Experienced practice owners understand the value of a well written contract and the value of getting all parties on the same page during an acquisition. When negotiating an acquisition, it’s always best to leverage an experienced acquisition consultant and lawyer to help you in structuring the deal. To help you identify some items you will want to discuss with your lawyer, we have developed an outline of the key considerations we frequently see addressed when structuring an acquisition.
Purchase Price/Business Valuation
A critical element of the deal is the valuation of the practice being acquired and the agreed upon purchase price. There are many factors that influence the value of a practice. It is also very easy for both parties to skew the value of the practice. That’s why it is crucial to get a certified and experienced professional to create an independent valuation of the practice. The other key benefit of getting a valuation from a qualified third party is it gives both the buyer and seller a concrete number to work with and removes much of the emotional factors that can artificially inflate or deflate price.
Another important detail for both parties to agree on is the timeline for the transition of the practice. This includes defining when to communicate the transition to clients, how long the previous owner will remain involved in the business, when the new owner will take control of the practice, when payments are made, etc. This helps define and communicate expectations for both parties and keep the deal on track.
Each Party’s Role
In addition to defining the sequence and timing of events, it is essential to outline the roles and responsibilities of each party throughout the process. If not defined, this too becomes a significant point of contention during the transaction and can even kill deals. Each deal and each buyer and seller are unique. However, it is still important to define the roles and responsibilities of all parties, especially as it concerns the transition phase.
Seller’s Existing Contractual Obligations
Oftentimes, an existing practice will have a number of contractual obligations including leases on office space, equipment rentals, advertising, and professional services. As part of the process the seller should disclose all obligations including the terms of the contracts and points of contact. The buyer can then determine if they will assume any of those obligations. If the buyer chooses not to, the seller can find ways to satisfactorily terminate those contracts or the deal can be postponed until the terms of those contracts are fulfilled. In either case, all obligations, how they will be handled, and who is assuming legal responsibility for those contracts should be outlined in writing.
Mediation and Arbitration
As in any legal arrangement, protocols for handling any breach of contract or disagreement should be included in the purchasing agreement. There is standard language that many lawyers include in their contracts. Each party can also offer their own changes or additions, so long as both parties agree to how the conflicts are handled and put it all in writing. It is important to note, that it is common to leverage a third-party mediation and arbitration service should the need arise. This ensures an unbiased agent is working to resolve the issue. This too is often designated in the contract, usually just as an agreement to leverage a third party or in some cases a specific agent or service provider is named.
Any Other Terms and Conditions
Depending on the needs and desires of the situation and each party, the buyer and seller may choose to include other terms and conditions that may not be “typical” of a purchase agreement. Things such as access or attendance to client functions, sponsorship perks, access for answering questions after the deal closing, and even ownership of certain office fixtures can and should be laid out in writing in the agreement. Essentially, anything that can be disagreed on, that will exchange hands, or that can be considered property or privileges of the business should be outlined in the contract in order to avoid disagreements down the line.
The development and execution of the purchase agreement is one of the most important elements of the whole process. Very few sellers or buyers have the skills and knowledge to fully develop and execute the agreement in a way that is legally compliant and that protects both parties sufficiently. It is best to leverage an experienced advisor or lawyer in this process to ensure a fair and positive outcome for both parties.