Navigating the Course

Mergers, acquisitions, and other exit strategies.

By Iris Kimberg, PT, MS, OTR

Orchestrating the sale of your practice is not unlike the process of starting or growing your practice. It requires intense focus on your end goal, coordination among many professionals working on your behalf, and a firm belief in your ability to navigate the course as it unfolds. Since the sale will impact your professional and private life after the sale, you must structure it to meet your end goal.

Fifteen years after I sold my own therapy practice and 15 days after I helped a physical therapist sell his practice to an employee so he could move back to Australia, I am still in awe of how a therapy entity can be sold. After all, we cannot guarantee that a patient will walk through our doors, we cannot guarantee that a physician will make another referral, or that a therapist will stay at work. Yet, if a practice is built to last and if value is integrated into every aspect of a practice, it is an asset that commands whatever price the marketplace will bear. Anything that increases the volume or the security of future revenue will increase the value of your practice. What makes your practice valuable to you should also make it valuable to a buyer.

In the past, practice owners approaching the age of 60-plus and thinking of retiring were the most likely private practice sellers. Today there is a new face for practice sellers. These include therapists of any age who have grown their practices as far as they can and want “out;” therapists who are selling from a position of strength (for example, their practice is booming, and they want to capitalize on that); therapists who are selling from a position of weakness or desperation; and therapists who need to sell for myriad reasons, death in family, breakup, or dissolution of partnership.

Make sure you understand why you are selling so that you are clear to potential buyers. Be sure about your goal in selling and be flexible about how you might reach that goal. If the goal in selling is to secure enough money to retire: Don’t count on it, although many therapists look to recoup their initial investment and be compensated for many years of hard work and endured risk. Others want to end the burden of ownership, but continue working as a highly compensated employee. Typically, the ways to reach your overall goal of selling include an outright sale (stock or asset purchase), a structured buy in/buyout plan, or a merger with a local competitor.

To achieve your goal, you will need to assemble a team to navigate the course, yet I cannot emphasize enough how vital a role and voice you should have in the process. While everyone’s focus tends to be on the asking price, and, later on, the gap that is often between the asking price and the offered price, many other facets to any practice deal exist. Life after your practice sale needs to begin well before the ink is dry and the deal is done. How you structure the deal will impact how your life will be after the deal.

Your accountant will play a vital role in your practice sale. The strength and quality of your financial statements is a direct reflection of your practice and should include profit/loss statements/balance sheets from the past three to five years with information backed by filed tax returns. Your accountant should help you break down your clinical costs so that gross profit percentages can be determined. Prospective buyers will want an accurate aging report (AR), and projections for the current year.

Your accountant may or may not be equipped to help you with your practice valuation; if he is not, seek out a professional who is. Your accountant should discuss with you and your attorney the consequences from a tax perspective on structuring your deal as an asset or a stock sale. This is crucial and will directly impact your tax liability. Unfortunately, what is advantageous for a seller from a tax perspective may not be advantageous from the buyer’s perspective; fair negotiations are important.

There must be an open and ongoing dialogue between your attorney and accountant for structuring the purchase agreement. Your attorney should make sure you have a good nondisclosure agreement in place before you release any details to potential buyers. Your attorney should help you evaluate any letter of intent from a potential buyer, and review, revise, and sometimes create the purchase agreement. Your attorney should help craft an employment agreement (if that is part of your deal) and evaluate any non-compete clause you will undoubtedly have to sign. Sometimes lucrative employment contracts offset a less than optimal purchase price. Other times a poorly negotiated employment agreement may not compensate you adequately, especially when you may be working less or differently during the non-compete transition period.

Be realistic, be flexible, be clear about what you want for yourself, and what you want your role to be post sale. Most therapists think their practice is worth more than it actually is, so be prepared for some initial disappointment. If you plan on staying on only for a “reasonable transition period,” then who you sell to is less important. If you want to stay on post-sale as an employee, then you need a high degree of compatibility between you and the new owners. The negotiation of your employment agreement (terms, salary, etc.) becomes almost as important as the negotiation of the purchase agreement. Your non-compete clause must be reasonable in order for it to be enforceable. Carve out any nuances that you believe are important. You must always be allowed to earn a living, but there are a finite number of nonclinical, academic, or management positions in our field. Do not wait to begin exploring what is next until the day you walk out the door.

The emotional component to a practice sale is rarely addressed or discussed. Regardless of the purchase price and the joy you may envision after a sale, most owners post-sale have some degree of identity crisis. You are probably more attached to your work identity than you realize. Answering “yes” to the question: “Can this practice exist without you?” is easy. Answering “How will you exist without your practice?” may be harder. Even though you may be selling of your own accord and on your own terms, you are likely to feel a sense of loss. Who we were versus who we are today comes into play. One therapist described it best: “It is like I lost my wallet. Suddenly, I don’t have a job title, a desk, or a name plate!” Re-inventing yourself post-sale, much like growing and selling your practice, is a process. Capitalizing and leveraging the skills you have amassed over the years will assist your successful transition.