Buying a Practice
There are many legal issues to consider if you are planning to purchase an established practice. The issues include:
- Legal consequences of hiring existing staff members.
- Ability to get your deposit returned if the transaction is not completed for any particular reason.
- Obtaining the landlord’s consent to transfer the existing lease or entering into a new lease.
- Ensuring that existing associates at the seller’s practice are bound by non-competition and non-solicitation agreements, so they don’t solicit the patients from the practice after you have purchased the practice.
Here are a few helpful resources to help you along the way:
- Buy vs. Starting Your Own Practice
- Financing Documents
- Registration of a Business Name
- Practice Appraisals
If you are an associate in one practice and plan to purchase a practice other than the one you are currently working at, a lawyer would have to analyze any existing associate agreement between you and the owner of the practice where you are currently practicing to determine if there are any restrictions on opening up a practice in your new proposed location. The lawyer can also advise you to what extent, if any, you can solicit the patients you served at your former location.
Once you agree upon some of the preliminary terms, the next step would be to have the lawyer write a comprehensive agreement of purchase and sale. This document will set out, in legal terms, all of the exact terms and conditions of the particular situation. The agreement of purchase and sale would generally be conditional upon certain things, including:
- Ability to get financing for the purchase price
- Ability to get the landlord to consent to your moving into the premises
- The removal of all liens against any of the property or assets of the selling practitioner
- The existing important staff member agreement to continue their employment with you
There are numerous legal searches called “due diligence” searches that a lawyer would conduct. These include searches to determine whether there are any taxes owed by the vendor, court judgments against the vendor, or liens on any of the assets being purchased. If any of such factors exist, they must be addressed prior to the purchase, to ensure you, as the buyer, are free and clear of any such problems.
A properly conducted purchase transaction realistically takes approximately six to eight weeks to complete, considering the fact that numerous legal searches have to be ordered, negotiations of the fine details with the vendor and landlord may take time, and numerous documents and agreements need to be prepared.
You have two options here: You can either buy an existing practice or you can start one up from scratch. Both have their advantages and disadvantages.
- Business Owner Assessment: Evaluate if you are ready for this step.
Purchasing an Existing Practice
The big advantage in this situation is that you are, in essence, purchasing a proven product. You are buying an established patient base that, hopefully, understands the value of your service and has become accustomed to receiving treatments.
There are, however, many aspects of the business you need to be informed of before you sign on the dotted line. For instance,
- What are the terms of the lease you are assuming?
- Is it still considered fair market value?
- What kind of patients does the practice treat?
- Are these the type of patients you would normally be trying to attract?
- Do the facilities or the equipment require upgrading?
- Is the purchase price based on an evaluation?
Many of our clients have come to us for help putting together their business plans and for advice on the financing of a practice purchase. Some of these clients are considering purchasing the practice where they have worked as an associate.
Others have simply found a practice for which the asking price seems reasonable. They go in and observe the practice for a couple of days and, if everything seems appropriate, they sign the deal and become the new owner.
Unfortunately, a couple of days of observations do not necessarily guarantee a good purchase.
Think about things like:
- Fees charged by the practitioner — are they below industry standard?
- How is the practice equipped — have treatment rooms or equipment been upgraded at all?
- The lease being assumed — is it reasonable? Do you have exclusivity? Is the rent appropriate for the area?
- Staff – do they have the level of expertise and professionalism that you want?
Once you have thought about the issues mentioned, are you still prepared to pay the price the vendor is asking?
The best thing you can do for yourself is to have an idea of the cost of setting up a practice from scratch and then compare it to the purchase price. While purchasing an established practice may give you instant cash flow, in some cases, you can set up a practice in the same area for half the price.
You may decide, though, that spending the extra money on an established practice is worth it if you are not prepared to accept the risks associated with a start-up practice. What matters is that you’ve considered all the aspects of the purchase.
Starting Your Own Practice from scratch
This can be the most exhilarating and terrifying time of your life. When you make the choice to start your own practice, you become the master of your own destiny. You have complete control over your success and only you can determine the practice’s growth.
By starting up you own practice you do not run the risk of purchasing an existing patient list and then having some of these patients leave. You are also not inheriting problem cases from the previous practitioner. Instead, the patients who come through your door are, in effect, chosen by you, because they are responding to your marketing efforts. You are also in a position to select your own equipment, instead of settling for someone else’s.
Setting up a practice is not for everyone. A lot of time and thought is required when selecting the location and you must be prepared to accept the fact that you will be building your own patient base from scratch. On average, it takes most individuals approximately four months to organize themselves and actually open the doors for business.
Most importantly, you must be prepared to delegate. For a new practitioner, this is an extremely difficult thing to do. On one hand, a new practitioner attempts to save money by doing everything him/herself. However, you must learn how to evaluate and understand the value of your time. For instance, if you have the ability to generate $100-300/hour, why would you spend your time playing receptionist or bookkeeper?
The key to being a successful practitioner is to recognize your strengths and weaknesses. Do what you do best and allow someone else to assist you with things that are outside of your skill set.
A lease is the legal agreement between you (as tenant) and the landlord of the premises where your practice is located. If you are planning to start a practice from scratch or purchase an existing practice, your lease will be a very significant document. Leases are complicated documents that place onerous obligations on tenants.
Too often tenants fail to spend the time or money to have their lawyer negotiate or explain the terms of their lease. As a result, tenants often do not understand its legal implications and the obligations they have undertaken by signing it. In these cases, the tenant can have serious difficulty when unexpected problems arise during their tenancy.
There is no such thing as a “standard” lease. Many leases, however, are slanted in favour of the landlord, delineating onerous obligations and limited rights for the tenant. A lawyer should review your lease prior to signing it and perhaps negotiate changes for such things as free rent, lessening your obligations, obtaining a right of first refusal on additional space in case you want to expand, renewal terms and preventing the landlord from renting other space in the building to your competitors.
There are numerous issues that need to be considered in the lease, including:
- Length of the term and right to terminate
- Renewal of term
- Yours and the landlord’s obligations under the lease
- Definition of rent and additional rent
- Whether fixtures remain the property of the tenant
- What happens in the event of a disaster
- Relocation of your premises
- Right to transfer your lease if you wish to sell your practice or move
If you are planning to buy an established practice or start a practice from scratch, you will most likely need to obtain a significant loan and line of credit to finance the purchase and operation of the practice. A lawyer can explain your obligations under the financial institution’s standard loan agreements and other related agreements.
The financial institutions will most likely ask you to sign a security agreement, which grants the financial institution a lien over all or some of your property and assets, such as your equipment, furniture and accounts receivables.
If you default on payment of the loan, the financial institution has numerous significant legal rights and remedies that you should be aware of when entering into the loan. The financial institution may also ask your spouse or family member to sign a personal guarantee that states they will pay the debt if you default on paying. This individual will have to obtain independent legal advice from a separate law firm than the one you have retained.
If you carry on business under a name other than your own personal name you are required to register the business name with the Ministry of Consumer and Commercial Relations.
In addition, under certain circumstances and depending upon your profession, you may have to register the name with your governing body.
There are certain requirements and restrictions regarding the use of business names other than your own individual name. Speak with a lawyer who can advise you on the law relating to the use of and registration of business names.
The following is general advice to help you legally protect your business:
- Seek legal advice at the earliest stages of your matter, as required. (Do not bring the lease to your lawyer a few days before you intend to move into the premises. A lawyer needs time to review the document, and to prepare and negotiate agreements on your behalf).
- Do not seek legal advice from your friend, neighbour or classmate unless s/he is a lawyer. All legal advice depends upon the particular circumstances of a situation. The legal advice that another lawyer may have given to your friend or colleague may not be applicable to your particular situation.
- Do not sign any agreement unless you have read it and clearly understand your obligations and rights under the agreement.
- Do not assume the agreement is “standard” and cannot be amended. A lawyer should analyze the agreement, explain its implications and advise you of what should be added or deleted from the agreement, so as to protect your legal interests.
- Do not attempt to negotiate with a landlord without consulting a lawyer, unless you are trained or skilled in negotiations. Negotiating on your own behalf without proper training could harm your legal interests. It is wise to spend a little money at the outset to try to negotiate changes to a lease such as a free rent period. It may actually save you a lot of money in the long run. Call a lawyer before you enter into serious negotiations with anyone.
- Put all verbal agreements in writing to avoid any misunderstanding about your obligations and rights.
- It is wise to take a preventative approach to protecting your legal interests.
- Seek out a lawyer who will be a part of your professional team of advisers, so you can run your practice with peace of mind.
Why have an appraisal completed?
- Valuation is required by banks (to borrow the money to buy the practice)
- Valuation helps a practitioner know what price is reasonable to pay
- Gives a quick check-up to your practice so that you can see how healthy it is
- Investment and tax planning – after all, your practice is a huge investment and should be considered as part of your portfolio
- Determine a price for selling (starting point)
- Legal Issues – such as divorce
Every situation is unique, but
- The seller always thinks that the practice is worth two to three times the actual value
Things to consider:
- How easy is it to step into the selling practitioner’s shoes?
- What can be done to compensate for fit differences?
- Retention (50%-95%)
- Who are the patients loyal to? Doctor/Clinic/Location
- Files (active vs. dormant)
- Non-competition agreements
- Quality of financial information
- Financial statements and tax returns
- Site visit and observation
- Area visit/demographics
- Evaluation of competitors
- Legal review of agreements
- Existing business plans
- Year-to-date results
- Complete listing of equipment, inventory and other assets
- Copy of lease agreement (if premises rented)
- Copy of any agreements with sub-contractors, associates, staff
- Detailed information about owner, key personnel and staff
- Hours of operation
Basic valuation steps:
- Normalize earnings
- Cash flow positive? Yes/No
- Yes: discounted or capitalized cash flow
- No: Asset-based valuation
- Determine discount/capitalization rate
- Estimate/opinion of value
Points to remember:
- Put your best foot forward
- Financial statements should be as clean as possible
- The better the information, the better the price (generally)
- Valuation is only the starting point