Failed Medical Practice Sale
Selling a business or medical practice is rarely easy and this month I was once again reminded of that fact. Here’s a high level post mortem of a failed medical practice sale with the main facts so it hopefully provides a learning experience.
A buyer made an offer to buy a medical practice just on 8 months ago. When the first offer was made in a Letter of Intent, the buyer wanted to close the sale in 2 months or the end of October. The seller had some bonus money coming to them from Obamacare that would be paid in late December and so made a counter offer which was to close by the middle of January so they could receive the Obamacare bonus money.
Things then went from bad to worse as one of the conditions of the offer was that the buyer had to get a loan approved. Their first application was made to Wells Fargo who said they would have the loan approved early January. Early January kept dragging on and on and so a second lender was approached and eventually approved their loan by the end of January.
Find the right attorney
With the finance now in place and the buyer’s attorney having been working on the transaction since October, the seller looked for an attorney to help with the legal documents necessary to close the sale. Unfortunately the attorney they hired refused to return my calls and let me give an update on the previous months of work I had done, keeping all the parties in the transaction up to date and understanding what was happening.
Find the right CPA
This lack of response from the professionals assisting the seller also carried over from the CPA the sellers were using. Over the course of the time I worked with the sellers I reached out to their CPA 7 times for help and each time never received a response.
During the preparation of the Purchase Agreement for the buyer by the attorney, he made a suggestion to rather than do a regular Stock sale to buy the Sellers Corporation, the proposal was made to do a Section 338 (h) 10 election which was a simple technique to allow the buyer to buy the corporation like an Asset sale. This would then allow the buyer, for tax purposes, to depreciate the assets at a higher rate. This would have created a negative tax effect for the seller, but the buyer agreed to cover any additional tax impact so the seller was fully protected. At different times contact was made with the sellers CPA to get his professional advice but unfortunately it was never forthcoming, even though he chose to charge the seller for the time he supposedly worked on researching the issue.
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Working with the landlord
Another issue that came into play was with the landlord. There were a number of different issues. One of them included the amount of space the seller had been leasing for about 10 years was understated by about 80 square feet or $200 per month. The landlord was insistent that the buyers sign a new lease including the additional 80 square feet, which they agreed to do.
At the beginning of May eventually all the main deal points were resolved. The last step to take place was finally having the seller and buyer have a final conversation as a very important time line in the transaction had now been breached and this created too much tension, as it turned out, that could not be resolved. This tension came from the original agreement that the seller would be able to stop working full-time by the end of March so she could retire. That is, as we were in early May, the buyer wanted the seller to continue working full-time until July 31 and then work part-time to the end of October. However, by this stage the seller was concerned the need for her to continue to work full-time would continue passed July 31 and so she refused to take the last steps to close the sale.
Time kills deals
There are many lessons from what happened in this transaction. First and foremost is that time kills deals. Although the buyer and seller initially signed an agreement in August, many things happened which eventually became too difficult to overcome. Some of these were out of any one parties control while others occurred to create tension in the deal. Over the course of the 8 months of working with all the parties in the transaction I received 723 emails. Each and every email was received and replied. Additionally, there were many phone calls and meetings with the different parties to keep the communication open. As the broker in the transaction, communication is my primary responsibility. In the case of this transaction it was my responsibility to keep informed the seller, the buyer and his two advisors, the attorneys for each party, the buyers two CPAs, the sellers CPA, the lender providing the loan for the buyer, the escrow company that held the buyers down-payment and finally the landlord.
Make no mistake that selling or buying a business is not easy. For good reason the sale of business only closes when there is a motivated buyer and a motivated seller, when the buyer is under no compulsion to buy and the seller is under no compulsion to sell and both parties have reasonable knowledge of all relevant facts.
If you would like more information about selling a business, selling a medical practice, buying a business, buying a franchise or a related service such as valuing a business, please visit my webpage Services and choose from the drop down menu the information you would like.
For more immediate help, you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.