a lender will loan you, it’s how much they will loan you for a specific transaction. You may have a solid net worth, but a bank may refuse to lend for a practice with insufficient cash flow (by their analysis, which is sometimes different than a broker’s analysis). Likewise, you may have very little in terms of personal assets, but you make an offer to buy a great practice; that is more acceptable to a lender.
Usually, your education-related debt does not hurt you. Many buyers still have quite a bit of education debt to pay off.
Does your credit standing matter? Yes, but mostly to the extent the lender wants to see that you pay your bills. Even the offer price doesn’t matter much, as long as it’s reasonable.
A lender will not commit to anything until they see the signed purchase contract for a specific transaction.
Unlike buying a house, where your personal assets and income determine what you can buy, banks looking at a practice purchase expect the practice to be able to cover its operational expenses and pay you a reasonable salary including enough to pay the purchase loan.
We have a list of recommended lenders. Don’t hesitate to ask us for it.
We don’t want the seller to see some terms that they like in a draft, only to have them deleted in the final purchase contract. More importantly, the seller needs to understand the entirety of the proposal before saying yes or no. Not just the price, but any employment terms, date of closing, funding arrangements, etc. The seller also needs to know that, if they accept, they have a deal; likewise, you know that if the seller says yes, you have a deal.