Selling a Medical/Dental Practice
by Drew Larson
Monday, March 16, 2015
Benjamin Franklin famously said that the only certain things in the world were death and taxes. For the owner of a medical practice, it is also certain that your practice is going to transition. While you can’t stop an eventual transition, you can take steps to influence the form the transition takes. With planning, you could sell your practice, help finance your retirement, and ensure that your patients will continue to have access to quality care.
While there are nuances in every transition, the most common transition is where a retiring practitioner sells his or her practice (or part of a practice) to a younger associate or partner. By planning ahead and understanding the goals of each side of the transaction, a deal can usually be structured that is fair to both sides and meets everyone’s needs.
So, what is it that the parties want? Both parties will want clarity regarding their ongoing duties and responsibilities, to minimize taxes, and maintain business operations during a transition period. The seller is concerned about getting a sufficient price to meet their retirement income goals, minimize ongoing liabilities, and maximize up-front cash. A buyer does not want to overpay for the practice and to ensure that they have a remedy if the seller misrepresented something in the sale.
The biggest points for negotiating are the price, financing, and the terms of any continued employment.
In a perfect world, most of these matters have been addressed much earlier than the proposed sale in a buy-sell agreement. In a well drafted buy-sell agreement, the parties already negotiated a fair mechanism to set the price for the seller’s interest in the practice. The price is often determined by a formula tied to the practice’s earnings or revenue, or some other objective measure that the parties agreed to before the pressure of a sale is upon them. This is especially helpful in a practice owned by multiple parties, where the company may be buying out one of their retiring partners. If the method of determining the price has not been prearranged, then this is just a matter of negotiation, often falling back to similar formulas to help determine whether a value is fair to the parties.
As for payment terms, a seller almost always want the entire purchase price in cash at closing. However, a buyer will often request that a portion of the purchase price be paid on a promissory note to ensure that the seller will effectively help transition the practice and that there will still be cash available to cover any claims related to breached representations or warranties. In addition, the seller may desire to receive payments over time to spread out the taxes from the sale over multiple years. It is common to see at least 20% of the purchase price payable to the seller over time pursuant to a promissory note.
Lastly, many times the seller of a practice will remain as a part- or full-time employee after the sale of a practice. An employment agreement is key to ensure that there is clarity on salary and benefits eligibility. In addition, the employment agreement will also deal with regulatory and business matters such as records retention and access, licensure, insurance, non-compete obligations, and the like. While usually pretty standard, it is important for all parties to ensure that the terms of any employment agreement satisfy all regulatory and business requirements.
If you are considering selling your practice, bringing in a new associate, or otherwise transitioning your practice, call your BrownWinick attorney early in the process to ensure that you are getting the best possible outcome for your situation.