Sale of Professional Practice
- Nika Dorofyeyeva
- May 1, 2023
- 9 min read
A sale of your professional practice is an important milestone in your life, it might be your path towards a comfortable retirement, or a steppingstone to something new but no matter what reason you have for selling you want it handled in a professional manner. For many professional practice owners, it will be the single most important financial transaction of their career.
There are a number of steps that I recommend practice owners take to maximize their proceeds and reduce the stress of the sale:
1. SET CLEAR GOALS
2. START EARLY & ASSEMBLE YOUR TEAM
3. PREPARE
4. NEGOTIATE
5. TRANSITION THE PRACTICE
Next, let’s look at each step in detail:
1. SET CLEAR GOALS
This involves some initial research into the existing market, gaining understanding of where your practice is in relation to the market and where would you like it to be to meet your objectives.
Market Landscape
The market of professional practice buyers is comprised of individual professionals as well as corporate professional practice consolidators. There are a number of significant differences between the two. In each case it is helpful to put yourself in your buyer’s shoes and think about the risks that each of these groups would perceive in a given transaction. All else equal, the higher the perceived risk, the lower the price that the buyers would be willing to offer for the same cash flow.
In general, corporate consolidators have broader sources of capital (most notably private equity) and are able to offer a higher price for a qualifying practice than an individual purchaser. Individual buyers are generally limited to financing through a health-care professional loan program with one of the major Canadian banks.
Furthermore, in some cases, a corporate consolidator may offer a higher price based on the growth expectations, while the bank financing of the individual purchaser will be based on a more conservative business plan thus limiting the purchase price in the latter case.
Additionally, corporate consolidators stand to realize savings (also called synergies) by adding a practice to their portfolio, such as reduced cost of sales through bulk inventory ordering, reduced administrative costs of hiring, reduced advertising and accounting costs as well as competitive advantages of cross-practice knowledge and staff sharing to name a few. These synergies are even more valuable when multiple corporate consolidators are interested in the practice.
However, corporate consolidators are keenly aware that should there be a professional employee shortage, revenue and profitability would suffer. Thus, those practices that are less reliant on the principal owner and have a full compliment of tenured staff, and committed associates are more attractive to corporate purchasers. It is due to the stronger labour market that consolidators often heavily favour urban locations in desirable growing communities. To an extent some of these risks can be mitigated by the owner staying on board for one to two years post completion to pass the reins over as well as hire and train their replacement.
While an individual purchaser will generally not be able to compete with a corporate consolidator based on price, they might be a preferred buyer in some circumstances. An individual purchaser can step into your shoes and replace your production immediately. They will not require a lengthy commitment from a retiring practice owner and might be more open to less urban or less populous areas of the country.
Your Fit into the Landscape
It is beneficial to do a thorough assessment of your goals to determine the best way to prepare your practice for sale and to determine the best marketing strategy.
You advisor and you could begin by jotting down your goals and objectives:
- How soon would you like to sell? How soon would you like to fully exit the practice? Would you be willing to stay on board after the sale and work full-time or part-time and for how long?
- Do you have a preference between a corporate and a private sale? Do you have an associate that has expressed interest in ownership? Would you consider selling a portion to the associate and a portion to a corporate consolidator?
- Would you like to remain a part owner and for how long? In the case of multi-location practices, would you like to retain one of the locations?
- Is the highest price the most important factor in the sale or will a better fit with a purchaser influence your decision?
2. START EARLY AND ASSEMBLE YOUR TEAM
In almost all cases, to guarantee the most optimal outcome, it is recommended to start the planning process as early as possible. This affords you the opportunity to educate yourself on the active buyers and to get the practice ready for sale without any stress or looming health crisis.
Your business’ accountant and lawyer will form an integral part of your team, so will your valuator and broker/sale advisor.
It is recommended to touch base with your accounting firm to ensure that financial statements and tax filings are in good shape and potentially undertake some tax planning. Tax planning is particularly advisable if your practice accumulated significant cash/investment balances or if your company has personal assets or real property that will not be included in the sale. In some cases, tax planning can save practice owner hundreds of thousands of dollars, particularly with regards to your company’s shares eligibility for the tax break on sale known as the Lifetime Capital Gains Exemption.
It is also beneficial to connect with a valuator/practice sale advisor ideally 2-3 years prior to your desired sale date. This will help you to stay informed of any changes in the market over the next few years and perhaps undertake some actions to increase marketability and value of your practice.
I would recommend that a Calculation of Value is completed at this time. This will provide a preliminary indication of your practice value as well as highlight areas for improvement. Consider for example that improving cash flow in a few key areas by $20,000 could result in the value of your practice increasing by as much as $100,000 - $200,000. However, this is only possible if the cash flow improvement is sustainable in the long run. In other words, temporary cash flow preservation strategies such as paying lower than market salary to the owner or lower than market rent will typically be adjusted in the calculation of value and thus will not result in the desired increase in the practice value. Please see more information on this in my Practice Valuation and Practice Fine-Tuning Blog Post.
3. PREPARE
When it comes time to list your practice for sale, preparation is the key to the optimal deal. If you have a large successful practice, multiple buyers will be interested in making you an offer. As part of their negotiating strategy, they might put a short deadline on their offer, or they could make a strong personal appeal through dinner or another face-to-face meeting. Without adequate preparation and representation, it will be difficult to know if you should accept the first offer that you receive. Furthermore, it will be difficult to know what your practice is worth and who the best purchaser of your practice might be.
In preparing your practice for sale, I would recommend updating the valuation of your practice (particularly if you took the steps to increase your practice value, as discussed above), obtaining an appraisal of your property (if applicable), and preparing clear answers to the questions that your potential purchasers will be thinking about.
In updating your practice valuation, your advisor will calculate its cash flow (also known as EBITDA, i.e. earnings before interest, taxes, depreciation and amortization) as well as a potential value range given your practice’s specific investment profile. Strategically, you may choose not to share the whole valuation with prospective purchasers but rather provide them with your EBITDA calculation. Generally, there is no benefit in keeping cash flow/EBITDA a secret. In fact, sharing your cash flow calculation allows you and your advisor to correctly identify and exclude any discretionary and personal expenses, ensuring that the purchaser is basing their valuation on the highest possible cash flow.
Secondly, I would recommend sitting down with your advisor and thinking through the major aspects of your business, identify risks and how they could be mitigated and document opportunities that may accrue to the future owner. Depending on the advisor, they may document it in a formal marketing package and/or use this knowledge throughout the negotiating process.
- Clients: Is the number of clients growing or expected to grow or is it on the decline? What is causing the growth or decline (e.g. addition of a new doctor to the team, new development in the area etc.)? What are your clients saying about you on social media websites such as google and yelp etc.? How many new clients does the practice get on average per month? What is the client retention rate?
- Professionals: Is there a sufficient number of doctors to service the current and future demand? How easy or difficult might it be to recruit doctors and AHTs/nurses given your location and the type of practice (mobile, mixed, specialized, focused on alternative medicine)?
- Location: Is the population in your area growing or on the decline? What are the economic drivers in the area and what is the outlook for these sectors of the economy? How does average income in the area compare to the Canadian average?
- Competition: What are the competitive advantages of your practice? Do you differentiate based on service, client relationships or price? Who are your competitors? In the case of corporate consolidators, are there any other practices under their ownership located nearby?
- Management: Was the practice well-managed in the past three years? Were various cost ratios to revenue and profitability to revenue in line with Canadian averages? Was staff turnover low or high?
Etc.
Once the preparation is complete, it is time to go to the market and commence preliminary discussions with potential purchasers.
4. NEGOTIATE
Negotiations involve the discovery of the respective parties’ objectives, price, and terms. An optimal deal will only be possible if this step of mutual information sharing is not omitted.
Well-thought out and thorough communication between the buyers and the seller (or seller’s representative) will prevent the parties making incorrect assumptions about their respective positions and terms. For example, in the case of related party real estate ownership, it is important to clearly communicate your desired rent. Likewise, it is important to agree on your post-closing involvement including your future hours and compensation and the length of your contract.
Either the owner directly or their advisor could conduct these exploratory discussions. When selecting an advisor to represent you be sure to find out what your advisor’s preferred negotiating style is, what your advisor will expect from you, how they will be soliciting interest in your practice and how they will be communicating with prospective purchasers. Be sure to select an advisor who will be a passionate advocate of your practice and who will be willing to dedicate the time and effort needed to ensure the best possible deal is realized.
Negotiations usually end with a signed Letter of Intent to Purchase; this document is also often called a “Term Sheet”.
5. LEGAL, DUE DILIGENCE AND TRANSITION
Once the Term Sheet is signed, your purchaser may conduct due diligence procedures, which usually involves gathering a number of documents to supplement their initial purchase investigation. Legal documents are also prepared, reviewed and signed at this stage. If the purchase is an individual, the purchase contract will likely be subject to financing.
After the final Purchase/Sale Agreement (and in some cases Lease Agreement and/or Post-Closing Employment Contract) is signed, a staff announcement could take place and the preparation for transition would begin. A tactful and thoughtful way of announcing the sale to your staff should at a minimum address the continuity of their employment and compensation as well as how the sale is expected to be communicated to the clients of the practice.
If you have a Practice Manager, you could delegate the majority of the subsequent transition steps to them. Amongst other things, these steps will involve an inventory count and gathering specific documents to transition accounting and payroll functions.
In the context of the corporate sale, depending on the consolidator you have selected as your purchaser, a whole practice management system transition may take place to align the practice’s information systems with those of the other practices in the corporate consolidator’s group, or the practice may continue operating with the existing systems. Similarly, depending on the corporate purchaser, the branding of your practice may change, or the corporate ownership may remain completely hidden in the background.
CONCLUSION
In conclusion, an advisor can be of help in preparing and navigating through a sale transaction ensuring the best possible price and terms for the seller. Seasoned advisors, who have been involved in numerous deals will be aware of the requirements and negotiating style of each active corporate buyer and will be able to prevent costly negotiating mistakes. A trusted advisor will also be of great help in a private sale to keep the transaction on track and guide both parties towards completion in an organized and timely fashion.
Don’t hesitate to contact me, should you have any questions about selling your practice, or would simply like to get free no-obligation information on the current state of the market.
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