Frequently Asked Questions About Brokerage

Why is it important to use a licensed broker?

Why choose Practice Consultants?

Is it fair for you to represent both the seller and the buyer?

When I sell or bring in a partner, what's the right price?

Are Price and Financing the same thing?

Should I carry part of the financing?

How long will it take to sell my practice?

Can I stay in the practice for a while after the sale?

How does the buyer's financing affect me?

How do I assure that the transaction is binding?

As a buyer, why do I need to wait to see some information until after I’ve made an offer?

Why should I buy the seller’s Accounts Receivable?

What other costs will I incur?

How does selling or buying affect my tax situation?

Why is it important to use a licensed broker?

Buyers have a greater trust in practices that are professionally represented. The evaluation and participation by a neutral third party lends credibility to the worth of the practice. This is especially important if the buyer is seeking funding through a financial institution.

Additionally, licensed professionals know the proper procedures to assure an equitable and binding transaction. As a seller, you want to be sure there are no lingering liabilities, and as a buyer, you want be sure there are no surprise creditors that could make a claim against you. All large businesses use the services of professional brokers and/or merger-and-acquisition consultants, not because their transactions are necessarily more complex, but because these businesses recognize the value of an objective expert to direct the process and assure that all issues are appropriately addressed.

In every-day life your home and your automobile are typically your largest assets. However, when it comes to practice ownership, the practice value often takes first or second place. You want to secure the best possible advisor for the sale or purchase of such a large asset.

The process of buying or selling can be time consuming. Licensed brokers have the experience and specialized education required to pass the regulated licensing requirements, so they can navigate the process of buying or selling a practice and guide you through it. Even more important, licensed brokers know how to properly value practices and structure terms to ensure that both parties are getting a fair deal.

In addition to the above, a broker…

		makes it easier for you to maintain confidentiality. Every potential buyer must sign a Confidentiality Agreement prior to receiving information beyond what is in the publicity text. And, of course, there are no potential buyers calling your office.
		properly recasts financial statements for use by potential buyers and lenders.
		has marketplace and valuation knowledge.
		provides an overview of tax consequences prior to the parties consulting with their own accounting professionals.
		clarifies what is being sold. This sounds obvious, but it too often can become a sticking point.
		has a database of prospects.
		has an understanding of various financing options, and contacts with appropriate specialists and lenders familiar with the broker and clinical transactions.
		uses negotiating skills and an understanding of the emotional issues of the parties to guide them to a fair arrangement.
		acts as the buffer between the parties, thereby allowing the parties time to make reasonable decisions.
		has the experience and expertise to better control the issues that arise.
		coordinates and facilitates seller and buyer activities regarding the lender, landlord, accountants, attorneys, insurance agents, and the escrow/closing firm.
		is not emotionally tied to the business, so he can maintain objectivity during the entire process.

Selling a practice is not as simple as putting an ad in the trade publications. It's a complex, legally binding transaction with potential repercussions far into the future. Just as you would turn to a real estate professional when it comes time to sell or buy a home, turn to a business brokerage professional to sell or buy a practice.

Why choose Practice Consultants?

Superb client care, vast experience, unimpeachable ethics.

Client care: We pride ourselves on fast response to our client's questions, and try to anticipate their needs rather than wait for problems to arise. Please read what clients have said about us on our Testimonials page.

Experience: Practice Consultants has been in the brokerage business since 1989. The backgrounds of Our Team are impressive, to say the least: All of us have education beyond our baccalaureate degrees, including two doctorates and an MBA. All of us are licensed brokers or agents. We have decades of experience in the world of optometry and in the world of business. We can honestly say that we are not just experienced professionals, we are experts.

Ethics: Each of us is a licensed broker or agent and must abide by our profession's ethical standards. But for us, that's not enough. We specifically promise that we will be fair to both buyer and seller. We strive to exceed our clients' expectations so they will want to use us again in the future, and will refer others to become our clients.

Is it fair for you to represent both the seller and the buyer?

We are occasionally asked how it can be fair to represent both buyer and seller, as we do in most transactions. From a price standpoint, we have to set the transaction amount where financial institutions will fund it; they are truly independent and if the price is too high, they won't provide the money. And if the practice doesn't sell, we don't get paid anything.

Although price is the obvious issue, there are many other considerations that go into a transaction. Frankly, we think it's better for our business to have both parties claim the transaction was fair, than to have just one of the parties happy and the other party dissatisfied.

When I sell or bring in a partner, what's the right price?

First it is important to recognize the distinction between price and financing. See Are Price and Financing the same thing?

Determining the price is much more complex than most doctors realize. Many want a simple percentage-of-gross figure. Others want to simply multiply the net by some factor. Both of these can be done in the general sense, but neither is accurate for a specific practice. It takes experience, expertise, and knowledge of the marketplace to determine a fair price.

In short, a practice must demonstrate economic reasonableness as both an investment AND a livelihood.

Here are some very broad boundaries. Most practices sell for between 45% and 65% of the latest full-year gross revenue. Yes, some sell higher and some lower, but most are in this range.

For more insight regarding valuation, see What is the appraisal formula?

Are Price and Financing the same thing?

Price is the value of the transaction in total. As an example, a practice that sells for $200,000 plus inventory of $30,000, has a price of $230,000. Price usually excludes accounts receivable, accounts payable, and cash in accounts; the seller keeps them. It also assumes that the seller pays off all equipment leases and other liabilities. Price, then, is the "clean" transfer value.

Financing is how the money changes hands. It may be seller financed (often called a take-back note), bank financed, or a mix of lending arrangements. Financing also includes adjustments to the price that reflect the buyer handling carry-over items. For example, if there is an equipment lease that will continue with the new owner, the value of those future payments (that the buyer will be paying) will reduce the amount of cash that changes hands at closing; the buyer has agreed to make those payments in return for consideration (putting up less cash) at closing.

Should I carry part of the financing?

The buyer is going to pay interest to somebody, why not you? Seller financing is a way to put a few more dollars in the pocket of the seller, without any additional cost to the buyer. On the other hand, the seller now has to service the note, meaning that you will need to keep track of payments and go through a collections process if payments aren't made.

Carrying a note opens up your practice to buyers who may not be able to secure conventional financing but are still “safe” borrowers. This is especially applicable if your practice is small and/or cannot demonstrate (because of creative tax returns) sufficient profitability; it may be impossible for any buyer to secure conventional financing.

Seller financing is also fast! A conventional loan may take up to a couple of months to arrange, whereas financing through the seller may be arranged in a couple of days. If either you or the buyer is in a hurry, this is the way to go.

There are also tax consequences, usually favorable, to carrying financing. You will pay income taxes on any profits from the sale that are RECEIVED each year; seller financing spreads out your tax liability over the life of the financing. Consult your tax advisor for more details; also see How does selling or buying affect my tax situation?

Ultimately, of course, there is the risk of default resulting in the seller getting the practice back after it has been reduced in value. For transactions that are priced properly and structured properly to begin with, this risk is very, VERY low; but it's not zero. If the worst does happen, you will have received the down payment and some number of monthly payments. Although certainly not pretty, after re-selling the practice there is a good chance you will end up getting most of the money you originally anticipated.

How long will it take to sell my practice?

This can be the most unsettling aspect of selling your practice. Although many buyers are looking for practices, we need to make a match with the right person. He or she may see our ad right away, and the practice could be sold quickly. On the other hand, a buyer that wants your location, your size practice, your style of practice, your practice's look and feel, at a price they can accept, may not yet be ready to buy. It could take many months for the right buyer to begin his/her search.

In general, up-scale urban and suburban practices tend to sell in the shorter time periods. Less desirable urban locations, and all rural locations, tend to take longer.

Once a buyer is found and a deal is struck, the process leading up to actual transfer of ownership typically takes six to eight weeks. There are documents to prepare and sign, notices that must appear in newspapers in some states, financing arrangements to be established, lease terms to be settled, tax and lien clearances must be received, and many other tasks that take some time to finalize. During all of this activity, the buyer needs to be performing due diligence, without disrupting the day-to-day operation of the practice.

Can I stay in the practice for a while after the sale?

This depends on the desires of the buyer and the financial ability of the practice to support both the buyer and you for a period of time. For a small practice this can be very difficult.

How does the buyer's financing affect me?

If the buyer is seeking funding from the commercial lending arena, your financial statements and tax returns will need to demonstrate the ability of the buyer to make the loan payments. Additionally, of course, the buyer needs to be creditworthy as an individual. (Recent OD graduates, even though they have substantial debt related to their education, are usually credit worthy in the eyes of most lenders.)

If you are considering financing part of the transaction, this obviously will affect you even after the transaction closes. See the related topic Should I carry part of the financing?

How do I assure that the transaction is binding?

Transferring ownership of a business requires many licensing, tax, and regulatory criteria to be satisfactorily documented. Practice Consultants processes its transactions through licensed escrow/closing parties as a safeguard for our clients. This assures that there is no lingering liability for the seller, and no surprise liabilities for the buyer.

As a buyer, why do I need to wait to see some information until after I’ve made an offer?

There is a separation of information between that used to DECIDE about making an offer, and that used to VERIFY the facts you were given. The offer contract would include a contingency that lets the buyer out of the contract if the results of the verification process are not satisfactory.

Due diligence is that verification process; it’s an investigation that serves to confirm all material facts regarding a sale. It includes reviewing financial and practice operations records to satisfy the buyer that what he/she was told as the basis for the offer is true. The buyer may review any records the practice has: checkbook statements, invoices, day sheets, 3rd party payment reports, etc. If this analysis shows that the financial information the buyer was given is substantially different, the buyer may retract the offer and get back his/her deposit.
 
Keep in mind, however, that this process is not for decision-making regarding interest in the practice. Due diligence takes place after an offer has been made and accepted, and it’s purpose is verification.

As an example, it is reasonable to see the tax returns to understand the reported revenue and expenses. You, as a potential buyer, will use that information as part of the basis for making an offer. But you don’t need to see the bank statements at that point; you presume the tax return is correct. After a deal is signed, then you may look at the bank statements to verify that they approximate the revenue and expenses claimed; that is part of due diligence.

Why isn’t this data shared earlier in the process? For three main reasons, as follows.

1. The seller doesn’t want to share such details with a number of potential buyers so that, in effect, anyone who expresses interest may grab the data. A nearby competitor may play the role of an interested buyer, only to try to get detailed competitive information.
2. It can be a significant time burden on the seller and we don’t drag him through it unless we have a deal to sell the practice.
3. This process usually includes some documents that show patient names; access to such documents needs to be minimized.

Why should I buy the seller’s Accounts Receivable?

If the buyer does not buy the seller’s Accounts Receivable, the buyer has a responsibility to forward payments that belong to the seller as those payments arrive. Both buyer and seller need to keep track of this activity. At the same time, since most money arriving shortly after the buyer takes over belongs to the seller, the buyer needs a significant amount of working capital to pay the bills. Finally, although the buyer must forward what comes in, he does not have responsibility to try to collect funds; the collections process remains with the seller.

By buying the A/R along with the practice, all of these hassles are eliminated. The buyer simply keeps the money coming in, proving working capital. The buyer doesn’t need to keep track of or forward payments. Likewise, the seller doesn’t have to track them and doesn’t have to worry about trying to collect delinquent payers.

Typically the buyer acquires all receivables, but pays 95% of the less-than-90-days amount. The buyer gets the cash immediately and avoids all of the record-keeping and collections activities. Note to sellers: The A/R buyout is not subject to our commission percentage; it all gets passed along to you.

Also recognize that this has nothing to do with payables. The seller maintains responsibility for payables for services or items received prior to close of escrow, regardless of when the bill shows up.

What other costs will I incur?

Escrow/Closing - Based on the size and complexity of the transaction, the total may be as little as $2,000 or may be as high as $8,000. We can estimate the fees based on our knowledge of your transaction. These fees are usually split equally between the buyer and seller.

Professional Expertise - Fees for your own legal and/or financial advisors, if you choose to use any.

How does selling or buying affect my tax situation?

As part of a sale transaction, the buyer and seller must agree on how the value of the transaction is to be treated for tax purposes. We provide you with a draft allocation that you may use in discussing the transaction with your tax advisor. After those discussions, we will submit the final agreed allocation to the escrow/closing process.

Only your own tax advisor knows your particular situation and the details regarding IRS and state taxing authorities regulations. As a general rule, the following may be useful.

Seller -The seller will pay income taxes on any profits from the sale that are RECEIVED each year. Seller financing spreads out the seller's tax liability over the life of the financing. Caution: Recapture of depreciated assets may occur in the year of the transaction, regardless of the financing terms.

	Capital Gain	Ordinary Income
Trade Name
Goodwill
Patient Records
Leasehold Interest*
Leasehold Improvements
Covenant Not to Compete
Supplies
Inventory
Furniture**		usually
Fixtures**		usually
Equipment**		usually
*Value of the location, but only if lease payments are below market value. ** No tax up to basis, ordinary income tax up to original cost, and capital gain over original cost.

Buyer -The buyer will reduce his/her income tax liability based on these deductions.

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