Practice buy ins: entrance strategy or early exit strategy (Proceedings)

Exit strategy or practice succession planning can include every aspect from financial planning for retirement to where will I find a buyer. This retirement financial aspect would include planning for the future practice sale value. That is another session not covered in this topic.

This session is to study how and where buyers are found and how to make a sale with a potential buyer.

Buyers either are third party unknown persons found by advertising or they are "inside" associates or other staff persons currently working in the hospital. The smaller the practice gross revenue and the lower the number of doctors the more likely there will have to be inside buyers. Corporate third party buyers usually prefer at least a three doctor practice grossing one to two million or more per year.

In simple technical terms, the way to make a deal is to meet the requirements of contract law. This requires a Buyer to make an offer to buy, or a Seller to make an offer to sell and the two parties to make an agreement on the terms, at which time the Buyer will provide consideration (money or sweat equity) to make it a binding contract to purchase.

In simple technical terms, the way to make a deal is to meet the requirements of contract law. This requires a Buyer to make an offer to buy, or a Seller to make an offer to sell and the two parties to make an agreement on the terms, at which time the Buyer will provide consideration (money or sweat equity) to make it a binding contract to purchase.

One approach to this transaction is that the offering party can make a Letter of Intent that is non-binding, but gets the proposed terms on the table. An alternate plan, for an offering party, would be to make a Purchase and Sale Agreement that, when signed by the other party, would be a binding agreement, even though subject to contingencies.

This Purchase and Sale Agreement could be for all the assets or for any entity that is being sold; however, if the business is a corporation this document would be called a Stock Purchase Agreement, or a Membership Purchase Agreement, if the selling entity was a LLC or PLLC.

Another issue is whether or not the real estate is going to be sold or leased. A last but not least option, if both parties could agree, is that the practice and/or the real estate could be leased with an option to purchase. This is not very common for the business entity, unless there is a health issue with the Seller.

Usually the offeror on the Letter of Intent or Purchase and Sale Agreement is the Buyer. After the Buyer makes the Letter of Intent or Purchase and Sale Agreement, the offer requires a willing Seller to agree. The transaction can be finalized with consideration whether the sale is to be a contract purchase or a cash-out sale with financing.

The consideration of cash or financing to affirm this transaction may be provided through the Buyer's savings or Buyer's equity in a home or any other asset. The Buyer may obtain a loan from a relative or from a third party lender, whom may provide money up to 100% of the price. Usually the Lender will not loan 100% of the sale price without some advanced loan fees, which require at least a minimal amount of cash up front. This cash may be reimbursed to the Buyer upon closing of the loan. In addition, the final two ways to meet the consideration is for the Seller to agree to finance the sale, or for the Buyer to have a guarantor sign on the loan to get third party lending.

Financing is commonly through national banks with specialty lending departments for lending on intangible assets. The private lenders would include, of course, the Seller or relatives or occasionally Angel financers, which are third parties that like to get businesses started, if they can be found for a veterinarian hospital. Usually they require a large business before they will become involved, which may require several veterinary hospitals to be in a group.

The advantage of private financing is that usually you will get a lower interest rate and you are more likely to get fixed interest rather than variable. With private lenders, it is important for the Buyer to be sure that the private lender is not involved in the operations or management of the business if the sale is for 100% of practice. However, an Angel will want to be involved in management. The Angels are usually just smaller investors than venture capitalists. If the Seller is financing the purchase and it is not a 100% sale, then third party lending will still be required, if the Buyer doesn't have sufficient cash. In this case it is important to note that the Seller will be required to subordinate security so the third party lender gets 100% priority security interest.

If the Seller is financing only a portion of the sale, it is important to get the Seller to be financing the business purchase, so that the Buyer can use the real estate as the primary security. This will allow for a longer term financing at a lower interest rate. If loans are required for the business, without the real estate as part of the purchase, the term will be from five to ten years with possibly a short-term fixed rate before changing to a variable interest rate. Usually the fixed rate will be no more than three to five years.

If you are borrowing money for the business and the real estate, you may get a blended loan for the business and the real estate, which would extend the payoff terms for the business loan and give a longer-term fixed rate. This may be good or bad, depending on the cash.

If the Buyer is getting a loan for the real estate purchase, the term would be 20 to 30 years, with interest fixed or variable, for long term; but occasionally it may be fixed only in the short term and then converted to variable, or if it stays fixed, it will usually require a rate adjustment every five years.

The critical base line of whether to purchase or not must be based on many factors including the Buyer's desire to be in the geographical location of the practice, and that the style of medicine practiced at the hospital is in compliance with the style of medicine to be practiced by the Buyer. Other than these personal issues, about geography and style of practice, the other biggest issue in purchasing a practice is to know what the fair market value of the practice is, and to compare that to an alternate perspective or feasibility study value from the Buyer's perspective, assuming the Buyer has rights, knowledge and power to change management. This is a given as long as Buyer is purchasing 100% of the practice.

A Buyer's Feasibility Study may allow the Buyer to pay more than fair market value as a negotiated price, relative to terms, if the practice can be improved for more profitability, essentially providing more cash flow to the Buyer. The Seller's employment is a part of the negotiation that is very important, besides price. The purchaser and seller will have to negotiate the work schedule (between the Buyer and the Seller) and the cash needs of the Buyer. If Seller finances, Buyer and Seller negotiate whether or not the Seller is going to have the first security interest or is willing to subordinate. If the Buyer is intending to pay for this practice from business proceeds, it may require changes in management and the fee schedule. This will require the Seller to defer management decisions to the Buyer.

After these major issues are met and the individual geography needs are met by the Buyer, the Buyer must undertake due diligence. Due diligence will include the factors listed above plus it will require the Buyer to review several years of management history, including quality medicine statistics, equipment, the fee schedule, and the review of invoices and medical records.

The review of the medical records is to ascertain the compliance with medical standards and to see the quality of medicine delivered. This should at least include reviewing the medical records for the in-depth diagnostics that have been used, the methodologies of treatment, and client rechecks whether charged for or not. These are indications of whether or not the clients have been compliant with the recommendations of the doctor for needed medical care.

The minimum medical quality review should include the number of injections per patient (on a sampling of the records), the number of diagnostic tests, the number of x-rays, and the number of prescriptions. This basic data is important to ascertain some degree of the quality of medicine.

In summary, practice acquisitions require much homework, research and due diligence by the Buyer, but the purchase and sale should not be held up by a Seller's firmness or inflexibility in price, if the practice will provide ample cash flow. The purchase can be a very big success for the Buyer, if the Buyer is able and willing to make changes to raise cash flow, providing there is sufficient client traffic.

The entrance strategy is for an associate doctor to plan and instigate offers to purchase at least 10% as soon as possible, then proceed above to purchase more each year.