OD -- OD Practice Sales

One of the most common transactions in optometry is the purchase or sale of an optometry practice. There are two common forms of this transaction:

• A buyer comes along and wishes to purchase the practice
• A buyer is joining a practice as an owner

In either case the buyer may be an existing associate in the practice or may be an outside individual with no prior relationship to the practice. It really does not matter, with one exception. In many cases the buyer is a son or daughter of a retiring optometrist. That creates some special considerations because it touches upon estate planning/inheritance and related tax considerations. Of course, it may also relax some of the formalities such as the need for a personal guarantee on a seller note. 

First, an initial note. Sales between optometrists are unlike Private Equity (PE) sale transactions. The information here pertains to transactions between optometrists, not PE acquisitions of a practice. There is a separate article that discusses PE acquisitions. 

The Process

Speaking now of a buyer buying a practice (not a buy-in), generally, here is the process one can expect. 

• General communications between seller or seller's broker and buyer or buyer's broker. 
• Initial exchange of general information such as asking price, gross sales, etc. 
  • A non-disclosure agreement may be requested by some Seller's even at this early stage
• Offers and Counter-Offers leading to a signed Letter of Intent 
  • The LOI should address key terms, including whether it will be an asset sale or a stock sale. 
• Buyer initiates due diligence process
• Buyer initiates with potential lenders
• Hiring of legal counsel
• Drafting and signing of definitive agreements
• Lease/Lease Assignment
• Funding
• Closing

Valuation

More often than not, this is the first topic of interest to sellers and buyers: how much? 

There are actually two parts to that question. The first is a shared concern between Seller and Buyer, and that is, what's the value or sales price of the practice? Unlike in the PE setting, in most cases the sales price is viewed in terms of a percentage of the annual gross revenue. That, however, can be misleading in some cases because "gross revenue" doesn't pay the bills, net revenue does. A practice grossing $800,000/year but netting $300,000 may be more "valuable" than one grossing $1.6M and netting $150,000! So I advise both Sellers and Buyers to not look at gross revenue in a vacuum. A common formula for valuation is 2x the Net revenue (i.e., seller's total earnings). Generally, a high-net practice will generally sell for a higher percent of the gross revenue than will a low net practice. In some cases the Seller will have obtained a formal practice appraisal. Those appraisals will typically then be the basis for the initial asking price. 

The second aspect of valuation is one that primarily impacts Buyers: is the practice affordable? What does that mean? It means, after you take into consideration the debt payment from the purchase is there enough cash flow to meet or exceed your individual financial needs (i.e., your cost of living for rent/mortgage, student loans, food, etc.)? (This may matter to Seller if the Seller is financing any part of the sale. Seller's don't want Buyer's to default because they purchased a practice, even at a very fair price, that they could not afford because of their cost of living demands.)

Also, do keep in mind that if the Buyer is obtaining funding from a commercial bank/lender, whatever the parties agree to for the valuation will be independently reviewed by the lender and loan approval may depend on the bank agreeing that the valuation is fair and affordable. 

Role of the Attorney(s)

In about half of cases, the Seller and the Buyer each have their own legal counsel. In the other half the parties agree to "share" a lawyer (with appropriate waivers of the conflict of interest). In those cases the attorney's job is to draft definitive agreements that fairly and accurately reflect the deal the parties have made. It is not to advocate for one party to gain an "advantage" over the other. When a single attorney represents both Seller and Buyer the cost for legal representation is lower and the transaction proceeds more quickly. However, each side loses having their own advocate to push for terms more favorable to that party. Those are the pros and cons. 

That said, the primary role of the lawyer or lawyers is to prepare the definitive sale agreement and any ancillary agreements required (such as a promissory note, employment agreement, etc.) and advise clients on the meaning of various provisions, their rights and responsibilities under the agreements, etc. Except in the simplest of transactions there should be at least one attorney experienced in the sale of professional practices is involved in the transaction to ensure the paperwork is done correctly and is thorough. 

For those instances where, for whatever reason, the parties do not want to hire a lawyer and want to do the transaction paperwork themselves, a Model Practice Purchase Agreement, along with model ancillary agreements such as promissory note, security agreement, and personal guarantee, can be purchased directly from Dr. Steinberg from this link. 

Special Considerations

Here is a partial list of the issues and matters that the purchase agreement should be addressing.

• What is being sold, exactly. Included and excluded assets. 
• What the consideration is and how it will be paid.
• Representations and warranties concerning the accuracy of the data provided by Seller.
• Allocation of the assets for IRS purposes.
• Non-compete and non-solicitation provisions.
• Transition period while the Buyer is obtaining credentialing.
• Allocation of Accounts Receivable and Accounts Payable.
• Post-Close employment of the Seller.
• Assignment of various rights such as to websites, domain names, etc. 
• Contingencies on the closing (lending, lease, etc.). 
• If Seller owns the real property, new lease terms/new lease.
• Dispute resolution procedures. 
• Handling of "work in progress," especially for medical, IPL, and surgical/co-management patients.