When buying or selling a practice, have a professional do the negotiating.
By Richard S. Kattouf, O.D.
Q I'm an employee of a group that owns three practice locations. For the past six years, I've been the sole doctor in the one location, which is only seven years old. The two senior doctors/owners want to sell me 50% of the location, but I feel that what they're asking for goodwill is excessive because I've developed the practice. Please advise.
Dr. J. A.
Ohlin, via e-mail
A: The owners have taken a
financial risk with equipment, leasehold improvements, salaries, inventory, utilities, etc. They deserve a fair market value for the practice and their profit is in the goodwill calculation.
If the owners were selling to a new doctor who hadn't helped develop the goodwill, then the new doctor should pay the full goodwill value. But because of your service and dedication to this practice, the owners should make an adjustment downward on the goodwill portion. Here's a similar situation.
A potential buyer calls for help
Longacre, who was a potential buyer of 50% of one of three practices, hired me to appraise the location he was interested in and to negotiate the buy-sell agreement with the owners.
Just like you, he had more than five years of service with the practice, which grossed $650,000 and appraised at $455,000.
Negotiating an offer
I informed Dr. Longacre and the owners that on the open market, the practice was worth the fair market value of $455,000. The goodwill portion of this value was $300,000. Because I was representing the buyer, I counseled him to offer $370,000, therefore reducing the goodwill by $85,000.
The owners balked at the reduction but I explained to them that Dr. Longacre had established himself as the only doctor in that location for five years. Many patients had multiple clinical experiences with Dr. Longacre and he was the natural buyer for the practice.
Because the practice had grown from scratch under his service, a reduction in goodwill value was in order. I also pointed out that we're in a buyer's market. Sure, they could sell the practice at $455,000, but with brokerage fees and a new doctor chemistry for that location, I argued that it was wiser to sell to Dr. Longacre at $370,000.
My point was that they all would make more income by selling to Dr. Longacre because he could grow the practice much faster than a newcomer could. After helping them add two specialties to the practice and code properly for major medical, the practice grew to $950,000 in two years after the sale.
Considering debt obligations
Another pitfall to watch for in these situations is outstanding debt service. For example, if a practice purchased $100,000 of new equipment with loaned money, then the 50% buyer assumes 50% of the debt. Many buyers pay for hard assets in the appraisal and assume part of the debt. If you're not careful, you'll pay for the hard assets twice.
Consider a professional's help
Selling a practice is a huge venture that requires professionals who have experience with ophthalmic offices. Both buyer and seller must seek agents who can appraise, negotiate and develop a proper buy-sell agreement. This service reduces stress and develops an outcome that is fair, equitable and profitable to all parties.
As consumers, we consult realtors for property. It makes sense to seek proper consultation when buying or selling a practice.
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.
Optometric Management, Issue: January 2003