We ask two experts the same question to give you two different answers on a complex issue
QUESTION I haven’t been able to get my sale price. Is there a way I can get additional money if the practice does well after the sale?
Lynne Nelson
If the additional money you would gain is based solely on the buyer exceeding your numbers, it would be very unusual. From my experience this has been accomplished in special circumstances such as a sudden death or disability where a practice is sold below market value to expedite a quick sale with the additional cash being rewarded after the new practitioner takes over and keeps the practice moving forward and on usual pace.
You may be able to work back and gain additional monies, but putting that income toward sale price rather then paid productivity is not what I believe the above question is asking.
In some instances I have ran across a practice or two that possesses intrinsic value. For a variety of reasons the practice is underperforming and with the help of a young ambitious purchaser the productivity would go up markedly to the purchaser’s satisfaction. However, you will have trouble convincing a purchaser to pay for that. In my experience the practice value is based on an appraisal that takes into account the performance of the practice and the different characteristics of the practice. If your desired sale price is over market value, you may wish to work a year longer to make up the difference rather then mounting such a challenging effort to get a higher sale price. There is something to be said for the piece of mind one receives in an uncomplicated purchase and sale agreement, where both parties know exactly what to expect when documents are signed.
Lynne Nelson is senior broker at Consani Seims, Ltd. and ADS Northwest, and cofounder of Practice Management Associates, LLC. For more information, contact her at (206) 920-6217, by email at [email protected], or via www.mydentalconsultants.com.
QUESTION I haven’t been able to get my sale price. Is there a way I can get additional money if the practice does well after the sale?
Tom Snyder, DMD, MBA
If you are stuck on a sale price and the offer is lower than what you anticipated, discuss with the purchaser the concept of earn-out. An earn-out is a way in which you can receive additional income should the practice meet certain performance criteria. With the down turn in our economy a number of practices have been experiencing decreases from a steady revenue decline over the past few years, and that has been impacting their practice values.
Earn-outs are usually applied if the Seller remains after the sale. The earn-out payment period can vary, usually from 12 to 36 months. The first step in determining an earn-out is to agree upon additional amount that can be earned if the practice achieves certain performance levels and for what period of time. There may some additional criteria that need to be met, for example, requiring the Seller to practice for a certain number of days per year, and/ or achieving a minimum production/ collection goal. The next step is to determine what percentage of Net Profit the Seller is entitled to receive as the earn out payment for the agreed upon time frame. A percentage of net profit must be also determined (for example 30 %) that will constitute the earn out payment for that year. The earn out payment is usually capped, for example, $75,000 payable over a three year time frame. Net Profit is determined by defining all of the practice’s Fixed and Variable operating expenses as well as a target compensation for the Purchaser. The balance is then the available Net Profit that will be shared. By guaranteeing a pre-determined compensation to the Purchaser, he/she is assured there will be no financial hardships to the Purchaser when making the earn out payment . And in this example the Purchaser would get 70 % of that Net Profit in excess of his/her Target compensation. So this is the ultimate “win- win” whereby both parties benefit from the practice performing at a higher level than when the practice was sold.
Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].
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