Selling Your Practice - Ancillary Concerns
2007-04-26 14:37:07So you have just finished speaking with a business broker or Merger and Acquisition specialist and everything seems good. They have promised to market your practice confidentially and to let you know what they think you will get for the business. Now you can sit back and let them do their thing and not worry about it until an offer comes in right? WRONG!!!! If you want to make sure that you get full value for your business and are able to take as much home as possible your job has just started.
When selling your practice, you should have an entire team on board and not just the medical business intermediary. Each person on your team brings value to you and dollars to your bank account. In other articles we will discuss the roles of lenders, CPAs and corporate attorneys, but today let's focus on three team members who bring value to the bottom line; the medical business appraiser, the tax attorney and the asset manager.
Many business brokers and business intermediaries will tell you that they can value your business without your going through the expense of an independent valuation. But in most cases, the business intermediaries have not had the special training required for such an appraisal and rarely do they have the certifications that are required to be an effective appraiser. Most often the business intermediary will either use an industry multiplier or some sort of software to value your practice. Both of these appraisal techniques leave quite a bit to be desired. Both are generally driven only by numbers and do not take into account the various factors that really make your practice special. Further, those who may consider purchasing your business will often discount valuations done by the business intermediary on the theory that the business broker has an inherent interest in the purchase price of the business as the higher the selling price the better commission that the business broker will receive.
Additionally, a third party appraisal will look to the intangibles that make your business unique. Such factors as research into your end of the industry combined with research into your geographical trade area can really make a huge difference in price. We have often seen valuations where the industry multiplier stated that the value was three times cash flow whereas after a bit of research and review of other intangible factors, the valuation came out at four and half times cash flow. So how much of a difference does this make? Let's assume that your practice has a cash flow of $350,000 and we use the industry multiplier of three times, we come up with a sales value of $1,050,000. Now that's not too shabby. However, what would have happened had we spent a little time and money and gotten that third party valuation? Well then we would have ended up with a sales value of $1,575,000. Wow! Over half a million more in value!
The next question that comes up is why and when should I consider engaging a tax attorney to aid me in the sale of my practice. The answer will surprise you. The best time to hire this practitioner is between two and three years prior to contemplation of sale of the practice. While that is optimal, hiring the tax attorney any time prior to the actual sale may do you some good. There are a wide variety of tax strategies that can be used to defer your capital gains taxes on the sale of the practice. Such strategies include The Deferred Sales Strategy (c) , Charitable Remainder Trusts and Installment Sales. These strategies can often reduce your tax liability by hundreds of thousands of dollars. Yet, if you don't give the tax attorneys the proper amount of time to set up a property tax deferral methodology there is little they can do for you. So what kind of savings are we talking about? Let's assume that it cost you $100,000 to set up your practice those many years ago. This $100,000 is referred to as your basis in the business and everything on top of it is subject to capital gains tax at the time of sale, if no planning is done. Using our $1,575,000 number and assuming that it would be taxed as an asset sale under the long term capital gains taxation rates; you would pay an approximate total of 24.3% taxes (15% federal and 9.3% California) on $1,475,000 or an estimated tax of $358,425. We are assuming that the business was sold in California; other states have varying rates on long term capital gains. Appropriate tax planning prior to the sale of the practice could significantly reduce the immediate tax bite and may lead to an indefinite deferral of those taxes.
Now for the final step, here you are, you have obtained a good price for your business, worked with your tax attorneys to defer your taxes and now you have a nice large sum of cash. What shall we do? Go to Hawaii? Buy a Yacht? Go to dinner in Paris? All excellent ideas, but wait, we still have to worry about the future. While we have all this cash, our golden goose has passed on to another. We will still need some income so its time to invest our money.
Actually, if we were smart we would have brought in an asset manager to work with the tax attorneys and CPA's prior to the sale of the practice. Doing so allows the tax attorneys to work with the asset managers to create a financial plan that meets both the goals of reducing taxes while maintaining an livable income by way of investments. While I am certainly not qualified to recommend any investment strategy, I always recommend that the seller of a successful health care practice work with a highly qualified and experienced wealth manager. Often times these folks will aid you in diversifying your portfolio amongst different investments while meeting your appetite for risk and reward. We have seen good asset managers' average 8% on the investable assets. What would that mean to you with that $1,575,000? Assuming that eight percent return was what your financial planner was obtaining for you; you would see an income of $126,000 a year.
The message to be taken away from this article is simple, put your team together before selling your practice and ensure that your years of hard work building your business result in the economic rewards, tax reduction and on-going income that you deserve.
Author: Mark Burton, JD, CSBA, CMEA
Mark Burton is In-House Counsel and Vice President of National Operations for Business Evaluation Systems, a nationwide appraisal firm, focusing on the valuation of businesses, machinery and equipment and intellectual property. Mark has personally advised on more than 100 business transfers and valued several hundred businesses ranging in size from $20,000 up to $40 million. While Mark was in private practice he served business clients in the areas of corporate and business transactions, labor law, estate planning, and business succession. Since then, Mark has headed up operations for a consulting firm, has been an editor and publisher for the Daily Journal Corporation and acted as Vice President of Business Development and Marketing for a software firm. Mark currently serves on the boards of several companies, both for profit and non-profit and speaks nationwide on the business transfer process, expert witnessing and avoidance of liability in merger and acquisitions for privately held firms and business succession.
He is a licensed attorney and is certified as both a business appraiser and a machine and equipment appraiser.
Contributing to this Article
Theresa Fette-Warner, JD, LLM - Theresa is a partner at Kyler, Kohler & Ostermiller LLP, a nationwide tax law firm. Theresa specializes in tax deferral strategies for highly appreciated assets such as the sale of businesses and real estate. She is licensed in several states and spends most of her time at the firms Las Vegas, NV and Beverly Hills, CA offices.
Jason Helquist, JD, LLM - Jason is also a partner at Kyler, Kohler & Ostermiller LLP, and is arguably one of the finest tax strategists in the country. Jason has had extensive experience in mergers and acquisitions and works in close collaboration with Theresa
Robert Lanham - Bob is CEO of Allied Business Intermediaries International, Inc., a mergers and acquisitions with a nationwide presence. Before founding ABI, Bob was a CPA specializing in business and business transfers. Among his various jobs, Bob was an audit manager at Touche Ross.
Please note that "Deferred Sales Strategy" is a specific strategy provided by Kyler, Kohler & Ostermiller, LLP and is the protected intellectual property of that law firm.
When selling your practice, you should have an entire team on board and not just the medical business intermediary. Each person on your team brings value to you and dollars to your bank account. In other articles we will discuss the roles of lenders, CPAs and corporate attorneys, but today let's focus on three team members who bring value to the bottom line; the medical business appraiser, the tax attorney and the asset manager.
Many business brokers and business intermediaries will tell you that they can value your business without your going through the expense of an independent valuation. But in most cases, the business intermediaries have not had the special training required for such an appraisal and rarely do they have the certifications that are required to be an effective appraiser. Most often the business intermediary will either use an industry multiplier or some sort of software to value your practice. Both of these appraisal techniques leave quite a bit to be desired. Both are generally driven only by numbers and do not take into account the various factors that really make your practice special. Further, those who may consider purchasing your business will often discount valuations done by the business intermediary on the theory that the business broker has an inherent interest in the purchase price of the business as the higher the selling price the better commission that the business broker will receive.
Additionally, a third party appraisal will look to the intangibles that make your business unique. Such factors as research into your end of the industry combined with research into your geographical trade area can really make a huge difference in price. We have often seen valuations where the industry multiplier stated that the value was three times cash flow whereas after a bit of research and review of other intangible factors, the valuation came out at four and half times cash flow. So how much of a difference does this make? Let's assume that your practice has a cash flow of $350,000 and we use the industry multiplier of three times, we come up with a sales value of $1,050,000. Now that's not too shabby. However, what would have happened had we spent a little time and money and gotten that third party valuation? Well then we would have ended up with a sales value of $1,575,000. Wow! Over half a million more in value!
The next question that comes up is why and when should I consider engaging a tax attorney to aid me in the sale of my practice. The answer will surprise you. The best time to hire this practitioner is between two and three years prior to contemplation of sale of the practice. While that is optimal, hiring the tax attorney any time prior to the actual sale may do you some good. There are a wide variety of tax strategies that can be used to defer your capital gains taxes on the sale of the practice. Such strategies include The Deferred Sales Strategy (c) , Charitable Remainder Trusts and Installment Sales. These strategies can often reduce your tax liability by hundreds of thousands of dollars. Yet, if you don't give the tax attorneys the proper amount of time to set up a property tax deferral methodology there is little they can do for you. So what kind of savings are we talking about? Let's assume that it cost you $100,000 to set up your practice those many years ago. This $100,000 is referred to as your basis in the business and everything on top of it is subject to capital gains tax at the time of sale, if no planning is done. Using our $1,575,000 number and assuming that it would be taxed as an asset sale under the long term capital gains taxation rates; you would pay an approximate total of 24.3% taxes (15% federal and 9.3% California) on $1,475,000 or an estimated tax of $358,425. We are assuming that the business was sold in California; other states have varying rates on long term capital gains. Appropriate tax planning prior to the sale of the practice could significantly reduce the immediate tax bite and may lead to an indefinite deferral of those taxes.
Now for the final step, here you are, you have obtained a good price for your business, worked with your tax attorneys to defer your taxes and now you have a nice large sum of cash. What shall we do? Go to Hawaii? Buy a Yacht? Go to dinner in Paris? All excellent ideas, but wait, we still have to worry about the future. While we have all this cash, our golden goose has passed on to another. We will still need some income so its time to invest our money.
Actually, if we were smart we would have brought in an asset manager to work with the tax attorneys and CPA's prior to the sale of the practice. Doing so allows the tax attorneys to work with the asset managers to create a financial plan that meets both the goals of reducing taxes while maintaining an livable income by way of investments. While I am certainly not qualified to recommend any investment strategy, I always recommend that the seller of a successful health care practice work with a highly qualified and experienced wealth manager. Often times these folks will aid you in diversifying your portfolio amongst different investments while meeting your appetite for risk and reward. We have seen good asset managers' average 8% on the investable assets. What would that mean to you with that $1,575,000? Assuming that eight percent return was what your financial planner was obtaining for you; you would see an income of $126,000 a year.
The message to be taken away from this article is simple, put your team together before selling your practice and ensure that your years of hard work building your business result in the economic rewards, tax reduction and on-going income that you deserve.
Author: Mark Burton, JD, CSBA, CMEA
Mark Burton is In-House Counsel and Vice President of National Operations for Business Evaluation Systems, a nationwide appraisal firm, focusing on the valuation of businesses, machinery and equipment and intellectual property. Mark has personally advised on more than 100 business transfers and valued several hundred businesses ranging in size from $20,000 up to $40 million. While Mark was in private practice he served business clients in the areas of corporate and business transactions, labor law, estate planning, and business succession. Since then, Mark has headed up operations for a consulting firm, has been an editor and publisher for the Daily Journal Corporation and acted as Vice President of Business Development and Marketing for a software firm. Mark currently serves on the boards of several companies, both for profit and non-profit and speaks nationwide on the business transfer process, expert witnessing and avoidance of liability in merger and acquisitions for privately held firms and business succession.
He is a licensed attorney and is certified as both a business appraiser and a machine and equipment appraiser.
Contributing to this Article
Theresa Fette-Warner, JD, LLM - Theresa is a partner at Kyler, Kohler & Ostermiller LLP, a nationwide tax law firm. Theresa specializes in tax deferral strategies for highly appreciated assets such as the sale of businesses and real estate. She is licensed in several states and spends most of her time at the firms Las Vegas, NV and Beverly Hills, CA offices.
Jason Helquist, JD, LLM - Jason is also a partner at Kyler, Kohler & Ostermiller LLP, and is arguably one of the finest tax strategists in the country. Jason has had extensive experience in mergers and acquisitions and works in close collaboration with Theresa
Robert Lanham - Bob is CEO of Allied Business Intermediaries International, Inc., a mergers and acquisitions with a nationwide presence. Before founding ABI, Bob was a CPA specializing in business and business transfers. Among his various jobs, Bob was an audit manager at Touche Ross.
Please note that "Deferred Sales Strategy" is a specific strategy provided by Kyler, Kohler & Ostermiller, LLP and is the protected intellectual property of that law firm.
