Purchase and Sale - Fifth Post

The next issue which will be considered by the parties is the type of practice being carried on by the Vendor. Does the Vendor carry on a particular type of practice which may limit his or her marketability? For example, if the chiropractor practices acupuncture or is a naturopath or has some particular expertise, ie. a sports fellowship or predominantly deals with paediatrics or geriatrics, the marketplace with respect to a potential Purchaser may shrink. The more specialized the practice the less potential Purchasers that may be available to acquire the practice. The greater the marketability of the practice the greater its value. Inevitably, the Vendor and Purchaser must be compatible in terms of their practices.

While it will be difficult if not impossible for a practitioner to change his or her practice technique in the time available for a transition of a practice, it may be beneficial for a Vendor to bring to a practice another practitioner who is in a position to assist the practice for the purposes of making it more saleable. Such would be the case in the event that the chiropractor is also a naturopath and is only able to sell the practice to a chiropractor who does not have dual licensure. The Vendor could enter into an associateship agreement with a naturopath to assist a Purchaser is acquiring the practice and maintaining the clinic's ability to provide care outside of the knowledge of the Purchaser.

For the purposes of establishing a value to the practice, it will be necessary to ascertain the basis from which patients are derived. Are the patients referred to the clinic from a source which may not exist after closing (ie. a relative of the Vendor)? Do the new patients come from an internal referral source (ie. existing patients)? If such is the case, the goodwill is of more value than a source of patients which will disappear after closing.

What are the billing practices of the Vendor? The Purchaser will be stepping into the shoes of the Vendor so he or she must be prepared to assume the same billing procedures of the Vendor. This applies to issues concerning what the Vendor bills in terms of quantum together with any policies that might exist in terms of discounts to students, children and seniors, and any credit policies which the Vendor may have.

Any Purchaser who alters the policies concerning billings to patients, or for that matter any office issues including office hours, methods of practice or even the office design does so at his or her peril. Again, any change in the status quo is an invitation to disaster.


EW: In the previous article, some of the factors in determining the price were addressed. Since value ultimately results in a number, taking those factors into consideration, how is value established?

First, it is imperative that both vendor and purchaser have an understanding of what value really means. After quickly suggesting that it means the worth of something, an examination of some valuation concepts will provide greater clarity to the determination of value.

1. Value is determined as at a specific point in time. That point in time could be the date of sale or the date of an offer of purchase and sale. It could also be determined as of the date of death or separation, as in the case of a marital or partnership dispute. The distant past is irrelevant unless one is determining a value as of some previous date. I have encountered some vendors who have an inflated view of their practice=s value. They argue that one use a fixed formula based upon some average of previous years= activity (however that is measured). Meanwhile, they have allowed their practices to decline more recently. The old expression, "What have you done lately," really takes on importance in that situation. The future is uncertain even though one might have certain expectations. Therefore, a valuation would consider the current state of the practice, the profession, as well as the related health care industry and economic environment.

2. The vendor is selling the future. In any purchase and sale transaction, the purchaser and their advisors are assessing what to expect in the future. Past results are essentially used as a guide to help determine future results. This is why practice statistics and financial information are requested for a number of years. As stated above, the future is uncertain and it is the purchaser who assumes that risk. With that in mind, the higher the perceived risk of attrition or financial loss in the future, the lower the price.

3. Expected cash flow determines the price. Ultimately, it is the cash flow that the practice is expected to produce which determines the majority of the value. The remainder of the value is made up of tangible assets, such as equipment, furniture and leaseholds. In some cases, real estate sold as part of the transaction will influence the price. The other key component is the risk associated with obtaining that cash flow. The risk is evaluated by assessing a number of factors which were identified in the previous article. Because of their importance, I will restate them. They include, but are not limited to:

1. the location of the practice;
2. the right to practice at that location;
3. the type of practice;
4. the staff; including referral base;
5. the name of the practice;
6. the billings of the practice;
7. the intentions of the vendor after closing.

4. A higher value attributed to "tangible assets" will generally result in a higher price. What this implies is that two identical practices will be sold for different prices where one has more tangible assets than the other. Even though a chiropractic practice is not capital intensive, compared to other businesses, there is still a perception of reduced risk to the purchaser. This applies to a lender as well. Financial institutions are generally willing to lend more against tangible assets than goodwill. In fact, many transactions have been aborted because some banks refuse to lend against significant amounts of goodwill, while they are more lenient in situations where the tangible assets are in a higher proportion. Greater value attributable to tangible assets also means greater tax savings through accelerated depreciation.

5. The liquidity of a practice is a key determinant of value. This refers to the ease with which the practice can be sold. As in real estate, the greater the number of potential purchasers, the higher the price. Conversely, the greater the number of practices for sale, the lower the price. Unlike real estate, there are not many practices for sale at any given time. Nevertheless, from a vendor=s point of view, all things being equal, one would be inclined to offer a practice for sale when there are no other practices for sale in the area. "Special purchasers" who perceive an even greater benefit will be willing to pay more than the average purchaser. One example could involve a practice where the chiropractor also practices acupuncture and it comprises a significant portion of the revenue. A purchaser who is also able to practice acupuncture will more than likely see more value than one who does not practice acupuncture. A second example could involve an associate or partnership. The associate or partner may perceive greater value and thereby offer a higher price than a total stranger. However, the more personal the practice the harder it is to sell and the lower the price.

Purchase and Sale - Fourth Post

We have dealt with the issue of "why" and "who" we should now deal with "when". Consideration should be given as to "when" a practice is most suitable for selling in terms of not only its worth but the related issues such as an expiration of a lease, the retirement of debts, the marketing of the practice (in terms of new graduates willing to purchase a practice), a new billing year to government or private insurance carriers, and any other issues which may affect the goodwill of the practice and ultimately the purchase/sale price.

As was indicated in the first article, it is best to be proactive in so far as a practitioner might make an informed choice as to when a practice will be sold. It is not merely a matter of waking up one morning and determining by the afternoon that a Purchaser should be found and the practice disposed of. Any consideration of such an option is dealing with a practice on a crisis basis. More important, a Vendor should work towards selling a practice. Having regard to the factors which make up the goodwill of a practice for which a Vendor will be compensated, a Vendor might well spend some time reviewing a practice and ensuring that the practice is in a shape which will attract the best price. This issue is no different from dealing with the sale of a residence which requires a painting or cleaning before it is placed on the market.

For example, if it is accepted that a practice which uses a location name is more attractive to a Purchaser than that of a practice which uses the name of the practitioner (ie. Ontario Chiropractic Clinic vs. Smith Chiropractic Clinic) it would be wise for a doctor who is presently using his or her name to change such a name to a location or something other than his or her personal name. The use of a generic name allows for an easier transition on a sale from a Vendor to a Purchaser. There are legislative limitations which are placed upon a Purchaser using the name of the Vendor.

Given some time, a Vendor can take care of such a situation. For practices which are sold in an untimely basis, such situations may not be able to be remedied and the sale price may be detrimentally affected by the personal nature of the name of the practice. Further on in these articles, we will deal with other considerations which should be taken care of a Vendor for the purposes of obtaining the best valuation possible further on in the articles.

When dealing with actual disposition or acquisition of a practice it is important to keep in mind the initial issues which we had discussed in terms of the Agreement which will be entered into between the parties, namely, who, what, when and how. In the case of who, we had reviewed the issues concerning the possible parties to the agreement. It is imperative that all of the relevant parties join in the agreement. Even if the practice had purportedly been operated by a corporation, it is imperative that a Purchaser ensure that a licensed chiropractor be a party to the agreement. A corporation in provinces which do not allow chiropractors to incorporate their professional practices cannot own a professional practice. Such corporations cannot own and transfer patient files which by their very nature are the subject of confidentiality. Such corporation cannot own the goodwill associated with a chiropractic practice which is regulated by statute, but it might well have "goodwill" of its own.

While a corporation may be a proper party to the agreement, having owned the chattels and leasehold improvements, it cannot be the sole party to the agreement. It is just as important to have a spouse be a party to an agreement if the practice is a family asset.

To the Purchaser and Vendor the most important part of an agreement may very well be the price which is to be paid for the practice. There are a number of opinions which appear to be in vogue and are used for the purposes of validating a purchase price for a chiropractic practice. Before we arrive at the conclusions relating to the formulae for ascertaining the purchase or sale price of a practice, it will be useful to deal with the issues involved in evaluating a practice.

There are a number of factors which come into consideration for the purposes of arriving at a value of a practice, namely:

1. the location of the practice
2. the right to practice at the location
3. the type of practice
4. the staff
5. the patient profile, including referral base
6. the name of the practice
7. the billings of the practice
8. the intentions of the Vendor after closing

As far back as 1987, the case of Rasmussen and Rasmussen (Ontario District Court, O.J. No. 1303) dealt with the considerations involved in valuing a chiropractic practice. Mr. Justice Forget dealt with a number of factors which are relevant for the purposes of determining a value to a chiropractic practice and concluded that a chiropractic practice has a "goodwill value".

In the opinion of the writer there is no more important determination in the value of a practice than that of ensuring that the "status quo" will continue after closing. The less changes that will take place the more valuable the practice becomes.

With respect to the location of the practice, it is important from the position of the Purchaser to ensure that the location of the practice will continue to remain as it is at the time of the transfer of the practice.

If there are substantial changes which will be made to the geographical area of the practice the more likelihood that the goodwill of the practice will diminish.

The second issue to be considered with respect to the matter of valuating a chiropractor=s practice is that of the Vendor's right to carry on practice at a particular location and subsequently the Purchaser's right to continue to do so after closing. This issue will either involve a lease or the ownership of the building in which the practice is carried on.

In the case of a lease, consideration must be given to the terms of the Lease Agreement dealing with such issues as:

1. the remaining term of the lease
2. the right of the Vendor to assign the lease to the Purchaser
3. the right of the tenant to maintain associates
4. the uses to which the premises may be used
5. the right to new the lease
6. any option to purchase the leased premises
7. any exclusivity rights of the tenant

Obviously the more rights that the tenant has the more valuable the lease. A lease with a high rent and long term may be considered to be a liability. A long lease with a low rent may be considered to be an asset. The totality of the terms must be dealt with in order to ascertain whether a lease will be attractive to a tenant.

However, there may be a more important consideration which should be considered by the Vendor and will impact on the Purchaser. If the Vendor assigns the lease which has a further term to run, ie. 3 years of a 5 year term, it is customary that the present tenant (Vendor) will not be released by the landlord from his or her obligations under the lease. If the new tenant (ie. Purchaser) defaults in his or her obligations under the lease, even two or three years after the completion of the transaction, the Vendor may be called upon by the landlord to satisfy the obligations of the Purchaser/tenant.

It may be more prudent for a Vendor to have the Purchaser enter into a new lease agreement with a Landlord so that the Vendor will not have any continuing obligations to the Landlord. However, as in most of the issues involving a sale of a practice, there are a number of interwoven issues which must be considered in terms of other issues.

If a Purchaser and Vendor agree that part of the purchase is to be paid over time, ie. one, two or three years, the Vendor may want to obtain some security for the outstanding debt. If there is also bank financing involved, it may be likely that the accounts receivable and assets have been pledged to the bank as a first security. The most appropriate security left to the Vendor to ensure payment of the outstanding indebtedness of the Purchaser are the files of the practice and a right by the Vendor to take over the lease. If the Vendor is owed part of the purchase price by the Purchaser or the Vendor is responsible for the lease obligations, the Vendor may wish to retake possession of the premises to attempt to mitigate his or her damages.

If the Vendor is the owner of the building in which the practice is carried on, there are at least two issues which will have to be dealt with by the parties. First, is the building to be including in the transaction? This becomes more of an issue if the practice is that of a home practice. If the dwelling is not included in the transaction, will the Vendor be able to sell the building to another party, or even more importantly is the value of the practice or the building's value affected by the fact that the two assets are not being sold as a joint basis.

If it is unlikely that the building and practice can be sold together either because of the costs involved or because of another issue, such as zoning, it may be appropriate to have the practice relocated prior to its sale by the Vendor. A Purchaser and Vendor may both have difficulties with respect to an immediate relocation of the practice after closing and as such it may be an issue which the Vendor will have to deal with if he or she hopes to obtain the highest price possible from a sale of the practice.

If the Vendor and Purchaser are entering into a lease arrangement for a building owned by the Vendor, the Purchaser may wish to obtain an option to acquire the building in the future. If such is the case, it is important that the terms of the option be agreed upon without leaving any issues open for debate (ie. how is the price to be determined, when is the closing, what fixtures are to be included).

If the transaction is to include the building and particularly if the building involves a principal residence, there are tax considerations which should be considered by the parties prior to the completion of negotiations.

Purchase and Sale - THIRD POST

Part II

Once you have come to grips with the concept of selling or buying a practice, and, if you are selling, you have ascertained that the timing of the practice is most appropriate for the purposes of obtaining the best value for the practice, the next issue to be dealt with who are the parties to the transaction and who else might be involved in the matter. While the obvious parties are the purchaser and the vendor, it should be remembered that there a number of other individuals who will be privy to the agreement and will have some impact on the transaction.

The Vendor may simply be a chiropractor who has established the practice and is now desirous of disposing of same, or may include a management company which owns some of the assets or a spouse which may have an interest in the practice. Even more customarily, there are individuals or entities which may have an interest in the practice and who will have to become involved in the transactions. These parties may include the bank of the vendor which will have to consent to the discharge of any encumbrances registered against the assets of the practice; a landlord who may have to consent to the negotiation of a new lease or the transfer of an existing lease; the parties who might be leasing equipment; the companies who may licence software; employees who may be remaining at the practice after the sale and of course the patients. In the case of the purchaser the parties may be quite similar in that in addition to the actual purchaser, the landlord, bank and employees may play an integral part in the transaction.

From the Vendor's standpoint there are different considerations with respect to dealing with the individuals, as indicated above, who may play a part in the transaction. With respect to the Vendor, it is important that the actual persons who have an interest in the transaction be made a party to the transaction, ie. any corporation or a spouse.

With respect to the bank, a vendor should ensure prior to the commencement of negotiations what encumbrances, if any, will be required to be discharged at the time of closing and the costs associated with such a discharge. If a practitioner is carrying on two practices simultaneously, a discharge may be required of all debts owed by the practitioner to the bank notwithstanding that the debt is owed to the bank for a matter unrelated to the practice. This may be a requirement of the bank and unless consent is given by the bank to the closing without payment of all indebtedness of the Vendor, the Vendor may be required to make such payments in accordance with the statutory obligations which will be discussed later in the articles.

In the case of the landlord, the situation is not quite so simple. While the consent of the landlord may be required to complete the transaction or the landlord may be asked to negotiate a completely new lease, the timing by the Vendor with respect to the aforementioned request is highly critical. It is quite likely that any proposed Agreement of Purchase and Sale submitted by a Purchaser will be conditional on such matters as bank financing or graduation. If there is a likelihood that conditions other those involving the lease (ie financing or graduation) will not be fulfilled it may be more than a nuisance if a Vendor contacts the landlord for consent to transfer a lease. The request might be costly in terms of the investigation which the landlord may undertake as a result of the request by the Vendor and for which the Vendor will be responsible. It may be more appropriate to deal with the conditions concerning the lease when the other conditions have been fulfilled. However, it is imperative that the lease be reviewed by the lawyer acting for the Vendor prior to any Agreement being executed by the Vendor.

An even trickier situation involves that of the employees. If, as part of the transaction the employees will be required to continue at the practice, the Vendor should have some reasonable expectation that the employees will remain. Obviously, if the Vendor is relocating to a community many, many miles away, ie a different province, and the staff is comprised of family members, then it may be unlikely that the staff will be remaining. However, the timing of telling the staff of the possibility of the sale by the Vendor is highly delicate and should be dealt with as such. I have experienced situations in which the Vendor informed the employees of the pending sale at the outset and I have also experienced situations in which the Vendor refrained from advising the employees until it was absolutely necessary. Obviously it is a matter which should be dealt with very carefully depending on all of the factors affecting the parties.

Unless the agreement relating to leasing of equipment or such things as computer software require immediate consideration by a vendor, such matters should be able to be dealt with in the ordinary course of events, ie. after the signing of the agreement. However, in all cases, the agreements and commitments of the Vendor must be reviewed prior to the execution of the Agreement.

In addition to the other parties who will have an impact in the transaction, it is just as important to consider the involvement of the lawyer and the accountant. In the case of each of these individuals, they should be contacted prior to the negotiations being undertaken by the vendor and the purchaser. Both the lawyer and the accountant should be allowed to advise the Parties of the issues which will be involved in the transaction, ie. the responsibilities of each of the parties both before and after closing and any additional considerations with respect to such matters as income tax, and professional matters. There are a number of considerations in the completion of the transaction which can have an impact on the finances of the parties. Once the negotiations have been completed it is difficult for a lawyer and accountant to bring new issues to the table. While the agreement may not yet have been completed there is a matter of integrity in the negotiation process which can do damage to the relationship of the parties in the event that either Party is required to reverse his or her earlier position.

The Parties may involve a Real Estate Agent or Business Broker in the transaction. This individual may be acting on behalf of a Vendor who has listed his or her practice for sale. The individual may be acting on behalf of a Purchaser who is seeking a practice. In any event, the agent may assist in locating the practice, evaluating it, assisting with a transfer of a lease, assisting in the preparation of the Offer to Purchase, obtain financing and generally assist in the completion of the transaction. Unlike lawyers who are prohibited from contacting the client of the other lawyer, whether it be a purchaser or vendor, the agent is not restricted from such contact. As such, an agent is in a position of intervening when difficulties may arise between the purchaser and vendor with respect to ensuring that there is an orderly transfer of the goodwill of the practice. The writer has participated in the sale/purchase of practices where it is unlikely that the transaction would have been completed. Both the vendor and the purchaser had become dejected because of the problems which were arising with respect to bank financing and a transfer of the lease. The agent was able to assure the parties that the difficulties were not insurmountable and, in fact, the problems were overcome by the intervention of the agent.

Finally, the Vendor must take into account any issues involving patients. At what point in the selling a practice should the patients be made aware that the Vendor will be terminating his or her relationship with the patients. The decision is obviously one of choice by the doctor but it is imperative that it not interfer with the continuation of the goodwill of the practice. It is likely that there will be a transition period to allow the purchaser to become involved with the practice. It is during this time that the patients will be introduced to the purchaser. More on this subject will be dealt with during a discussion of the Agreement of Purchase and Sale.

Purchase and Sale: Second Posting

INTRODUCTION:

A.F. Where to begin? There are a multitude of issues which arise in the acquisition or disposition of a professional practice. Beyond those issues dealing with a price, what assets are included, and when is the sale to take place, there are more difficult issues to deal with all of which may well come down to those five customary questions, namely, Awho, what, where, when and why@ -- and don=t forget Ahow@! Each of these questions can have an impact on the purchaser or seller in terms of whether a practice is saleable and under what terms and conditions.

When dealing with the different questions concerning the purchase and sale of a practice, the doctors will undoubtedly be concerned about price and what is included in the Adeal@. However, from experience garnered from years of involvement in the transition of chiropractic practices, it is the opinion of the writer that the most important question of all is Awhy@. The answer to this question leads logically to dealing with all of the other issues involved in the disposition of a practice.

WHY is the practice being sold? Is the vendor retiring from practice? Is the retirement voluntary or is the practitioner being forced to retire because of ill health, financial or professional difficulties? This might be the appropriate time to provide a definition of a bona fide commercial transaction, which might be described as a transaction between a willing purchaser and a willing seller for good and valuable consideration and acting at arm=s length from each other. In the Aordinary@ course of events the willing purchaser and willing seller would negotiate a price for the practice which is based upon objective factors resulting from the experience of prior sales and professional evaluations of the practice. Almost all practices have a worth -- some more than others. In some cases the worth of a practice has to be established for purposes other than a sale, ie. a matrimonial valuation, estate valuation, insurance claim. In the later instances the objective tools used for valuations are applied to assume that a sale of the practice would be between a willing purchaser and a willing seller without unusual factors. It is these factors that might come into question in dealing with Awhy@ the practice is being sold.

If the vendor is ill; if he or she has died and an estate is disposing of the practice; if there
are severe financial difficulties being experienced by the vendor the value of the practice and the method of dealing with a disposition of the practice will have to be tailored to deal with the difficulties. Both the purchaser and the vendor must be cognizant of any factors which may affect an orderly transition of the practice from the vendor to the purchaser. At the end of the road, that is to say, when the practice has been sold and delivered to the purchaser, the only thing that should have changed in the office is the doctor. The location remains the same, the equipment remains the same and hopefully the staff and patients remain the same. To put the matter in a proper perspective, there are three relevant bodies in the practice, namely, the doctor, the staff and the patients. The only body that should change is that of the doctor.

If the vendor is selling for retirement purposes or to relocate his or her office, these reasons must be considered in terms of where the practitioner is relocating. Is the vendor leaving practice permanently? Is the relocation permanent? While the intentions of the seller may be sealed in a contract with the use of a non-competition and non-solicitation provision, it is important to avoid any hard feelings which may be transmitted to patients of the practice by a seller who didn=t appreciate the seriousness of an agreement by which he or she agreed not to treat patients of the practice or establish an office within a certain geographical area of the practice which had been sold. Again, why is the seller selling and where is he or she going?

E.W. From a financial standpoint, the vendor must be clear on their motivation and committed to complete the transaction. Often, practitioners decide to sell without preparation, only to find that their net return is insufficient to satisfy their objectives. The main reason this occurs is because they haven=t clarified their objectives in the first place. If one decides to retire, for example, while the practice is on a downward trend, the net proceeds would not be the same as the practice being sold at its peak. If you were depending on a maximum selling price for your retirement, you should plan to put your practice in shape before putting it up for sale.

There is also the issue of selling for the wrong reasons. A practice may be offered for sale in order to get out of a costly lease or other fixed overhead, for example. Don=t be surprised when a prospective purchaser cannot be found! Clearly, a seller seeking to escape problems will realize a minimum return, if any.

Motivation and commitment go hand in hand. Once a decision is made to sell, the seller must be prepared to follow through. Waffling on the decision to sell can have devastating results; from lost revenue due to confusion in the practice, to potential litigation if a sale transaction is not completed. Having a clear objective and a strong commitment can help ensure a smooth transition.

Purchase and Sale of a Professional Practice

The following article and those dealing with this topic were originally written by myself and Ernest Wolkin, C.A. http://wolkin.ca/ and appeared in Canadian Chiropractor http://www.canadianchiropractor.ca/ . This topic will be presented in a number of postings.

PURCHASE / SALE OF A CHIROPRACTIC PRACTICE

Allan Freedman, LL.B.
Ernie Wolkin, C.A.


A.F. As the chiropractic profession continues to progress through its second 100 years of history, a natural result will be the increasing number of chiropractic practices that will be transferred from one doctor to another doctor through a voluntary or involuntary financial transaction. With respect to the matter of the voluntary transfer of a chiropractic practice, the customary transaction involves the purchase/sale based upon a willing purchaser acquiring the practice from a willing seller based upon fair market value. An involuntary sale might include either a disposition by a trustee in bankruptcy or an estate on behalf of a deceased practitioner.

Through a series of articles, we will be reviewing the various issues involved in the sale and purchase of a chiropractic practice, including the terms, conditions, warranties, representations, searches and valuations involved in dealing with a sale and purchase. There are different considerations involved in the various transactions depending on which Aside of the fence@ the practitioner finds him or herself. Just as important is the fact that there are a number of different parties who may be involved in the transaction, namely, the vendor, purchaser, their spouses, lawyers, accountants, real estate agents, appraisers, bankers, and landlords. It is the intent of the authors to acquaint the reader with an understanding of the issues involved in the transactions in order that the doctor will be in a position to meet the challenge of acquiring or disposing of a chiropractic practice in a professional manner in order to achieve not only the highest financial gain but to ensure that there is an orderly transfer of the practice to ensure that interests of the patients are maintained as being the most important factor in the transaction.

We have approached this topic in a novel fashion. The various topics which will be discussed in the series of articles will be commented upon within both the legal context and accounting context. The reader may well find that the comments of the two authors may not always be in agreement. In some cases, the important considerations relating to matters of finance may not necessarily be the same considerations relating to those of a legal nature. In other cases, the information presented by the authors may seem completely redundant. In any event, in those instances where the author is Allan Freedman, LL.B., the initials "AF" will be used. In those instances where the author is Ernest Wolkin, C.A., the initials "EW" will be used.

It should always be kept in mind that it is always left to the purchaser and/or seller to ascertain what might be in his or her best interests. For the most part, what we are about to endeavour upon is novel in approach and fraught with risk. Hopefully, when the series of articles has been completed, the reader will be better educated and in a position to deal with the contingencies of a sale or purchase of the practice. After all, we are all, at some time, going to be leaving professional practice in the 21st Century!