Selling our practice: A real roller-coaster ride

November 4, 2005

The process isn't for the faint of heart, the authors discovered.

After sharing a family practice for almost 22 years, we had no intention of dying in harness. Still, we weren't ready to retire, and neither were we ready to sell our business and work for someone else. Those were both options for the future, certainly, but not just yet.

Then we noticed an ad in a month-old copy of our state medical journal. Someone was looking to purchase a medical practice. Out of curiosity, we called the number listed. Not quite 24 hours later, we were showing a couple-we'll call them the Smiths-around our office. The woman, in her late 40s, was the physician-her husband, in his early 50s, a businessman. Apparently impressed by what they saw, they each asked a lot of questions, including the sale price. The query caught us off guard, since we'd discussed very few details of a possible sale and had only a vague idea of the price we wanted. When we suggested a number that even we thought too high to be serious-just under 50 percent of our annual collections-neither of the Smiths raised an eyebrow. After that, they departed, promising to be in contact with us in the near future.

Truthfully, we didn't expect to hear from them again. After all, how many physicians these days actually buy practices? And besides, if we did hear from them, were we ready to give up control of our business? But a few days later, they did call, leaving a message that indicated they were interested in moving forward.

Grappling with technical issues

Although the Smiths had offered us close to our asking price (about 40 percent of annual collections), that still left many other open questions. For example, since our practice was set up as a PC, it was crucial for all parties to agree on what kind of sale it would be.

If it were in the form of stock in the corporation, the proceeds we received would be treated as a long-term capital gain, which would be a distinct tax advantage for us. (The current long-term capital gain rate is 15 percent.) If, on the other hand, the sale was for the components of the practice-hard assets, such as furniture, and accounts receivable, for instance-that wouldn't be to our advantage, because the proceeds would be treated as ordinary income that the corporation would have to pay income tax on. To make matters worse, if we decided to withdraw this money as a dividend, we'd end up paying income tax at the 15 percent dividend rate on that withdrawal-the proverbial double whammy! Happily, we negotiated a deal that was for 100 percent of stock in the corporation.

Our ownership of the building in which we practiced also raised another series of questions. Facing the prospect of being the Smith's future landlords, we had to negotiate the terms and duration of the lease, the amount of the rent, and who'd be responsible for utilities and cleaning.

Our lawyers incorporated those provisions in a contract of sale-and arranged a date when copies of this contract could be exchanged. But the date came and went-and there was no word from the Smiths. Then, several weeks later, Mr. Smith left a message explaining the reason for the delay-his bank needed additional financial details about our practice. The snag didn't surprise us: After all, why would any bank lend money to buy something as nebulous as a medical practice?

Our suspicions were confirmed during our next meeting. Mr. Smith proposed that we, the sellers, finance part of the purchase price. That struck us as a bad idea: If the Smiths reneged on the loan or failed to make a go of the practice, we'd be left high and dry. The meeting ended with Mr. Smith assuring us that he would somehow get the financing that he and his wife needed.

Several more weeks passed, and we decided that the deal was probably dead. But once again the Smiths surprised us, blaming the most recent delay on the house they were building.