Avoiding Practice Purchase Blunders
Good (and not-so-good) ideas to remember when buying or selling a practice.
By Richard S. Kattouf, O.D.
Q I'm the senior 50% partner in a practice grossing (monies collected) $1,950,000. My partner has agreed to sell me her half for $325,000. An employee optometrist is aware of these figures and wants to purchase 50% of the practice from me for the same amount. What are your thoughts?
Dr. D.L. Lozzi, Via e-mail
A: For the sake of readers, know what not to do in such transactions. Here are some tips:
- The business discussions between you and your partner should have been private and confidential.
- The employee-doctor has taken no financial risks and has made no investment in the practice up to this point.
- You should purchase your partner's 50% of the practice at the agreed amount.
- You need to have the practice professionally appraised. The fair market value will range from $1,000,000 on the low end to $1,400,000 on the high end.
- Remember, we're in a buyers' market and buyers who are cognizant of the market will, many times, make bids below the fair market value.
- In large practices, the seller can lower the accepted value and make up the loss in interest payments from the buyer. Sellers acting as bankers can command as much as 1% above lending rates because they're not taking an equity position.
- After appraising the practice, negotiations between buyer and seller must commence with a professional agent representing both parties. Remember, the two parties are going to be "professionally married" for many years.
Practice purchasing triangle
Dr. Marshall (not his real name) called my consulting company with a situation similar to Dr. Lozzi's. I instructed Dr. Marshall to proceed in purchasing the 50% from the junior partner at their agreed value. I counseled him that we would base his buy-in value on the appraised value of the practice and that it had nothing to do with what the junior partner sold to the senior partner. I explained to the associate doctor that the owner had taken financial risks and put more than 20 years of work into building the practice.
I also explained to Dr. Marshall that the practice builds equity (value) as long as location, records, mode of practice, specialization, medical services and seller's willingness to stay with the practice are in tact. I assured Dr. Marshall that he too would benefit from the sale of his portion of the practice in the future.
My practice appraisal exhibited a fair market value of $1,250,000, in which case the associate's 50% would be $625,000. Following are some of the highlights of preparing Dr. Marshall's buy-sell agreement:
- The buyer (Dr. Marshall) must pay $125,000 in "work equity." This means he would work more hours and the senior doctor would work less but still earn financial compensation as if he were working as much as the junior doctor.
- I amortized $500,000 over 30 years with a balloon payment in 10 years to make Dr. Marshall's payments affordable and to enable him and his family to maintain a professional lifestyle.
Recognizing the lessons
Following are some pointers you can take from Dr. Marshall's situation that may help you in the future:
- Business matters are personal; don't share them with third parties.
- Retain a professional consultant who has experience in the ophthalmic field to prevent any errors.
- Optometrists rely on all kinds of advisors (attorneys, realtors, financial advisors and accountants) for advice and counsel regarding business matters. The experienced optometric consultant will save you money and will eliminate the stresses of trying to blindly perform business procedures.
Dr. Kattouf is president and founder of two management and consulting companies. For information, call (800) 745-EYES or e-mail him at email@example.com. The information in this column is based on actual consulting files.