Buying a practice or buying into a practice is a significant investment and commitment. You don’t just want to buy a practice but you want to buy a practice that you can successfully run for years to come. The first thing to do is assemble your team, a lender, a CPA, an attorney, a real estate tenant representative and a Practice Acquisitions specialist to negotiate the terms of the acquisition and coordinate the team. Practice acquisition generally consists of the following steps:
Think about what type of practice you would like to own and where would it be? Are you currently working there? If not, contact a practice broker to find out what practices are currently on the market. Contact a lender to get pre-qualified.
Once you’ve identified a practice, obtain the asking price and determine whether the practice is fairly priced. There are a number of ways to value a professional practice. We utilize the cash flow method because an educated buyer shouldn’t agree to pay a purchase price that can’t be supported by the practice cash flow. In other words, you don’t want to take a pay cut to buy the practice. Under this method the normalized earnings need to be enough to pay the debt service on a 10 year loan in the amount of the purchase price, on an after-tax basis. To determine normalized earnings obtain three prior years tax returns for the practice and have a conversation with the owners about expenses that a buyer may not incur (commonly referred to as add-backs ) to arrive at normalized earnings. Fair compensation to the buyer must be deducted as part of the normalized earning calculation. We have developed a proprietary tool to demonstrate that the purchase price will cash flow over ten years on an after-tax basis assuming that the practice achieves normalized earnings each year. Note that for CPA practices a portion of the purchase price will be conditioned on client retention. If the buyer and seller can agree on the terms of the sale a letter of intent (“LOI”) is drafted and signed by both parties. The LOI should contain contingencies for due diligence, financing and execution of an asset purchase agreement.
Prepare a business plan. The plan will help you formalize plans to operate and grow the practice including the services that will be offered and how it will be marketed. Contact us for a free template.
Get detailed records from the practice to make sure that you understand what you are buying and whether there are any problems not disclosed by the seller. Contact us for a due diligence checklist. Consider hiring a CPA to assist with this step. Also have the real estate inspected. If you are not purchasing the real estate then you will need to assume or enter into a lease for the property with at least a five year term. Contact a tenant representative to determine whether a lower rental rate is available.
Contact the lender to obtain financing.
After a letter of intent is signed, an asset purchase agreement (“APA”) is drafted. Usually the buyer’s attorney drafts the APA, however if the buyer’s attorney does not have experience with professional practice sales then it is more efficient for the seller’s attorney to draft the APA. Other than in sales of physician practices the buyer will normally want the seller to enter into a covenant not to compete. If real estate is involved a real estate purchase and sale agreement is also prepared.
Consult with your attorney and CPA to determine the type of entity (usually a corporation, professional corporation or LLC) that you wish to use to acquire and operate the practice. The entity will need a Federal ID# from the IRS. Your lender and CPA can assist you in identifying the necessary insurance and vendor contracts needed.
The closing should be effective at either the beginning or end of the day of closing.
Note that brokers, bankers, CPAs, lawyers and tenant representatives are listed in the Professions section of our web site.
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