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.