Moving In and Moving Out – The Ins and Outs of Buying and Selling a Practice Everyone Forgets to Mention

VIN ROUNDS NOVEMBER 4, 2007

For a PDF of this Article, Click Here: Moving In & Moving Out – The Ins and Outs of Buying & Selling a Practice Everyone Forgets to Mention

Jim Stephenson, DVM
President—Appraiser
Simmons & Associates Northeast, P.C.

Good evening to all and thank you for your time and attention tonight.

Closing a practice sale, if an organized approach is taken, can conceivably occur in 30 days for a practice purchase, and 60 days with a real estate purchase, after the initial price and basic terms are agreed in writing and the financing applications submitted. On the other hand, some closings have been known to take up to six months! As in surgery, time is also trauma to a business transaction. This presentation will help you classify and prioritize the tasks of taking a practice to, and through a closing. It will also highlight a few pitfalls that, for the unwary might significantly delay the process.

Our discussion will assume the price, terms, financing and basic contract elements are all satisfied, the buyer’s due diligence is satisfactory and that a closing date is set with a high probability of a successful closing. Granted, those are all major and pivotal events, but after the deal is cut between the buyer and seller of a practice there is plenty of work to do as the new owner moves into and the departing owner moves out of the practice. Knowing what these chores are ahead of time will allow an organized and timely approach, insuring a timely closing date and a smooth transition. In our discussion this evening, along with the obvious, some of the not so obvious transition tasks and challenges will be highlighted. Using this information will help you develop a systematic approach to, “moving in or moving out.” Although there will be a different focus for the buyer and seller, many of the activities involve both parties working on the same task. In fact, coordination and communication between the buyer and seller are essential to expedite the process.

Much of the information below is based on feedback from buyers and sellers along with our experience of thirty years of practice sales. Every transaction is dynamic and distinct in some way. Suggestions you may have to make the closing and transition smoother for other participants are welcome. Handouts have been provided for your reference. They include a “To Do” list for the buyer and one for the seller. There is also a hand out of a Time-Line/Priority Matrix spreadsheet.

For purposes of the discussion tonight it would be helpful to understand the perspective of the participants.

Poll 1
Where are you in the buy/sell process?
a. Prospective Buyer
b. Prospective Buyer
b. Recently Purchased
c. Recently Sold
e. None of the Above

Thanks!

Every practice purchase and transition seems to travel its own path but working your way to a timely closing requires knowing how to set priorities on the different tasks that stand between you and closing. Even though there is some overlap, these tasks can be categorized for convenience.

Transactional
Organizational
Transitional
Operational

Transactional. These are the activities of the purchase itself, such as the sales contract and financing. This topic will not be addressed in this presentation. It needs its own space!

Organizational–The organization tasks are as if you were starting a new business in many aspects. They include the application and obtaining the necessary permits, insurances, and setting up your accounting and bookkeeping modules and protocols.
{shortened list , referred to handout matrix.}
1. Licenses and Permits
State Veterinary License
DEA License
Local Occupancy Permit, Business License (if required)
Federal Health Inspection License
Medical Waste Generator and Misc.

2. Insurances
Disability-Per Lender Requirement
Life-Per Lender Requirement
Fire, Casualty, Liability-for Facility and Grounds
Employee Health

3. Accounting/Bookkeeping
Business Entity Chosen-Formed
Apply for Tax ID Numbers
Federal Withholding
State Withholding
State Unemployment
Sales Tax Registration
Sales Tax Clearance Request
Open Bank Accounts
Establish Vendor Accounts
Establish Utility, and Other Accounts
Select and Establish Payroll Service
Define Benefits
Purchase Bookkeeping Software
Purchase Bookkeeping Hardware (if necessary)
Input Data into Bookkeeping Software (Chart of Accounts)

Hopefully you requested information from the state licensure board even before you made an offer on the practice. Otherwise, if you need a license in that state make it your first priority. If you have not done so during the negotiating, after you have agreed on price and terms contact your accountant to seek advice on the form of business entity appropriate for you. Immediately take the necessary steps to establish this entity with the help of your attorney. This may take a little more time than you anticipate since the names have to be cleared by the Secretary of State’s Office before they can be registered. If a name already exists that is similar to your chosen one, then you have to pick another!! The name of your business entity can not be the same as that of the seller’s. If the seller is using the name of the practice as the registered business entity you will need to register your entity with a different business name, doing business as (d.b.a.) the name of the practice. Once the business entity is set up have your accountant apply for the necessary tax numbers and registrations necessary to carry on business in your state. State and local laws may vary so you will need your accountant’s help with this. Once you have the tax registrations it is easier to begin to open your bank accounts and get a merchants account for credit card transactions.

Most likely you will be buying the assets, rather than the stock of the business. Therefore, from an organizational standpoint purchasing an existing business is treated as if the business is a new start up business. However, from the government’s standpoint, your new practice will become a full or part successor of the previous employer’s unemployment liabilities, and could become liable for any sales tax not paid. The seller needs to provide the ID numbers for the existing unemployment account and in some cases the sales tax registration number for assured compliance. The seller also needs to provide the account numbers and contact information for the vendors and utility companies, copies of contracts, etc., for proper registration and transition of other accounts, and in some cases contracts, leases, or agreements that may be transferred to the buyer.
Poll2
Which item may take as long as financing and is necessary prior to closing the transaction?

1. Obtaining life insurance
2. Business entity formation and acceptance by the state
3. Obtaining disability insurance
4. Sales tax certificate registration
5. All of the above

A. They all are wildcards at times, but obtaining disability insurance may take a month or more and is often overlooked as a priority item to be addressed immediately.

Immediately after striking a deal, apply for the disability insurance as required by your lender. This may involve a medical exam and sometimes undergoes a lengthy review by the insurer. Apply early so it does not hold up the closing. While you are at it, get your life insurance applied for as well. Some companies will do it all (AVMA GHLIT comes to mind.) Or, you may contact the same insurance vendors the seller is using for continuity. Your lender may also have insurance contacts that are familiar with their loan requirements and protocols, especially for the disability and life insurance. You may decide the best approach is to get estimates from both the existing insurance vendors, and an alternative company. However, sticking with the seller’s insurance companies at the onset will likely be efficient from a time perspective, as long as they are responsive to your time frame. You can shop for better deals and fits later. The same goes for selection of a payroll service.

Establish vendor accounts a couple of weeks prior to closing and discuss the opening purchase bargains and terms. You need not take advantage of these deals immediately so you have time to learn your inventory needs post closing before making these big orders. Having at least the major vendor accounts established prior to closing allows you to maintain inventory flow and avoid shortages the first week in.
Contact the utility companies the week before closing to set up these accounts and advise them of the day of closing. The seller needs to do call to cancel the accounts. Canceling by phone and in writing is a good idea. Keep track of who you speak with in case there are problems. Don’t forget to cancel your long distance service as well if it is through a company other than your regular phone company.

Remember, the seller will need to maintain their bookkeeping capabilities and thus the buyer will need to acquire their own bookkeeping software, and in some cases even the hardware, depending on the agreement between the parties. QuickBooks Pro seems to be the most common software program (an observation, not an endorsement.) Having this in place prior to closing allows you to set up your bookkeeping software module and enter your accounts prior to closing. The seller needs to make accommodations for a business office off premises for after closing use. Bookkeeping and accounting for the sold practice will continue for months or even longer in some instances. Have this planned out and implemented early in the process so you don’t find yourself with a lot of files and paperwork piled randomly in the back seat of your car the day of closing.

Now that the organizational tasks are addressed, lets move on to the transitional tasks.
Q&A break
Transitional tasks generally require the buyer and seller working together to provide the least interruption in the continuum between owners. These tasks include:

Assigned or Conveyed Contracts and/or Leases
Staff Notification
Establish Vendor and Other Accounts
Payroll Details
Staff Orientation
Final Settlement with Employees
Accounts Receivable
DEA Inventory
Inventory of Drugs and Supplies (If done)
Close Out Books for the Month, and Year to Date
Client Notification

For purposes of the Purchase and Sales Agreement the seller likely has already listed any contracts that may continue after the sale. But if formal notification and conveyance of the contract or lease is required, both the buyer and seller need to contact the company to provide a notice of sale and contact information for the new owner. Once the deal is certain the seller can notify the staff. The buyer should go on site a couple of weeks prior to closing and be formally introduced and endorsed to the staff by the seller, in an informal luncheon or similar venue. The seller will provide a list of the employees with their hours, compensation, benefits, and position, and also counsel the buyer on who the key personnel will be. A week before closing the buyer can then visit on site and speak with the key employees to discuss their role in the transition plans. The employee compensation and benefits should be determined and conveyed to the payroll service.

Fortunately in most cases the accounts receivable, “AR” are not a major asset in small animal practice. In LA or mixed it can be significant. In any case, there easier ways than others to handle their collection.
1. Purchase AR from seller. Normally they are not part of sale. However, after determining an appropriate discount, you may purchase the AR from the seller, as an additional asset. This simplifies the bookkeeping for both parties, and minimizes the need for further interaction between the seller and buyer after the closing.
2. Seller may take all accounts, names, balances, etc., and handle on their own. Some may even hire a collection agency at this point and go after all existing over due accounts.
3. Buyer may collect. It is difficult however to just forward the payments on to the seller, since many payments are by credit cards. To get around this, at closing, seller and buyer take an AR aging report. The buyer can write the seller checks at the end of 30, 60, and 90 days, for the amounts collected as determined by the AR report. Very little will be collected after 90 days. For that matter even after 60 days. Provide the seller a list of delinquents and long term plan holders after 90 days, if the seller wants it, and have the seller collect on his/her own after that point. (usually not necessary since collectables miniscule to non-existent after 90 days.)

If an inventory of drugs and supplies is to be taken this should be done just prior to closing. A drug inventory can be time consuming but scheduling time the day prior to closing is ideal if the exact amounts are to be factored into the closing statement. In reality, the concept of conveying a working inventory within a range of value often allows this step to be skipped. If this is the case, an inventory is taken by the buyer and seller at a more convenient time prior to closing so the buyer can assess the inventory and develop confidence that it will be complete within the range specified.

Poll 3
True or False?

Prior to changing ownership the seller must return all of the controlled drugs to satisfy the requirements of the DEA.

A. False. Although the local enforcement branch of the DEA should be consulted, in our region the Class III and IV drugs can stay, as long as an appropriate inventory and accounting is made by the seller and formally (in writing) accepted by the buyer. Drug Enforcement Administration Home The buyer should acquire their own controlled substances log book prior to closing for their initial inventory and tracking the controlled drugs. AAHA has a prototypical log book many practices use.
Client notification of the sale serves different purposes for the buyer and seller. The seller may not want to participate in the costs of a full client mailing since there is no monetary return for them. A nicely prepared one page letter made available to each client as they visit the practice will typically suffice for purposes of the seller thanking the clients and endorsing the new owner. The buyer, on the other hand, may want to budget for advertisement in the local paper and/or a mailing and use the opportunity for promotion of the practice as well as an introduction. Some buyers have expressed reluctance to be too public about announcements fearing clients may be reluctant to return to the practice if the previous owner is no longer present. This has not been my observation, as there typically is substantial goodwill in the location, facility, and staff. The new owner will likely get at least one chance with every client (don’t blow it!)

Q&A break
Last, but certainly not least are the operational tasks.

Operational tasks are those needed to actually run the practice operationally starting on day one. Ideally you want to walk in the door on day one without the practice operations missing a beat. They include:

Software Orientation
Merchant Accounts (Credit Card Accounts)
Facilities Orientation-Keys, Alarm Codes, etc.
Cash for the Cash Box
Try and have most of the organization tasks completed prior to the week before closing so you can concentrate on staff orientation, closing details, and vital operational details. Learn the basic layout and function of the veterinary proprietary software prior to the first day. If time or circumstances do not allow an adequate on site software discovery prior to closing, you can get a demo from company. Your staff will guide you through this as you acquaint yourself post ownership, but some knowledge going in can make the first few days a lot less tense. Make sure you have acquired a merchants account for processing credit cards prior to closing, and even better yet, have it up and running. Your bank can help you with this. You may want to use the same account the clinic already has for ease of transition, but the processing machine will need to be reprogrammed. Whoever you use for this service, be sure they have a plan to allow for a seamless transition and will be available your first day of operation for troubleshooting the machine. You do not want to spend your first day of ownership fussing with this while having clients glare at you while they are trying to pay. That is no way to start your new life. If you are getting a new machine and an account with a different vendor, try and avoid the scam of the overpriced lease for a credit card processing machine you could purchase for 25% of the cost of the lease.
Prior to the closing, if possible become familiar with the basic workings of facility and equipment. If not, the seller will typically have agreed to stick around for a while at least to help learn the works of the facility and the equipment, along with other administrative and management aspects of the practice to help with the transition. In reality, the seller is only needed for a short while for this process. Typically a few hours a day for a couple of weeks. Introductions and endorsements to key clients during this time period may be desired by the buyer and seller. In a short time the new owner will have a feel for the flow and they typically begin to function better without the previous owner around. Although this may not seem intuitive, it plays out this way in almost every transition.
Don’t forget to transfer the keys at closing, and the alarm codes. That could be worse than a flittering credit card machine.
Many things happen in a short time span with a practice sale, especially for the buyer. This discussion, along with the handouts, will provide the opportunity for you to understand the bigger picture going into the process of closing a practice sale and transitioning into or out of a practice. There is a lot to do. With an organized approach, a sense of where the priorities lie, understanding the time frame involved for the individual tasks, and coordination between the parties, it can be a smooth and timely process.

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