One of the most important considerations in the sale of a medical practice is that of attrition.
Beyond just getting a sales contract signed, the seller also needs to do everything in their power to keep the value of the practice intact moving forward so that the buyer realizes the full potential of the practice.
This is especially essential if the seller is being paid overtime in installments. If, once the buyer takes over, a few months down the line, the number of patient visits begins to drop, it won’t just be dispiriting for the buyer; it may actually make it difficult for them to meet their commitment of paying for the remainder of the practice.
One way to remedy concerns over attrition, as well as potentially deal with many other issues, is to have the seller stay on in the practice for a while. This could be transitional (temporary); as a consultant; as an employee; or as an independent contractor.
Any or all of these could be employed in some combination, and should be determined by the buyer and seller of the medical practice before the sales contract is signed. We'll go over these options in greater detail further later on in this post.
First, let's evaluate the pluses and minuses of having the original owner stay on or take off early.
From the seller’s perspective, there are several reasons why you may wish to continue being a part of the business for some time, even when you no longer own it:
The buyer of a medical practice may also see some advantages to having a seller stay on, even if only temporary. These advantages may include:
There are also situations where the new ownership and the seller may wish to part ways early on:
If the seller is looking at staying on board for a while, there are several forms this may take. They may include:
Let’s take a look at each.
If the buyer and the seller of a medical practice agree that the seller will stay on as an employee for a given length of time, we recommend that the stipulations of that work are included in the sales contract of the practice. These stipulations would include:
It’s possible that the buyer may wish to have the seller or seller’s employees stay on for a limited amount of time, or come on as a consultant/advisor here and there, and in this case it may be preferable to have them come on as independent contractors. An independent contractor in a medical practice is expected to be paid on a project-to-project basis, either by the hour or by flat-fee per project.
A practice could also agree to pay an independent contractor for a given number of hours per week for a given length of time (say, 30 hours per week for 3 months). In contrast to employees, independent contractors are not given health insurance or other benefits, nor are taxes taken out of the payments made to the contractor. It is the responsibility of the contractor to report to the IRS all payments made, and account for their own tax burden.
Independent contractors should be asked by the practice to sign an IRS W-9 form at the outset of their employment. This form allows the practice to file a 1099 form in January following each year of employment to show the IRS how much money was paid to the contractor. A link to the form may be found on the IRS website or by clicking here.
The IRS is very keen to have people be employees rather than independent contractors, and they often look very closely at independent contractor situations. If an independent contractor is being paid regularly for much of a year, the IRS may believe this person should instead be an employee, and either side may get audited.
When we represent sellers, we often suggest that the seller stay on for a month or two to help the buyer transition over, without pay. This is a negotiating point and obvious benefit to the seller, which we call a “runway” to success for the buyer. In fact, we may add to this that the buyer’s first payment on an installment plan not be until a couple of months after the signing of the sales contract just to sweeten the pot for the buyer. These kinds of agreements should also be written in the sales contract, specifying which duties will be expected of the seller, and for how long.
We’ve found that most successful practices are anchored by one or more exceptional practitioners who are quite well loved by their patients. In fact, a big part of the value of the medical practice being sold may lay in the goodwill generated by the history of those practitioners.
So once these practitioners are no longer part of the practice, what’s to prevent them from just moving nearby and opening another practice?
This is where a Non-Competition Agreement comes in. If the anchor providers are not planning on retiring or moving a good distance away from the practice, a buyer will want to protect their investment by being sure current and future patients stay with the practice.
If your seller is planning to continue working after the sale, with or without the buyer, we highly recommend adding a “Covenant Not To Compete” into the sales agreement. For greater detail on Non-Competes here, check out our post on them here.
In the final analysis, deciding whether or not a seller stays with the business as an employee, independent contractor, at-will employee, and/or working for free is a big decision. Much rides on the way these agreements are put into a sales contract, both from a liability perspective and the view of the IRS.
We specialize in helping practices of all sizes separate the signal from the noise. Let us help you. Arrange a free call by reaching out to us today.
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