Exiting or entering into 100% practice ownership: know the strategies (Proceedings)
Buying or selling a veterinary practice generally is a long and arduous process. Preparation and a good lawyer are key to smoothing the bumps along the way.
How well you plan determines whether you will control the process or vice versa. Beyond identifying what is to be sold and the purchase price therefor, here is an overview of the main planning issues:A. What Seller should be doing. Future retirees should note that it can take a decade to properly prepare a practice for sale.
• Tax. Find out how the sale price will be taxed. Tax planning may require transformation of the practice legal structure and long waiting periods to optimize tax on sale. Bear in mind that the buyer may not accept the structure you wish to use for the transaction (e.g., he may prefer to buy assets rather than an interest in the practice entity.)
• Practice Appraisal. To increase practice profitability and sales price, it may be worthwhile to get an appraisal. Implementing the appraisal's recommendations may take several years. From the buyer's perspective, a purchase without an appraisal may mean the practice does NOT have the cash flow to fund the purchase payments. If the buyer defaults on the payments, seller may have to take back practice, long after retirement.
• Cleaning Up. Consult with your lawyer to see if there are any liabilities that should be taken care of before the sale (e.g., settle a claim). You also need to address any personal guarantees you have given to the business, and third party claims on any assets to be transferred (such as spouse and secured lenders). If the practice entity owns the real estate, you may need to divest it (at what tax cost?) back to yourself or another entity you own because the buyer may be unable to afford to buy both.
• Financing. Many potential buyers can't afford to pay cash and can't get bank loans on acceptable terms. Consider whether you should provide financing by taking buyer's promissory note (secured of course) for a portion of the purchase price.
B. What Buyer should be doing. Buyer's planning phase usually is much shorter than seller's. Try to minimize preparation expenses until you are reasonably sure that you have a deal with the seller. If the deal is aborted, you want to be as little "out-of-pocket" as possible.
• Hiring Counsel. When hiring counsel, trust your instinct. If you don't feel comfortable with him or her, get another one, there are plenty around. You find a good lawyer the same way you find a good doctor: by word of mouth. Your lawyer should be at least as smart as you are. Avoid lawyers that not nothing about assisting buyers purchase medical practices.
• Tax. Find out how the sale can be structured to minimize taxes down the road for the new owner(s) and the practice, including taxes when you sell or withdraw from the practice. (Remember every buyer is destined to be a seller.)
• Due Diligence. You don't buy a house without visiting it, nor a car without a test drive. Buyers need to spend time at the practice to "kick the tires." One of the most important goals of due diligence is to make sure buyers are not picking up hidden or poorly identified liabilities. Due diligence allows early detection of potential problems, so that the parties can address them...or separate. Not infrequently, good due diligence leads to a reduction in purchase price.
• Financing. If you can't pay cash, you need to line up financing (or be prepared to ask the seller for same) well before the sale.
• Co-Ownership Issues. If you are just buying a portion of a practice or joining with other partners to buy a practice, there are many co-ownership issues that need to be addressed. Like marriage, co-ownership works a lot better if the principal terms governing the relationship before getting hitched. At least as much time and effort should be allocated to properly establishing and documenting your relationship with your partners, as to the purchase itself.
• Investment Vehicle/Practice Structure. Unless you are buying into a pre-existing structure, consult with your lawyer to find the investment vehicle or practice structure best suited to fulfill your tax, financing and (co)ownership goals. (In making this choice, do not omit to factor in you succession or exit strategy.) Even if buying into a pre-existing structure, be aware of the consequences. For example, stock purchases are riskier than asset purchases because all of the liabilities of a corporation automatically are transferred with the stock, whether or not such liabilities were disclosed to buyer.
C. What Seller and Buyer should be doing Together.
• Employees. The practice's employees constitute its most valuable asset by far and it's in the interest of both parties that the transition take place smoothly. For the buyer, smooth transition is critical, since the departure of one or more key employees can cripple the practice. While legally (to avoid trailing liabilities), the buyer will insist that all employees be terminated prior to the sale (and to the extent the buyer wants to retain them, rehired after the sale), it is up to the parties to work together to ensure that the ownership change disrupts the employees as little as possible.
• Contracts. In asset sales where contracts are to be transferred (e.g. real estate and equipment leases), the consent of the other party to the contract is required. Obtaining such approvals is often easier when both buyer and seller approach such other party together (although as a contractual matter, it is almost always the seller's responsibility to get these consents).