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Cover Story: Sealing the Deal: Expert Advice for Buying or Selling a Practice

Pallarito, Karen

doi: 10.1097/01.HJ.0000421125.12052.93
Cover Story

The devil is in the details when buying an audiology or dispensing practice, acquiring additional locations, or putting a business up for sale. Hundreds of thousands of dollars are at stake, and any oversight or misstep could cost a bundle.

And every deal is different — no one-size-fits-all strategy can be used for buying or selling a hearing healthcare practice — but private practice audiologists and dispensers can improve their chances for success by understanding the true value of the business and planning in advance.

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A client's motivation can really shape the deal, said Michael Cherewka, JD, an attorney in Wormleysburg, PA. A business owner who intends to fund a portion of his retirement from the practice's sale, for example, differs from a client who wants to pass the business along to a family member or key employee.

A lot of time will be devoted to maximizing the purchase price and finding the right buyer in the former case, he said, while price may not be so important in the latter. A buyer who is rolling up practices may need help with planning and scouting for possible acquisitions, he said. “Motivation. Many times that's going to be the key. That sets timing, that sets price, it tells us how committed to the process they are,” Mr. Cherewka said.

A seller's motivation also plays into the type of buyer that the business will attract, said Craig A. Castelli, the managing director at Bridge Ventures in Chicago. “When people come to me and say, ‘I'm looking to sell, but I want to retire. I don't want to work for the person more than a month or two,’ it automatically rules out a number of buyers who might look at that market and say, ‘I can only buy if the person's willing to stick around,’” he said.

Ward Wicht, a Biloxi, MS, business intermediary and owner of Audiology Practices and the website, urges potential sellers to think about timing. They must be mentally prepared to close the deal if they are ready to sell “and cross the finish line,” he said. Practice owners do not want a buyer looking though a lot of proprietary material about their business if they are going to back off the sale, he added, because if the buyer is a competitor, which is often the case, “you've really exposed yourself.”

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Sellers are often emotionally tied to their business, said Kathy Foltner, AuD, an independent audiology consultant in Chicago. Practice owners do not want to give away an asset they have spent a lifetime building, but they do have to be reasonable or buyers may walk away. “You need to be emotionally prepared to understand the true value of your business,” she said.

Buyers, too, are at risk of making decisions based on their gut rather than cold, hard facts. “Don't fall in love with it. It's not like buying a car,” said Marshall Rosner, a dispenser in the Minneapolis and St. Paul area. “You've got to put in a lot of due diligence.”

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Location can be important, but buyers of hearing aid dispensing and audiology practices are interested in cash flow and profit potential more than anything. A buyer will want to see at least three years of financials, including tax returns, balance sheets, and income statements, experts said. “The buyer needs to get some level of confidence [so] they understand what they're buying,” said Andrew D. Schwartz, CPA, the founder and managing partner of Schwartz & Schwartz in Woburn, MA, whose clients are primarily dentists. “They have to have a sense of what kind of cash flow they can expect to receive and from that how much profit they'll have at the end of the day.”

Typically, the buyer will want to know about the clientele, Mr. Cherewka said. How many clients does the practice see, how many are repeat clients, and what are their ages? Can a lease be assigned to the new owner? Will the building's owner sell it or lease it as part of his retirement strategy? Buyers should look for a practice in a community that can support the business. “If you don't have 20,000 seniors in your catchment area, it's going to be tough to make a go of it,” Mr. Rosner said. The practice's patient base is dying out if it has a large percentage, about 70 percent, of repeat patients, he added. “You want a business that has new blood coming into the pipeline.”

Still, it can be less risky to buy an existing private practice than to start from scratch. Cash flow is established, and there are existing patients, third-party payer contracts, and an established brand, Dr. Foltner said. You do not want to overpay if you decide to buy those things, she said. “If the current owner is asking such a high price that the business cash flow does not cover the purchase price payments, then you may be better off doing a start-up,” Dr. Foltner said.

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Selling a practice, especially for owners planning to retire, requires quite a bit of advance planning. Experts recommended that owners initiate the process three to five years before their exit date. Mr. Castelli, who advised starting a full five years in advance, said it takes six to 12 months to sell a business. Corporate buyers who typically pay the most to acquire a practice usually want practice owners to continue working for them for three years after the sale, according to Mr. Castelli. “So already we're at three and a half, four years prior to the sale date, and then the extra year gives them plenty of time to hem and haw over when to actually get started and gives them a buffer in case things take even longer than expected,” he said.

Sellers can also make their practice more attractive by boosting sales, selling down inventory, paying down or transferring liabilities on the balance sheet, and getting rid of outdated equipment and personal items. Start preparing staff to take more responsibility from if the owner plans to leave the practice after it is sold, Mr. Wicht said. When the owner eventually leaves, the practice “won't be damaged as much,” and the buyer will see “more value and less risk,” he said.

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Sellers naturally want to attract the highest possible price while buyers do not want to overpay. So what is a practice really worth? Owners must seek a valuation before making or accepting an offer they may regret later. A valuation will assess the practice's worth based on key industry metrics.

Dr. Foltner looks at cash flow and multiples of net revenue and adjusted net profit, among other things, when performing a client valuation. Buyers and sellers should know the market value before entering into negotiations, she said. “Far too many audiologists expect the buyer to do the practice valuation and then either accept it or not, which is kind of crazy because you have no idea what the practice is worth,” she said. “You could have a practice that's worth a million dollars, but somebody offers you a half a million dollars, and you think, ‘Ooh, a half a million dollars! That's a lot of money. OK, I'll take it.’ If you have a practice that's worth half a million dollars but you're expecting to get a million dollars, that would likely squelch any business deal.”

What are practices selling for these days? Existing data are proprietary, Mr. Castelli said, but the industry rule is the total of net sales. “That's what people talk about and what a lot of people think practices are worth,” he said. That Figure is derived from gross sales minus any returns for credit but before the cost of goods. “But I'll give you the caveat,” Mr. Castelli added. “I've never seen a practice sell for exactly one time [net sales], and [the prices] can vary wildly above and below that number.”

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The buyer has an opportunity to scrutinize the business more closely once a seller accepts an offer, Mr. Castelli said. The due diligence process can ferret out potential problems, such as Uniform Commercial Code filings, liens by creditors against the practice, outstanding litigation, and tax write-offs for business expenses that do not match the paper trail, he said.

One seller, for example, ran up $3,000 a month in credit card expenses on the company tab. “Something like that is a pretty big red flag that would most likely reduce the valuation significantly,” Mr. Castelli said.

Mr. Rosner, the founder of Rosner Hearing, a Sonus franchise, said buyers should be “on the lookout for guys who don't report all revenue.” He said he has encountered a number of smaller practices that maintain a set of books for the IRS and a separate set for themselves. “You want to see what they report to the IRS, and that's what you base your valuation on, not the one that they slip to you,” he said.

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Hearing aid manufacturers provide the bulk of the financing for practice acquisitions. Each of the “Big Six” manufacturers structure their deals differently, but the loans are generally tied to a commitment by the hearing healthcare provider to sell a certain volume of the manufacturer's product, usually about 80 percent of all the units sold by that practice, according to Mr. Castelli.

Some buyers prefer financing through a bank, a credit union, a Small Business Administration loan, or other independent source because no strings are attached like with vendor programs, experts said. Dr. Foltner said every buyer should have a business plan to show potential lenders, and it should include financial statements from one to three years that model projected results. It should also spell out the risks the business faces and possible solutions if those risks play out. “The reason for that is the banker is going to know what the risks are, and they want to know [if] the business owner knows what those risks are and has a plan to deal with [them],” she said.

Experts acknowledged that private financing can be difficult to attain. “Unless there's real estate involved, banks are not real good at loaning to service businesses,” Mr. Cherewka said. “There's no collateral they can get their hands around.” Sometimes sellers provide a portion of the financing, but sellers typically receive a promissory note from the buyer structured over about five years, Mr. Cherewka said. Sometimes, Mr. Wicht added, the Small Business Administration requires a seller to agree to that promissory note because it helps mitigate the buyer's risk if a problem unknown to the buyer arises.

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Hearing healthcare providers need to consult with an accountant before buying a practice because the way the company is set up and the way the buyer pays for the company has tax implications, Mr. Wicht said. Putting a business up for sale has tax implications, too. Proceeds from the sale of a practice's core assets, including patient lists, intangibles such as a practice's reputation, and any real estate, are taxed as long-term capital gains in the hearing healthcare industry, Mr. Cherewka said. Often, equipment included in a sale has already depreciated, he added. Proceeds from selling those assets are treated as ordinary income and are taxed at a higher rate.

Currently, the capital gains tax rate is 15 percent. Experts worry, though, that the rate will shoot up, perhaps as high as 25 percent in 2013 when tax cuts championed by former President George W. Bush are set to expire, according to The Washington Post's Wonkblog. (Jan. 25, 2012; see FastLinks.) Some of Mr. Wicht's clients are asking to close their sales before the end of the year for that reason. “We're a debtor nation right now, unfortunately, and capital gains are being discussed as a target for increasing tax revenue,” he said. “So it actually can get more expensive to sell your company, we think, in the near future.”

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