OBSERVATIONS ‘07
Q&A OF BLUNDERS, CAUTIONS AND STRATEGEMS IMPACTING THE PRACTICE SALE THROUGHOUT 2007 (PART I)
by Sam Reader
Compliments of S.G. Reader & Associates, Inc.
Q: Can I sell my practice if I’m an independent contractor?
A: Yes, you can, but not as easily as the standard seller who owns his/her own lease for the premises, staff, equipment and furnishings.
Dr. A had been subletting space from Dr. B for 10 years. Dr. A was one of those doctors who graduated from school with no financial support from family or friends. The funders would not lend him money for a startup or preexisting clinic without a cosigner and small down payment. Dr. A had neither. Receiving a tip from a friend, he decided to set up shop as an independent contractor within another doctor’s practice. He would have use of all equipment and furnishings, including the billing staff and front desk assistant. The clinic was large enough where he could work five days per week, if desired, with limited help from one of the back office assistants. This arrangement would cost him one-half of every dollar he collected, with an overhead cap not to exceed $8k per month. Dr. A would also amass several credit cards to cash flow his marketing efforts and accounts receivable.
The early years were a struggle with close calls of despair and high anxiety, but with time and the “can do” spirit, he pulled through with a pretty impressive average in collections of $22k per month. With an overhead cap of $8k per month, his average monthly net was a healthy $14k.
Dr. A loved his situation. He noticed his stress level was much less than Dr. B, the doctor he was subletting from, particularly when it came to the ongoing staff problems. Although Dr. A’s friends encouraged him to pick up and leave to go find his own location and create his own unique clinic with his own staff …..etc., he didn’t see how it would pencil. He knew his overhead of $8k per month against his current collections was hard to beat. He was content and resolved to stay put until he was ready to retire. After all, there were other benefits that were not available to some of his buddies who were not subletting.
For example: Dr. A had a built-in cover doctor; therefore, he felt comfortable in taking short trips which totaled about three weeks annually. Dr. A also enjoyed the camaraderie and talking shop with a fellow doctor. He felt this kept him energized and on purpose.
The years passed. Dr. A felt restless from the aches and pains creeping upon him resulting from years of adjusting. His friends encouraged him to sell.
Dr. A was pleasantly surprised at the interest shown in his practice. He decided not to say anything to Dr. B until he had a bona fide buyer in his pocket.
Dr. A was becoming a little concerned about the lost opportunity to sell his practice. He learned from some of his prospective buyers who needed financing from third party funders that most of these funders were not comfortable in financing practices subletting from another doctor. The funders were uncomfortable with the practice not having any tangible assets, such as equipment and furnishings. They were most uncomfortable with the purchasing doctor not being assigned to the lease of the premises where the practice was located.
Dr. A resolved to be patient and find a cash buyer. Just six months into selling his practice, he hit the jackpot – Dr. C! Dr. C was a new and energetic chiropractor who had inherited some money from the death of his father. Dr. C had the full $150k cash Dr. A was asking for. Dr. C felt he was getting quite a deal!
Following the acceptance standards from the third party funders, this practice was a small “cash cow” with a net income to debt service ratio of 6.24 compared to the usual ratio of 4.00.
With the intent to offer and small deposit in hand from Dr. C, Dr. A felt confident all would go smoothly as he approached Dr. B.
To Dr. A’s surprise, Dr. B was not accepting. He was not interested in extending the same deal to another. The deal was off!! Dr. A would lose his jackpot. Although Dr. A had the option to relocate his practice anywhere he chose, there was no space available within the one to two mile radius of the home base acceptable to Dr. C.
In retrospect, Dr. A knew where he had dropped the ball. He should have had something in writing from Dr. B to extend the same deal to another and/or he should have been more assertive in relocating to his own premises (where a lease could be reassigned to a potential buyer) prior to the decision to sell.
Be Smart. Be Strong. Be Helpful. Enjoy!
