Selling your practice? Define what you are selling when you set the price.
Practitioners that are selling their practice typically (through some valuation method or other mystical technique) come up with an asking price for the business entity along with the real estate. Both the business entity and real estate should be valued separately and each will generally have separate purchase agreements between the seller and the buyer in an actual sale. In this discussion, we will focus only on the business entity and when you set the selling price for it, you should define what is being sold.
Perhaps, the first decision is whether you are going to be selling assets or equity. Assets are things like furniture, fixtures, equipment (lumped together called FFE) inventory, cash in accounts, accounts receivable, and intangibles (such as covenant not to compete, clinic name, goodwill, sale barn contracts, etc.). Equity is determined by, the total assets minus the total liabilities. The net of this equation is equity. It commonly defines the value of the business stock or the business membership interest. Now it should be easy to see that the value or price for assets is potentially going to be very different from equity, unless there were no liabilities.
When one typically sells his or her practice to an outside buyer (not an employed associate), one is selling in most instances, a select group of assets. I call them assets typically sold (ATS), which has meaning for me, but for many of you, it may not. In most practices sales, the ATS include the following:
What assets are not typically sold? Things like cash in accounts (and in small animal practice, accounts receivable) excess inventory, personal investments under the business name, personal type assets (airplanes, motor homes, condos) under the business name, or any asset that really is not income producing or an operational asset. If these assets are included they should be added to the value obtained for ATS. Now, it should become very clear that if you give a value or price for ATS and your buyer thinks that the price includes something else (such as all the inventory you bought in that spring heartworm prevention special) a problem is likely to occur due to miscommunication. So define what you are talking about when you give a price including the level of inventories to transfer.When is equity sold? In my experience, usually only when you sell a partial membership interest in your business and take on a partner. This is sometimes called the purchase of stock, if you are a corporation. When this happens, the associate is buying part of everything in your business and this could include all the business assets and all the liabilities. It also could include contingent liabilities (pending lawsuits), if they are out there. Again, the value or price of equity is likely going to be different from the ATS because there are assets that are included with equity that are not included with ATS and there are liabilities that are going to be included, that are not included with ATS. Examples of liabilities are long term debt, operating cash loans, accounts payable, taxes payable, or other debt instruments or obligations which may be pending.
So, to make things clear to all the parties involved in your sale, define what you are selling when you set the price and also when you get an appraisal or valuation know what the value given represents, so you can be sure you are selling what you intend to for the price given. Buyers should also understand this and if you don’t know you better find out or find someone that can help you.