It can be hard to know when to sell your practice. There may never actually be a “right” time. As such, holding on for that optimal point may just be holding you back from the next phase of your life.
When you are thinking about stepping back from ownership, remember that it does not mean you need to hang up your stethoscope as well. There are many doctors that continue to practice post sale. In fact, it is common that as part of the sale process that a new owner may require you to continue to work in the practice for two to three years post sale to ensure that smooth transition.
Having been involved with many practice sales, William Buck has developed some tips for those wishing to plan for their exit. We’ve outlined these below.
Apart from the lifestyle elements and the desire to slow down, the sale price will also include the financial element. How much is your practice worth? Do you have any real idea?
When looking at the sale process, we encourage practice owners to undertake a valuation of their practice around five years from the point that they are really aiming to be able to stop work. Note that this is not the same as when you may “have” to stop work.
A valuation will provide you with two key numbers, the future maintainable earnings and the risk multiple. The future maintainable earnings is the expected cashflow that an investor is purchasing as part of the sale. It will be different to your profit figure as shown in your profit and loss. The risk multiple reflects the risks identified in your practice which are likely to impact the certainty of that cashflow.
Undertaking this process five years from a retirement date gives you at least two years to work on any issues identified from the valuation to improve your sale outcome. You then have time to market the practice for sale and then have around 3 more years to work in the practice post sale. Although it can seem a long time, the five years will go very fast!
When selling, you have the option of bringing a doctor that is working for you through as an equity holder or selling to a third party. There is significant activity in the market place now from large and smaller corporate players. Many of the smaller players are entrepreneurial doctors looking to expand. It is important to understand what you are wanting from a buyer as part of the sale process. Do you want someone to maintain your practice as you have? Do you want the most money from the sale? Do you want a little of both? Having a clear idea of this will help shape your target buyer.
You can then choose how you will find the buyer. You can approach practice brokers or even speak with William Buck and we can assist with making introductions to potential purchasers.
Adjustments on the sale
As part of the sale, a purchaser will most likely take over the employment of your staff. This will mean that they also assume the liability for staff entitlements. It is common for the sale price to be reduced for this. If you have long term staff this can be a substantial adjustment.
If you participate in either the Practice Incentives Program (PIP) or the Workforce Incentive Program (WIP) (PNIP), adjustments may be required depending on settlement date, rent adjustments, adjustments for the stock you hold (medical supplies) and the transfer of your lease.
Note that if you are leasing premises from a large corporate entity, the transfer of the lease to a new owner can be an annoying process – be prepared for delays and high levels of frustration.
Capital Gains Tax
Many general practices will meet the criteria of a small business as outlined by the Australian Taxation Office (ATO). As such, they may be eligible for the small business capital gains tax (CGT) concessions. These concessions have existed for many years now but are not widely known.
Understanding CGT concessions and their application should be part of the planning process for a sale.
The use of these small business concessions could mean that the entire sale proceeds can be received by you totally tax free!
It is common practice for a buyer to ask the previous owner to work for a period oof time post sale. This can often be up to three years. for the owner to be asked to During this time, it is reasonable that you may be able to take additional holidays and scale back your hours. This requirement is about ensuring a smooth transition of the business to the new owner. If you opt not to do this, it could mean that the sale price will reduce to reflect the perceived additional risk.
Thinking about this, I recommend that you have a service agreement drafted up as part of the sale documents that reflect the terms and conditions under which you would like to work. I would not leave it to the incoming purchaser to set these terms. By providing them with your ideal working arrangement, you have a better starting point for negotiation.
Stepping back from practice ownership is a process which, if managed effectively and planned well, can provide you with a great tax-free lump sum and allow you to walk away under terms of your choosing without a bad taste in your mouth.
If you would like a confidential discussion on this process, please contact myself, Paul Copeland, at William Buck.