OBSERVATIONS ‘05

Q&A OF BLUNDERS, CAUTIONS, AND STRATAGEMS IMPACTING THE PRACTICE SALE THROUGHOUT 2005 (PART V)

By Sam Reader

Compliments of S.G. Reader & Associates, Inc.

  1. Can I sigh with relief after I sell my clinic?

  1. Yes and No!  Yes, because you just accomplished a major event – no small miracle in most cases.  No, because we still have a two- year statute of limitations (liability issues) to deal with.  If fraud can be proven, the statute of limitations is longer.

Case in point.  Dr. A just purchased a clinic in the Midwest.  Just 1-½ years out of school, this young and inexperienced doctor finds a colossal practice collecting over $900k annually and purchases it for $715k.  This price does not include the A/R’s (account receivables).  The first two weeks of ownership during transition went well.  Both parties were excited, almost euphoric, over the experience.  During the third week, the honeymoon phase of ownership suddenly began to wear off with the buyer.  The buyer had all of a sudden become aggressive in the purchase of the A/R’s.  The seller didn’t mind selling the A/R’s – he just wanted top dollar.  The buyer, on the other hand, stated that he just bought the clinic at a premium price with projected collections dropping by $120k from the previous year.

The buyer felt that because he purchased a practice with declining numbers at a premium price, he was justified to purchase the A/R’s at a reduced price.  As it stood, there was $600k of collectible A/R’s.  The seller had originally offered these A/R’s for $350k at the time of closing.  The seller was of the mind set that this was a one-time shot at a good deal – take it or leave it – opportunity.  The seller was firm.

No doubt this was a good buy.  Fifty cents on the dollar is common, assuming the books are up to date.  In other words, the A/R’s had been purged of any dead wood or absolute uncollectibles, to the seller’s best guess, as to what is or isn’t collectible.

The excitement between buyer and seller was diminishing quickly during the debate over the value of the A/R’s.  Just three weeks into the buyer’s long and awaited dream practice, and he was already feeling cheated.  On the flip side, the seller was feeling offended because of his perception of the buyer’s ingratitude of the marvelous deal he had gotten on the purchase of this magnificent practice – only to be thanked by complaints of  declining numbers of the practice and a low-ball offer of $200k for the A/R’s.

The writing on the wall for future litigation was inevitable.  Fortunately, the seller was open to counsel and kept an open mind to the feelings and facts coming from the buyer.

The feelings and facts of the buyer:

  1. The numbers had declined over the six months prior to purchase.
  2. Buyer was aware of the declining numbers and was assured by seller that it was “nothing to worry about – they were down due to vacations and scattered energy”.
  3. Buyer purchased at asking price.
  4. The bank would only provide $150k for operating capital for buyer.
  5. The $150k was not enough money to run this big P.I. practice.  Buyer and seller agreed the clinic would devour the $150k within 6-7 months.
  6. Without additional credit lines, the practice was at high risk to tank within the first year of ownership.

In addition to these feelings and facts, the seller experienced the sharp, cutting and desperate attitude of the buyer – a 180° shocking change of behavior only three weeks into this new relationship.

The seller agreed to sell the A/R’s at the requested amount of $200k.  After talking with his legal counsel, he was made aware that a possible lawsuit could cost him out-of-pocket anywhere from as low as $70k to as high as $400k, inclusive of settlements.  Seller was also made aware that his malpractice insurance would not cover this kind litigation.

The seller had come to the realization that discounting the A/R’s another $150k to adequately capitalize the buyer over the next 24 months, would be in his best interest – much cheaper than the consequences of losing twice that amount in the future gamble of litigation.

In the end, the seller’s deductive reasoning possibly saved him from several years of grief that comes from litigation and the risk of losing far more than his discount to the buyer.  It was a good ending for both buyer and seller.

The seller had made another important observation.  He felt his ultimate decision to discount the A/R’s was based on the future security of his patients.  He felt that by placing his patients first, he would not make the wrong decision.

Be Smart!  Move Forward!  Enjoy!