Selling a medical practice involves vital planning issues beyond the sales transaction. Liability and risk management planning should be part of every financial plan for sellers.
I see many levels of medical practice sales; from simple asset sales that allow doctors to simply hand over the reins and realize a small profit (or escape a growing liability in a failing practice) to much larger sales that can net the seller a substantial profit. Whatever the numbers, there are two key issues I remind my practice owners and executive clients about:
• Your wealth is more finite than ever before.
Great, you sold your business and got a nice chunk of cash, but that cash now has to last as long as you live, and in many cases will not be replaced with your actively earned income - especially for those who may be retiring at the sale of the practice. That "missing" income is typically substantially greater than the investment income from the sale proceeds of most average practices. I often caution clients that disciplined spending and adherence to budgets are an important part of financial longevity; idle hands are expensive playthings for some professionals who suddenly find themselves "free" after decades of being locked up inside their practices.
This means that your due diligence on investments, advisers, and personal risk management must be in top shape. If you were like the hundreds of thousands of doctors who suffered significant investment losses in 2001 or 2008, imagine how it would feel or affect your long-term plans if that happened after you stopped earning an income; many of those doctors are now back at work.
Planning for various potential expenses like long-term care should be done while you are relatively young, healthy, under-writeable, and well funded. A full 40 percent of American bankruptcies are due to medical bills, including people with higher incomes. I also typically advise clients to review their estate planning and life insurance planning at this time.
• You may be more liquid and collectible than ever before.
If you've realized a profit from the sale of a large or successful practice, (or any other business for that matter) you may enjoy a cash position that is greater that you've ever experienced at one time. I have many clients that make seven figures a year, but have never held a multi-million-dollar check in their hands before. This means you need to have a plan to secure this additional wealth from a variety of exposures, ranging from tail liability if you practice medicine, to a non-malpractice related exposure like a car accident or civil lawsuit by the buyer themselves.
Remember that the buyers rely on your representations of future practice revenue and a variety of other issues - if they for any reason lack your business/medical acumen, they and their lawyers will often look to recover at least part of the proceeds of the sale from you. I advise a full review of the seller's asset protection plan for existing assets, new liquidity, and securing any income stream from an earn-out or buy-out plan where the seller receives a stream of payments.
I don't want you, your spouse, or your revocable living trust to be the holder of the "note" on the sale, in whatever form it may be drafted. I typically use a separate legal entity that provides a variety of estate planning, asset management, and risk segregation benefits, including asset protection. In other words, if you are personally being sued I want to make sure that income stream can be safely received without it being accessible to any future, unforeseeable risk. Think of this as "net-worth insurance" meaning that it's time sensitive and can't be legally transferred later on if you run into trouble. Finally, I make sure the seller is well represented on any required security interest in the practice itself, if it is not a cash sale. This may include personal guarantees, life insurance on the buyer, and various other collateral that may be reasonably required.