The Top 5 “Deal Killers” in Selling Your Group Practice

I’m constantly amazed by the stories I hear from people who have recently either completed a transaction to sell their business or by those who had a transaction stall at the 12th hour.??

With all of the recent M&A activity in and outside of the world of dentistry, you’d think it was all simple, straightforward, and frankly easy.

It isn’t.?

Some of that is due to the business owner’s unrealistic expectations, and some of it is the complete lack of foresight by their sell-side advisor.?

Both are completely avoidable and totally unnecessary.?

This blog series is oriented at giving you a better understanding of what the process should look like, as well as the things you can do or the questions you can ask (ahead of time) to create a better outcome for yourself.? ?

Deal Killers to Avoid

Sure, every business has some element of “clean up” involved, but a few of them can actually result in a deal falling apart late in the closing phase – after you’ve spent a lot of time and money.? Work with an advisor to identify these elements ahead of time.?

Here are several to research:

1.??? Associates who are 1099 when they should be W-2 employees

2.??? Key Providers who are not owners, but may need a “retention bonus”

3.??? Leases that are not assignable

4.??? Current debt levels plus estimated tax rates compared against potential cash proceeds

5.??? “Poison pills” in the partnership Operating Agreement (example: sale requiring unanimous approval thereby creating a hold-out by a minority partner)

You do NOT want to deal with any of this a few weeks before closing.? Your advisor should help you identify aspects such as these and help you deal with them before you start the process.? It could add a few months to your timeline.

Associates as 1099

The IRS has been cracking down on this a LOT in recent years and we’ve seen it stall deals on several occasions.? Every business has a place for contract employees, but using a 1099 to circumvent payroll tax law is bad for both the employee and the employer.

If you bring in a specialist from time to time to perform certain procedures in your office, but it’s infrequent and inconsistent, that’s a contract employee.? However, if someone has consistent days and hours with a schedule set by you and your practice, then that’s a W-2.?

Look, I get it…nobody likes paying more taxes than they have to and many of the associates are the ones driving this issue in the first place, but get counsel from your accountant and a labor attorney on this because EVERY BUYER is going to ask you to clean it up before they acquire your business.?

Additionally, the buyer will most likely ask ALL employees to sign new employment contracts, so you should deal with this issue before you’re in the closing process, and there are a lot of dollars at stake.?

Which brings me to the next one…

Key Providers

More and more groups are creating some sort of “pathway to partnership” for their key executives and high performing associates.? If they’re an owner in the business, then they’re bound by the Operating Agreement and any sort of “post-sale continuity” terms.?

However, if they’re not an owner, but they are a high producer, then the buyer isn’t going to want to run the risk of them leaving post-sale.? The best way to retain them post-sale is typically some sort of retention bonus to be paid the associate at the end of 12 or 24 months (or both) for staying on.?

This type of retention bonus typically comes out of the seller cash proceeds or their equity roll, so get out ahead of this aspect with your advisor and identify which associates might be a “flight risk” ahead of time.?

The buyer is ultimately buying the continuity of cash flows from the continuity of clinical services provided, so key associates are key to the transaction and they’re key to the new business after the sale.?

Assignable Leases

Most buyers do not buy real estate (if you own it), but most emerging groups fail to negotiate an assignability clause in their lease agreements ahead of time.?

This might not be a problem if your practices are in buildings with national landlords or management companies because they typically have their own in house legal counsel and are probably accustomed to tenants being acquired by 3rd parties.? Those “professional” companies can move quickly and are familiar with a tenants M&A process.

That being said, “local landlords” might not be.? If they’re not familiar with the process, then they can take their own sweet time to turn documents with the buyer.? And if they balk at something outright, they can refuse to allow the buyer to become the new tenant…and your deal can die quickly.?

Typically an assignability clause stipulates that the lease can be assigned to a buyer if the buyer’s “overall credit profile meets or exceeds that of the tenant” (or some language to that effect).?

Does your lease(s) have an assignability clause?? You probably want to know that if you ever have plans of selling your business.

Current Debt Levels

You probably have a basic idea of the amount of debt you’re carrying on your business currently, but you want to run projections in the event of a sale that would entail the following aspects:

·????? Current debt level

·????? Taxes

·????? Advisor fees

·????? Deal structure (cash, equity, escrow or hold back)

The reason this is important is because sellers typically only focus on the top line sales number – like “$10 million.”? However, if the deal is 80/20 cash and equity, then that’s

?$8,000,000 in cash.? You’re going to pay around 22-24% in taxes and another 6-7% in advisor fees (sell-side advisor, accounting, legal, etc.).? Call it 30% combined, so there’s $1,840,000 in taxes (23% of $8,000,000) and $600,000 in advisor fees (6% of $10,000,000).? That’s roughly $2.5 million of the $8 million in cash paid out at closing, so we’re down to $5.5 million remaining.?

If you’re carrying $4 million in debt, then that only leaves around $1.5 million to be deposited into your bank.? Is that what you were hoping to “net” from the initial transaction??

Run the numbers and understand what your expectations are.? Get clear on it.

“Poison Pills”

Every multi-owner business has some sort of Operating Agreement (or Partnership Agreement or Shareholder Agreement) that governs how the business is run and what happens in the event of a sale.? The key to this one is how the vote goes down.

If your Operating Agreement requires 100% approval (“unanimous”), then a minority partner who only owns 1% of the business can hold up a sale.? When we see this happen, they typically have to be “bought off” by some level of negotiated settlement at closing to acquiesce and vote for the deal.? It pits partners against one another and it’s messy.

As the saying goes: “We’re all friends and partners until there’s a pile of money on the table.”

Read through your governing documents and understand what’s required (in terms of vote) to transact the business.? You don’t want to dela with that during the closing process.?

Concluding Thoughts

As I said in the opening, all of these issues are avoidable, but you have to work with an advisor that is willing to take the time to understand all of the aspects of the “pre-sale” process.?

So, how long will it take to sell your business?? The short answer that hides the truth is 5 to 12 months.?

The real intent behind the question is: “How long will it take to sell for maximum value so I can be free and clear to be sitting on a beach or playing golf?”? And the honest answer to that is likely somewhere between 2 and 8 years:

·????? 6 months to 2 years to clean up and improve the business to increase the valuation

·????? 1 year to actually complete the sale process and transaction

·????? 1 to 5 years on post-sale commitment and the release of any equity roll

So, if your desire is to be “free and clear” in another 5 years, then you should probably start the discussion with your M&A Advisor…NOW. Click here to learn more about our sell-side advisory services here.

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?Have questions? Reach out to us here.

Posted by Perrin DesPortes, Co-Founder of Polaris Healthcare Partners

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