you change your mind about the timing or if circumstances arise over which you have little control. Always have your draft plan examined by legal and account- ing experts. There is little point in going through this only to fi nd that your nest egg is frittered away to Canada Revenue Agency, or you have unworkable or unenforceable covenants in your agreement. The same thing holds true for the idea of having the practice valued by a qualifi ed appraiser. This is the best way to fi nd out if it is worth less, or perhaps more, than what you had thought. SELLING OUT, ALL CASH A common failing among business owners (and a chiropractic practice must be considered as a service business) is that most think their business is the jewel to others that it is to them, and if offered for sale, it will be immediately snapped up. Unfortu- nately, it may not be. You must contend with buyer uncertainty and reluctance. Across the country, there are several chiropractic practices for sale, a shortage of qualifi ed buyers, and problems as- sociated with arranging financing, all making a cash sale difficult. Accordingly, the surest, and often the only, procedure is some form of seller fi nancing, such as a buy-in or an earn-out. THE BUY-IN/BUY-OUT The term “buy-in” refers to the purchaser whereas “buy-out” re- fers to the seller. However, both mean the same thing. This ar- rangement is most common when selling to a junior associate or partner. By this procedure you are paid out over the next few years, usually not less than two and seldom more than five. You remain active and in control until the debt owing to you is fully retired. The buyer becomes a working partner, increasing his/her ownership in stages. This is different from the earn-out (discussed below) where the selling price is adjustable – with the buy-in/ buy-out, the selling price of the practice is agreed to and settled at the time the buy-sell contract is entered into. One of the fi nancing methods for the buy-in/buy-out arrange- ment, is to deduct from the buyer – now a partner – from his/her wages and a percent of the net profi t based on this person’s in- creasing ownership an agreed to amount, which will be applied to the purchase price. This continues until your interest has been retired, the buyer owns it all and you leave the practice. However, you must ensure that a suffi cient amount can be withheld, so that you can be paid out within the allotted time frame. It is important that the payments to you – and the debt service to any other(s) who may have loaned the buyer money for the down payment – can be made from his/her income and still leave enough for this person to make a decent living. Otherwise the buyer will default – guaranteed. Alternatively, have the purchaser arrange financing elsewhere and pay you out now. Under this agreement, you remain under contract with the practice as his/her employee for a stated number of years, phasing out as you go. THE EARN-OUT Although not commonly used in the transfer of professional practices and small businesses, this arrangement could work well when selling over time to an outsider who is not presently involved in the practice. As an employee would already have a good idea of the value and potential of the practice, a buy-in with a fi xed price would be the better route. But, the intent of the earn-out is to accomplish two things. Although the seller can depart immediately, it can allow him/ her to remain with the practice, maintaining control until paid out, and it bridges the gap between the price the seller wants and what a buyer is willing to pay. The earn-out is a payment for performance after the deal is closed. After it is sold, if the practice reaches or exceeds a certain agreed upon financial in- take target, or other milestone, during a specifi ed period, the purchaser pays the seller additional compensation pursuant to an agreed upon formula. What does this mean? Buyers traditionally buy based on historical performance, whereas sellers want to include, in their valuation and price, an increment for potential growth and profi t increase. Whereas an increase in the seller’s price cannot be justifi ed by future “may- bes,” an earn-out is a logical way to cover the gap. It protects the purchaser who does not wish to overpay for “potential,” and the selling chiropractor who does not want to leave money on the table. AN EXAMPLE OF EARN-OUT For demonstration purposes, let us assume that during the past three years, your chiropractic practice has been growing at five per cent per year and, last year, it netted, after tax, $150,000. Using a 0.550 discount rate, the practice would have a value of $272,727. ($150,000 divided by 0.550) You are convinced Continued on Page 38 18 • CANADIAN CHIROPRACTOR | OCTOBER 2009 www.canadianchiropractor.ca
Chiropractic + Naturopathic Doctor October 2009: Page 18
