AAOE News

Selling Your Practice Interest
Robert Wade, JD

Sooner or later, you are going to leave your practice — one way or another. In group practices, ophthalmologists usually deal with the disposition of their practice interests in their shareholders’ agreements or buy-sell agreements. That way, when they are ready to head off to greener (or less-hectic) pastures, they know they are going to get value for their practice interests. But what about a solo practice? What option, beside just closing the doors and turning off the lights, do you have? With proper planning and some assistance, you can sell your practice. (Now if you’re in a group practice, you may think that you need read no further, but many of the issues discussed below come into play in the negotiation and documentation of buy-sell arrangements). What follows is a brief “how to” guide to go about selling your practice.

Finding a buyer: Timing and luck can play significant roles in finding a buyer. Be prepared. Buyers take time to locate, so you need to plan ahead. It is not realistic to expect you can sell and retire in only a couple months' time. Patience truly ends up being a virtue for prospective sellers. You should count on giving yourself an absolute minimum of two years before retirement to find the buyer, negotiate the deal, close on it and transition the practice to the purchaser. More time is better, though. Ideally you should think in terms of a three- to five-year window prior to that date. Incorporate some flexibility into your thinking, and the pool of buyers will be bigger.

I know what you’re thinking, though: five years? Yes.

You spent more than double that time to acquire the tools you needed to enter this profession, develop and build your practice. All that took hard work and time. Don’t let the day-to-day “busy-ness” of practice keep you from taking the steps and time to preserve the value of your investment. And speaking of “value,” you’ll attract more potential buyers if your pricing is appropriate. Ophthalmology practices do sell, and often for a substantial sum — but you have to be realistic. The closer you get to your anticipated retirement, the more flexible you will likely need to be in your negotiations. The less attractive your location, the more this will apply. Everyone wants to go to New York or Los Angeles, but people need to be sold on places like Omaha. Consequently, you are going to have to sell the benefits of your location over hot spots. Even popular cities have their issues, though, so don’t assume that because you are in Beverly Hills or the Hamptons that you’ll be able to command top dollar. Get a realistic appraisal of the value of your practice by someone who knows the marketplace and price accordingly.

Where do you find the buyers? The American Academy of Ophthalmology lists practice opportunities on its Professional Choices [http://www.aao.org/careers] Web site, as do many other state and local ophthalmology societies and even specialty society Web sites. Advertising in journals, online and in print, as well as the various practice management publications is an option as well. There are also brokers who can connect buyers and sellers, but their fees can amount to as much as 6 percent to 10 percent of sales proceeds. Word of mouth is a cheaper option that can also be effective, but you should always proceed with caution. On the up side, in competitive markets, buyers often come from around the corner — other local practices looking to grow and solidify their base. However, once word gets out in your community that you are looking to sell, rumors can spread that — even though your timeline is for retiring is years away — you’re closing up shop next week. Patients who get wind of this may begin shopping around for a new ophthalmologist.

The Process. Once you’ve located a prospect, the process from the initial point of discussion to closure of sale should be as follows.

Confidentiality Agreement. The parties should immediately enter into a confidentiality agreement. The confidentiality agreement serves several purposes. It enables you to provide the buyer with the requisite practice information for his or her due diligence without fear of disclosure or dissemination of such information to others. Typically, it will require that, in addition to keeping all the information handed out confidential (with penalties for breach of confidentiality), all materials handed over to help with the due diligence be returned if an agreement does not go forward. This protects each party from having information about the potential transaction end up in the hands of unintended recipients (e.g., colleagues, employers and the like). For example, a buyer may be worried that word of his/her interest in purchasing a practice could spread to his/her employer; the seller may worry that word could spread to his/her colleagues within the community.

Buyer Due Diligence. Once a confidentiality agreement is signed, the buyer will want to perform what is known as “due diligence” — kicking the tires, so to speak. A serious prospect will want to proceed with a review of all the relevant practice information detailed below and probably more. At a minimum, you should be prepared to give a prospect the following information almost as soon as the confidentiality agreement is signed. A serious and savvy prospect, which you want, will always ask for this information.

• Copies of the practice income tax returns for the three (3) most recent fiscal years, as well as copies of accountant prepared financial statements (e.g., income statements, balance sheets and depreciation schedules) for the same period.
• A copy of the practice’s most recent interim financial reports (e.g., balance sheet and statement of income and expenses), even if internally generated.
• Any statistics that you maintain on practice volume, such as new patient starts, surgical cases, etc.
• An aged statement of accounts receivable, broken down by payor as well as provider, if applicable.
• A list of all practice payors, including managed care payors, and a percentage breakdown of their makeup of the practice.
• A detailed listing of the practice’s tangible assets, showing acquisition date and cost.
• Information containing the community and number of ophthalmologists, optometrists (and practices) and practice patient demographics.
• Copies of any office and other (e.g., equipment, computer) leases.
• Copies of any other contracts (e.g., equipment leases, physician, paraprofessional, etc.).
• A list of employees, dates of hire and wage information.
• A list of current benefit and retirement plans available to employees.
• Information regarding business insurance policies in place for the practice.

This information may lead to other requests for information. (Note also: if you have multiple “components” to your practice, such as real estate, an ambulatory surgical center and/or an optical shop, all this information will need to be available for review on those entities/components as well.) All this information will enable the buyer to have the practice appraised and make informed decisions about the various terms and conditions going into any agreement of sale.

Letter of Intent (Term Sheet). Sometimes, contemporaneously with the execution of a confidentiality agreement, but more often after the completion of some due diligence, you and the prospective buyer will negotiate the basic business terms. These include primarily the following terms:

Purchase Price. The buyer will acquire a sense of the practice’s value after having reviewed the due diligence materials. You, hopefully, have already had the practice appraised prior to putting it up for sale and know beforehand the reasonable range of values constituting its worth. Note that the purchase price should reflect the practice value — subject to different opinion, of course, but also influenced by the other deal points discussed below.

Payment Terms. How will the purchase price be paid? If seller-financed, what are the terms (e.g., length of payment period, interest rate, security/collateral)? Ideally, you want to require that a buyer pay all cash and acquire any necessary financing through a third-party lender. However, some buyers cannot pay cash or get the financing to do so. Sellers who “take back paper” usually require a pledge of collateral of the buyer’s practice assets (or stock, as the case may be), a personal guarantee of payment from the buyer … perhaps also the buyer’s spouse.

Included/Excluded Assets. Assuming the more common “asset” transaction, one question is whether accounts receivable are to be retained by seller. Typically, because of Medicare reassignment prohibitions, accounts receivable are not sold. The question then is, will these be collected by buyer and, if so, will there be a charge to do so? Will any other assets be excluded from the purchase? References to “stock” transactions hereinafter are meant to include transactions involving ownership interests in practice entities, be they membership interests in a limited liability company or partnership interests in a partnership. The pros and cons of an asset transaction and a stock transaction vary between the seller and buyer. (Note that if the seller is a sole proprietor, he or she has no legal entity and the transaction must be an asset transaction).

Post-closing Obligations. Will there be a restrictive covenant? Your response to this question should be a resounding “yes.” While restrictive covenants can be difficult to enforce in the employment setting, they are usually enforceable in the practice sales setting. How long will you be staying on to help transition the practice? For the typical sale — assuming the seller is looking to retire as soon as possible — I recommend he/she stay on board through the one-year anniversary of the practice sale. Some sellers believe they cannot legally stay onboard beyond the one-year anniversary. Indeed, the Medicare Fraud and Abuse provision stipulates that the seller must not retain or obtain a professional position to make referrals one year following the date of transfer. This provision is a “safe harbor”. However, being outside a safe harbor does not imply that the seller cannot stay on board beyond a year. There are ways to structure the sale in stages, if need be. If you do plan to stay beyond a year, be sure to discuss this with your attorney. The longer the seller stays on, the better the opportunity for patients to accept the “new kid on the block” while having the comfort of the old one.

The Basic Deal Structure. Is this a stock sale or an asset sale? To say which is an important distinction beyond the ken of this article, but suffice it to say that sellers usually want to sell stock and buyers want to buy assets. The tax and liability consequences of this decision are quite significant. That said, most deals we do end up being asset sales. The seller must thus take care to look for other ways to minimize taxes.

Transaction Date. The parties must, of course, agree as to when the transaction will take effect. Often, the parties desire to have the transaction occur as soon as possible. More often than not, the desired date is far too soon — particularly in an asset transaction, where the buyer must ready his/her practice entity for the purchase and subsequent operation of the practice. Furthermore, when deals are third-party financed, the banks or financial institutions have their own timeline for due diligence, issuing commitment letters and scheduling a closing. Even deals that are seller-financed still often require the buyer’s use of borrowed funds to finance start-up and early operations since, as discussed, sellers usually retain accounts receivable.

The Formal Purchase Agreement. Once the letter of intent has been agreed to, the seller and buyer can set their sights on negotiating for their signature the formal purchase agreement. The purchase agreement will, of course, memorialize the business deal as covered in the letter of intent. However, the purchase agreement also serves a much broader purpose. First, the business terms in the letter of intent are often agreed to in cursory fashion and need further clarification. Additionally, the purchase agreement provides for a closing date. This typically is the same as the transaction date, as noted above. The purchase agreement also usually contains a litany of conditions — both buyer- and seller-initiated — which must be satisfied after execution of the purchase agreement, but on or prior to (and sometimes, after) the closing date for the transaction to “go through.” The purchase agreement also contains representations and warranties from the seller about the assets to be transferred (essentially, the practice) and will contain protections for each party as to liabilities of the other party and breaches of the purchase agreement (in particular, the seller representations or warranties). There also will be much greater detail on the issues of the restrictive covenant, security, collection of accounts receivables and notices to patients.

Another distinction from the letter of intent is that the purchase agreement is legally binding upon the parties, at least as regards the terms of the purchase and sale. While the letter of intent may contain binding obligations regarding confidentiality, duty to bargain in good faith and what happens if a deal doesn’t go through, it is typically otherwise no more than an expression of intent to move forward. This doesn’t obviate the need for the letter of intent, however. A letter of intent moves the process forward and makes negotiation of the purchase agreement far easier, since the essential business terms will have been negotiated. Also, most parties feel morally, if not legally, obligated to stick to their agreements in the letter of intent.

Closing the Deal. As of the date the sale is to take place, there is usually a big “signing party” where buyer, seller, their lawyers and other advisors are present to make sure last-minute details are ironed out, documents signed, money and keys handed over and the like. A bank representative may be present if a loan has been obtained to finance the buyer’s acquisition. Various documents may be filed with the state and county to ensure security interests are properly protected, but then the fun begins. You as the seller give up the reins and continue to practice for a while longer (usually in some diminished fashion), spending time introducing patients to the new doctor, working fewer hours and giving up surgeries. If it is handled well, in about six months minimum to a year later, you can head out to that beach that was beckoning you.

About the author: Robert Wade, JD, is a partner in the health law firm Wade, Goldstein, Landau & Abruzzo, P.C. in Berwyn, Penn., and a member of the Academy’s Consultant’s Directory [http://www.aao.org/aaoesite/consultant]. The firm limits its practice to the representation of health care providers in their practice, regulatory and business matters.