When Selling Your Business, Watch out for Client Attrition

By Cliff Ennico

November 13, 2018 6 min read

"I am a podiatrist with a fairly large practice in a large Midwestern city. My wife and I have decided to move south to Florida to be closer to our grandchildren. I have found a younger podiatrist who wants to take over my practice, but I'm not sure exactly how to put the deal together with him. Any suggestions?"

You have obviously worked hard and long to build this practice, and it's always a big letdown when owners realize how little theirs is actually worth when it comes time to sell.

Except for a few hard assets, such as computers, chairs, bookcases, supplies like bandages and workstations, most of the assets you sell will be soft assets, such as the patient records. And the fact is they aren't worth much.

Why? Because the key asset in any professional practice is ... you. People don't call podiatrists out of the Yellow Pages when they get a bunion. They talk to their neighbors, their relatives and their friends. And when they decide on a podiatrist, it's usually as much for personal reasons (they like your personality, your office decor or staff, the amount of time you spend answering their questions, your sensitivity to managing pain) as it is professional ones.

When you leave a professional practice, the value plummets. If your patients don't like the buyer for any reason, rational or not, they will pull their files and seek another podiatrist. I don't have statistics for podiatrists per se, but in general it's not uncommon for a professional practice to lose between 50 and 60 percent of its patients within three years of changing hands. Because of this high patient attrition rate, most medical practices sell at a significant discount from their actual value.

If that sounds unfair, think back to the last time a physician, dentist, accountant, lawyer, insurance broker or other professional you used for years decided to retire. Now ask yourself: Did you stick with the person who took over his or her practice, or did you go elsewhere? Enough said.

Here are some tips for selling a professional practice that will help keep patient attrition to a minimum and ensure that you get the highest possible price for your practice:

1) Get as much cash upfront as possible. Since you cannot control what happens in your practice after you sell, you need to be paid in full at the closing. If the buyer offers to pay you over time with interest, watch out — if he loses lots of patients because he has the personality of an ogre, he may want to renegotiate the deal and take it out of your hide, saying you misrepresented the number of actual patients you had. Since by that time you will be retired in Florida, the patients will already be gone and you won't want to throw good money after bad, you will probably agree to the buyer's unfair demand.

2) Ask the buyer for a three-year royalty on sales. If the buyer cannot afford to pay all cash, here's a better way to structure the deal: Have your assistant print out an Excel spreadsheet with the names, addresses and telephone numbers of all your current patients. Attach this list as an exhibit to the contract of sale. Then include a clause saying that you are entitled to a percentage (usually 20 to 30 percent) of the buyer's gross revenue from that list of patients over the next three years. Each month, the buyer will total that up and write you a check for your cut. You would not get a percentage from any new patients who come on board after the closing, and after three years, all royalty payments to you would cease. Be sure to include language giving you the right to audit the buyer's books and records during the three-year period, to keep him honest.

3) Help the buyer out during a transition period. Don't be too quick to leave town. Especially if there's a royalty involved, you need to hang around for a while (60 to 90 days is customary) and do everything possible to ensure that patient attrition is kept to a minimum. Be sure to send a letter to all of your patients singing the buyer's praises, and be there at least a few days a week to greet your patients and introduce them to the buyer personally. If the buyer expects you to work on patients during this period, make sure you are paid separately for that — it shouldn't be part of the purchase price.

4) Change should come slowly. If your practice has any unusual design features your patients find attractive but the buyer isn't wild about (such as distinctive artwork or a tropical fish tank), make sure the contract requires the buyer to maintain those for a period of time after the closing to minimize patient shock.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.

Photo credit: at Pixabay

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