Large Practices Sell Best via Partnership
Both the buyer and seller can benefit from this arrangement.
BY BRAD RUDEN, M.B.A.

When an organization first gets involved in practice-brokering as part of its consulting services, it often has visions of selling large practices for substantial sums, believing that a bigger practice is a better practice. My experience in practice sales tells me that selling a large practice is substantially more difficult than selling a moderate-sized practice. The two primary reasons for this are:

Large practices are often intimidating to a single buyer. Most buyers want a practice that has room to grow -- not one already operating at peak performance.

Large practices carry large price tags. The pool of potential buyers for a practice decreases substantially when the purchase price is $1 million or more. The reasons for this are the intimidating size of the loan, and the inability of many interested parties to obtain the necessary financing.

For these reasons, many owners of larger practices are forced to discount their asking price in order to attract potential buyers, or, similarly, discount the price to a level at which a buyer can obtain financing. Either way, an owner can often wind up accepting less than hoped for just to get the deal done.

When I'm contacted by an owner of a large practice who wishes to relinquish ownership -- and time isn't an issue -- I typically recommend the owner consider recruiting one or more associates and selling via a partnership buy-in. In this article I'll explain why there are many advantages to selling via the "partnership route," including the following:

► The associate gets to know the practice, staff and patients from the inside. This helps to create a comfort level leading to the buy-in. The more comfortable a buyer is with the practice, the more likely a seller can get the full amount of the appraised value.

► The ownership transition is easier when the buyer works in the practice prior to becoming an owner. This aids in staff and patient retention when the transfer occurs.

► Lenders look more favorably upon buyers who buy into a practice in which they've been employed because they have more knowledge of the business and have developed a patient following.

► The phasing-in of an associate allows for the timely and orderly phasing-out of the owner.

► The purchase can take place over a period of 3 to 5 years. This allows the seller to spread income from the sale over several years rather than realizing the full amount -- and the resulting tax obligation -- in a single year.

► When one buys a practice outright, prior to working in it, it's typically an asset sale. However, a partnership buy-in is handled as a stock transaction. A stock transaction carries lower tax obligations for a seller than does an asset sale.

State Your Intentions Clearly

While many practitioners would like to recruit an associate who'll eventually take over the practice, some practice owners make basic mistakes that result in an associate electing not to buy-in, and instead opting to leave the practice. If your goal is to recruit an associate to take over the practice, state so upfront and screen for this accordingly. Nothing is worse than having to put off retirement because a buy-in didn't occur as planned. Time can become an enemy for the seller if he or she is forced to recruit too late in his or her career and too close to the planned retirement.

Many buy-ins don't go as planned because of differing expectations between the buyer and the seller as to the practice's value. With that in mind, when putting together an employment contract, as much as possible try to include the terms of a buy-in and the formulas used to derive values. I've been successful in integrating valuation formulas as an attachment to the employment contract. Not only does this keep both parties on the same page as far as the value of the practice, it also eliminates the need for buy-in negotiations down the road.

Selling in Stages

Some large practices will require that two or more associates be recruited to buy out 100% ownership from the seller. In these cases, prior to recruiting the second doctor, the first doctor recruited should be given first right of refusal to purchase all remaining ownership shares.

If this option is declined, the second physician should be added once the first has begun his buy-in. As a good-faith gesture, the senior doctor should allow the junior partner some input in the recruitment process provided it doesn't interfere with the senior doctor's ability to sell his/her remaining ownership shares.

Some may worry that selling via the partnership route is more time-consuming than an outright sale. My experience tells me otherwise. Many large practices can stay on the market for years due to a lack of capable potential buyers. Even if buyers are identified, they typically want the seller to stay with the practice for 6 to 12 months to assist with the transition of ownership of such a large entity. By selling via the partnership route, one reduces the uncertainty of selling and instead replaces it with a timeline so the ownership transfer can be conducted in an orderly manner over 3 to 5 years.

Brad Ruden, M.B.A., is practice consultant and owner of MedPro Consulting & Marketing Services. He can be reached by phone at (602) 274-1668, via e-mail at bruden@medprocms.com, or on the Web at www.medprocms.com.