Keeping Client "Attrition" Low When Selling a Professional Practice

Cliff Ennico
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Posted: Sep 15, 2010 12:01 AM

"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 to realize how little it's actually worth when it comes time to sell out.

Except for a few "hard assets" such as computers, chairs, bookcases, supplies such as bandages, and workstations, most of the assets you are selling 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, relatives and 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) than 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 percent 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 to 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 a question: 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 up front 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 the buyer 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 are already 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 of 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 percent 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 up his gross revenue from those patients and write you a check for your "cut." You would not get a percentage from any new patients that 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 or her 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 personally to the buyer. 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 (such as artwork or a tropical fish tank) but the buyer isn't wild about, make sure the contract requires the buyer to maintain those for a period of time after the closing to minimize patient "shock."