OTHER ISSUES
There are other approaches for the valuation of a practice, but they are generally used to confirm a value determined by another approach.
Other factors can enter into the valuation of a practice and make it more complicated. A major factor is the involvement of a corporation. With its inherent separation from the individual, income tax implications can enter into the calculation. Similarly, the allocation of the purchase price between tangible assets and goodwill can cause subtle or large changes in overall value.
Another factor is the effect of an associate or partnership arrangement. This may affect the ability to sell and, in the case of partnership, the income tax implications can affect the price.
The multi-disciplinary clinic brings its own issues. Will the potential purchaser be acquiring all aspects of the clinic? If so, there are different valuation issues for the other specialties.
Finally, consideration should be given to the potential for a "special purchaser" who perceives an even greater benefit and who may be willing to pay more than the average purchaser.
It should be evident to both potential purchasers and vendors that the value is a reflection of the practice as a whole. The illusion that a practice is worth a fixed percentage of historical revenue, regardless of the present circumstances, should give way to a clearer understanding of what factors really count in determining the value of a practice.
AMF:
The effort which is required to determine the value of a practice should take into consideration the fact that unlike real estate and commercial operations such as restaurants, and retail establishments the transfer of a professional practice involves to a very large extent the transfer of a practitioner's history as a doctor. The bottom line for any purchaser must be his or her ability to have earnings continue to be generated from the practice.
For a prospective vendor and/or purchaser the rumors, generalities, rules, policies, attitudes and guidelines involving the price to be paid for a practice abound in multitudes. "Everyone" has an opinion and "everyone" will provide guidance to a purchaser or vendor in terms of what he or she can expect to pay or receive from a sale of a practice. While it would be optimum to quote a textbook, study or economic principle that could be used as the guiding light for participants in a transfer of a professional practice relating solely to that of a chiropractor, alas, such does not exist to the knowledge of the writer.
If experience is any indicator of what transpires in the transfer of a chiropractic practice, (and having spent twenty-five years participating in the professional guidance of chiropractors) then generalities based upon experience may be the best indicator of what will result from the negotiations involving the establishment of the price relating to the transfer of a chiropractic practice. It is the experience of the writer that when all is said and done, and the experts have reviewed the practice to establish the sale price based upon billings, taking into account past revenues, receivables, equipment, leasehold improvements, etc., etc., etc., the parties ultimately will arrive at a value having regard to the billings. In the area of real estate acquisition it has been stated that the three most important factors in establishing the value of a property are location, location and location. In the area of practice valuations relating to chiropractic practices, the three most important factors are billings, billings and billings.
In addition, It is the experience of the writer that the parties must direct themselves to considering how revenue is generated from the practice. Obviously any general rule is subject to exception and should be adopted with careful consideration. No purchaser should be acquiring a practice for a "generally accepted" percentage of billings averaged over a number of years when the billings are decreasing.
However, just as important are the consideration which add to the discussion concerning the value of the practice in terms of the equipment, leasehold improvements and other assets. It is unlikely that a purchaser will be willing to acquire substantial equipment for a substantial price when such equipment does little to increase the billings of the practice. It is the position of the writer that historically, while a value is given to equipment and other assets, the value of the practice will be somewhere between 2/3 and 3/4 of a year's billings averaged over three years. From that starting point the value will go up or down depending on all of the factors which have been previously discussed including such matters as location, security of the lease, referral base, type of practice, turnover period, security of billings, name of practice, state of equipment, staff, financing by the vendor, etc.
For the purposes of establishing a value attributable to a chiropractic practice the golden rule can be enunciated in two words: "Status Quo" -- that being, "the more that can stay the same, the more the practice is worth!"
Purchase and Sale - Eight Post
EW: The conceptual framework for valuation of a practice has been examined in the previous article. We now look at practical approaches to determining value. They include: Net asset value, comparable market, and approaches based on earnings.
NET ASSET VALUE
This approach is used where the practice has wound down and there is no value beyond selling the equipment and other tangible assets. It is also used where the goodwill of the practice is of a personal nature, and therefore, not transferable or saleable. This personal goodwill represents the personal skills, techniques, experience and contacts of the individual chiropractor. Lastly, it is used in the valuation of a successful practice, going-concern, where the tangible assets are determined and valued separately from the goodwill.
Net asset value can be determined in a few ways. The simplistic approach would be to value the tangible assets (eg. Equipment, furniture, etc.) at their depreciated book value on the financial statements. This may be applicable where their value in use closely approximates book value. Often, adjustments have to be made to book value, either increasing or decreasing the value. An example of an adjustment would be for land and building, where they are included in the sale of the practice. They would have to be adjusted to reflect outside appraisal. Another type of adjustment may be to reflect costs of liquidation where a practice may be closing or be subject to a bankruptcy situation. In that situation, a purchaser could be acquiring someone=s used equipment at bargain prices.
COMPARABLE MARKET
This approach determines the value by comparing it to other practices that have been sold close to the date of valuation. Most of us are familiar with this approach, especially as it pertains to real estate. Unlike real estate, however, transactions involving chiropractors tend to be private and there are not many comparable practices for sale at any given time. Many times, practitioners will make reference to a practice which they have heard has been sold at a given price and suggest that they be entitled to at least the same since their practices are similar. Since there are a multitude of factors which affect the value (see previous articles), NO TWO PRACTICES ARE ALIKE!
Clearly, to be useful as the primary valuation approach, one needs a large sample of practices sold with all relevant factors addressed. Because of its inherent drawbacks, this approach is most often used as a reality check with which to assess a value using another method.
EARNINGS BASED APPROACHES
In all cases, earnings based approaches assume the continuation of the practice after its sale known as a going concern assumption. The purpose is to determine a price which will provide to the purchaser a return on their investment at a rate of return that is acceptable to them, given the risk inherent in the practice. To many this may appear odd, talking about a practice as if it were, say, an investment in stocks or mutual funds. However, one must use the same theoretical approach to purchasing this type of business or any other. That return on investment, as described in the previous article, is the expected cash flow that the practice is expected to produce in the future. Expected cash flow is most often represented by maintainable earnings. In other words, what level of revenue less expenses can be expected to occur in the future based on the existing practice.
Capitalization of Maintainable Earnings
In its most simplistic form, this method looks at historical profits over a period of years and adjusts those profits for unusual items. Those items could include removing salaries to family members, eliminating revenues from revenue sources which will not continue in the future and adjusting for conditions which will change with the sale of the practice. The profits would typically be averaged to come up with a figure for maintainable earnings. However, to use previous years profits, or use an average only apply if the historical profits are an indication of the future. A practice which is on the downswing or is suddenly incurring excessive expenses would not be assessed based on distant history. Similarly, a practice which is experiencing significant growth should not be penalized by sticking to outdated numbers. In those cases, the more recent profits are often an indication of maintainable earnings and would be used.
Once a maintainable earnings amount is established, it is then necessary to capitalize those earnings to determine a value. This process involves assessing the risk inherent with achieving the level of earnings and deriving a capitalization rate. In previous articles, we have listed many of the factors affecting risk. The capitalization rate is more often referred to as a multiple. Therefore, the lower the risk, the higher the multiple. Multiples can vary from 2 times to five times earnings depending on the risk and whether a salary for the practitioner has been assumed in the expenses. There are a number of variations of this method. Even so, it is still the most comprehensive approach because it encompasses the revenues and the expenses, as well as the assets.
Maintainable Fee Revenue
This popular method, in its most simplistic form, looks at historical revenues over a period of years and capitalizes an average at a rate which reflects risk in order to determine goodwill. Similar to the earnings method, revenue should be adjusted for non-recurring income and, often ignore historical revenue in favour of more recent relevant data, particularly where there have been recent changes in the practice. The capitalization rate which considers all the risk factors is calculated by percentage. The lower the risk, the higher the percentage. Utilizing this method, a value for a chiropractic practice could vary from 20% to 70% of annual maintainable revenue plus tangible asset value.
This method suggests that revenue is the key determinant of cash flow. It further assumes that there exists a constant relationship between revenue and that cash flow. Because of its simplicity, the maintainable revenue approach has become a "rule of thumb" for the valuation of many professional practices, including chiropractors. Its simplicity is also its weakness, because it ignores the fact that some practices may pay higher than average rent, or be more efficient with their overhead. Some may have associates to whom they pay a portion of the fees billed. Because of these deficiencies, this method should be used with caution and can be used as a reality check with a valuation based on earnings.
NET ASSET VALUE
This approach is used where the practice has wound down and there is no value beyond selling the equipment and other tangible assets. It is also used where the goodwill of the practice is of a personal nature, and therefore, not transferable or saleable. This personal goodwill represents the personal skills, techniques, experience and contacts of the individual chiropractor. Lastly, it is used in the valuation of a successful practice, going-concern, where the tangible assets are determined and valued separately from the goodwill.
Net asset value can be determined in a few ways. The simplistic approach would be to value the tangible assets (eg. Equipment, furniture, etc.) at their depreciated book value on the financial statements. This may be applicable where their value in use closely approximates book value. Often, adjustments have to be made to book value, either increasing or decreasing the value. An example of an adjustment would be for land and building, where they are included in the sale of the practice. They would have to be adjusted to reflect outside appraisal. Another type of adjustment may be to reflect costs of liquidation where a practice may be closing or be subject to a bankruptcy situation. In that situation, a purchaser could be acquiring someone=s used equipment at bargain prices.
COMPARABLE MARKET
This approach determines the value by comparing it to other practices that have been sold close to the date of valuation. Most of us are familiar with this approach, especially as it pertains to real estate. Unlike real estate, however, transactions involving chiropractors tend to be private and there are not many comparable practices for sale at any given time. Many times, practitioners will make reference to a practice which they have heard has been sold at a given price and suggest that they be entitled to at least the same since their practices are similar. Since there are a multitude of factors which affect the value (see previous articles), NO TWO PRACTICES ARE ALIKE!
Clearly, to be useful as the primary valuation approach, one needs a large sample of practices sold with all relevant factors addressed. Because of its inherent drawbacks, this approach is most often used as a reality check with which to assess a value using another method.
EARNINGS BASED APPROACHES
In all cases, earnings based approaches assume the continuation of the practice after its sale known as a going concern assumption. The purpose is to determine a price which will provide to the purchaser a return on their investment at a rate of return that is acceptable to them, given the risk inherent in the practice. To many this may appear odd, talking about a practice as if it were, say, an investment in stocks or mutual funds. However, one must use the same theoretical approach to purchasing this type of business or any other. That return on investment, as described in the previous article, is the expected cash flow that the practice is expected to produce in the future. Expected cash flow is most often represented by maintainable earnings. In other words, what level of revenue less expenses can be expected to occur in the future based on the existing practice.
Capitalization of Maintainable Earnings
In its most simplistic form, this method looks at historical profits over a period of years and adjusts those profits for unusual items. Those items could include removing salaries to family members, eliminating revenues from revenue sources which will not continue in the future and adjusting for conditions which will change with the sale of the practice. The profits would typically be averaged to come up with a figure for maintainable earnings. However, to use previous years profits, or use an average only apply if the historical profits are an indication of the future. A practice which is on the downswing or is suddenly incurring excessive expenses would not be assessed based on distant history. Similarly, a practice which is experiencing significant growth should not be penalized by sticking to outdated numbers. In those cases, the more recent profits are often an indication of maintainable earnings and would be used.
Once a maintainable earnings amount is established, it is then necessary to capitalize those earnings to determine a value. This process involves assessing the risk inherent with achieving the level of earnings and deriving a capitalization rate. In previous articles, we have listed many of the factors affecting risk. The capitalization rate is more often referred to as a multiple. Therefore, the lower the risk, the higher the multiple. Multiples can vary from 2 times to five times earnings depending on the risk and whether a salary for the practitioner has been assumed in the expenses. There are a number of variations of this method. Even so, it is still the most comprehensive approach because it encompasses the revenues and the expenses, as well as the assets.
Maintainable Fee Revenue
This popular method, in its most simplistic form, looks at historical revenues over a period of years and capitalizes an average at a rate which reflects risk in order to determine goodwill. Similar to the earnings method, revenue should be adjusted for non-recurring income and, often ignore historical revenue in favour of more recent relevant data, particularly where there have been recent changes in the practice. The capitalization rate which considers all the risk factors is calculated by percentage. The lower the risk, the higher the percentage. Utilizing this method, a value for a chiropractic practice could vary from 20% to 70% of annual maintainable revenue plus tangible asset value.
This method suggests that revenue is the key determinant of cash flow. It further assumes that there exists a constant relationship between revenue and that cash flow. Because of its simplicity, the maintainable revenue approach has become a "rule of thumb" for the valuation of many professional practices, including chiropractors. Its simplicity is also its weakness, because it ignores the fact that some practices may pay higher than average rent, or be more efficient with their overhead. Some may have associates to whom they pay a portion of the fees billed. Because of these deficiencies, this method should be used with caution and can be used as a reality check with a valuation based on earnings.
Purchase and Sale - Seventh Post
Goodwill
Thus far, we have been discussing a number of concepts and factors affecting the value of goodwill. In most cases, it comprises most of the eventual price so it is extremely important that both vendor and purchaser understand what type of goodwill has value. There are two types of goodwill: Commercial and personal. Because of the nature of professional practice, they often overlap and make valuation difficult.
Commercial goodwill is the goodwill which has value and can be sold or transferred to other parties. It represents the perceived benefit to prospective purchasers of getting into practice with an established office, existing patient base, staff and premises. It's value is in direct proportion to the ability to maintain the earning capacity of the practice.
Personal goodwill has little or no value and is not transferable or saleable. It represents the personal skills, techniques, experience and contacts of the individual chiropractor. The degree to which these factors cannot be emulated by a prospective purchaser will affect the ability to sell the practice. A typical example would be where a chiropractor practices a unique procedure that no one else does, including prospective purchasers. If this procedure is the only source of revenue, the practice will have no value for goodwill.
In looking at the conceptual framework for determining the value of a practice, a prospective vendor should be more aware of what factors determine that value and therefore implement changes to their practice to improve its ultimate liquidity and sale price. Prospective purchasers should have a better understanding of what elements to look for in a practice in order to find the right practice for the right price.
AMF: For both the Purchaser and the Vendor it is important to keep in mind the bottom line B how much is being paid and how much can be retained after the payment of debts, including taxes.
The Purchaser must remain concerned about the ability of the "asset" being able to generate the income which has been represented to have existed at closing by the Vendor. Was there "value" to the "asset". All things being equal, the Aasset@ should be able to provide income which has been anticipated by the Purchaser to be derived by the practice after closing.
Empirically and by anecdotal discussion with purchasers, there is no reason why the billings generate previously by a practice cannot be maintained by the purchaser with a "drop off" rate of no more than 15%. The drop in patient income after closing should be able to be maintained at an amount not less than 10%. In order to accomplish this fact, the Purchaser must be in a position to maintain the "goodwill" after closing as it had been maintained prior to the transfer of the practice. The status quo is the most vital part of a practice in that the less that is changed the better. There is a sense of security for a patient who attends an office and is able to be assured that things will remain the same in terms of staff, location, treatment technique, billings and other office protocols.
There is danger to making any immediate changes to the practice which will cause a patient to question whether the "office" has changed to an extent whereby the patient is content to seek care elsewhere. This includes the addition or replacement of equipment or furniture.
There will always be some "drop off" by patients who are members of the Vendor's immediate family or for some reason may have a relationship with the Vendor which will result in the patient remaining with the Vendor after closing notwithstanding the non-competition and non-solicitation provision. The Purchaser should recognize that these patients exist and should ascertain from the Vendor the extent of the list and how it will affect the future income of the practice.
A practitioner should keep in mind that as long as there is a purchaser willing to pay for that portion of a chiropractic practice which exceeds the actual value of furniture, equipment and leasehold improvements (whether that value is established by replacement cost, undepreciated value or actual cost) goodwill will continue to be an asset which can be created, maintained, bought and sold.
Thus far, we have been discussing a number of concepts and factors affecting the value of goodwill. In most cases, it comprises most of the eventual price so it is extremely important that both vendor and purchaser understand what type of goodwill has value. There are two types of goodwill: Commercial and personal. Because of the nature of professional practice, they often overlap and make valuation difficult.
Commercial goodwill is the goodwill which has value and can be sold or transferred to other parties. It represents the perceived benefit to prospective purchasers of getting into practice with an established office, existing patient base, staff and premises. It's value is in direct proportion to the ability to maintain the earning capacity of the practice.
Personal goodwill has little or no value and is not transferable or saleable. It represents the personal skills, techniques, experience and contacts of the individual chiropractor. The degree to which these factors cannot be emulated by a prospective purchaser will affect the ability to sell the practice. A typical example would be where a chiropractor practices a unique procedure that no one else does, including prospective purchasers. If this procedure is the only source of revenue, the practice will have no value for goodwill.
In looking at the conceptual framework for determining the value of a practice, a prospective vendor should be more aware of what factors determine that value and therefore implement changes to their practice to improve its ultimate liquidity and sale price. Prospective purchasers should have a better understanding of what elements to look for in a practice in order to find the right practice for the right price.
AMF: For both the Purchaser and the Vendor it is important to keep in mind the bottom line B how much is being paid and how much can be retained after the payment of debts, including taxes.
The Purchaser must remain concerned about the ability of the "asset" being able to generate the income which has been represented to have existed at closing by the Vendor. Was there "value" to the "asset". All things being equal, the Aasset@ should be able to provide income which has been anticipated by the Purchaser to be derived by the practice after closing.
Empirically and by anecdotal discussion with purchasers, there is no reason why the billings generate previously by a practice cannot be maintained by the purchaser with a "drop off" rate of no more than 15%. The drop in patient income after closing should be able to be maintained at an amount not less than 10%. In order to accomplish this fact, the Purchaser must be in a position to maintain the "goodwill" after closing as it had been maintained prior to the transfer of the practice. The status quo is the most vital part of a practice in that the less that is changed the better. There is a sense of security for a patient who attends an office and is able to be assured that things will remain the same in terms of staff, location, treatment technique, billings and other office protocols.
There is danger to making any immediate changes to the practice which will cause a patient to question whether the "office" has changed to an extent whereby the patient is content to seek care elsewhere. This includes the addition or replacement of equipment or furniture.
There will always be some "drop off" by patients who are members of the Vendor's immediate family or for some reason may have a relationship with the Vendor which will result in the patient remaining with the Vendor after closing notwithstanding the non-competition and non-solicitation provision. The Purchaser should recognize that these patients exist and should ascertain from the Vendor the extent of the list and how it will affect the future income of the practice.
A practitioner should keep in mind that as long as there is a purchaser willing to pay for that portion of a chiropractic practice which exceeds the actual value of furniture, equipment and leasehold improvements (whether that value is established by replacement cost, undepreciated value or actual cost) goodwill will continue to be an asset which can be created, maintained, bought and sold.
Purchase and Sale - Sixth 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.
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.
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.
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.
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.
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.
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