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

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Nov 01, 2010

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.