Selling A Practice: When Should The Buyer Receive Equity?

Dear Dr. Hayes,

I am an employed optometrist working for two older ODs who own their private practice 50/50. The senior OD wants me to buy his 50% over an eight-year period.

Here's the problem. He expects me to start making payments now, but he doesn't want any of my equity to vest until I am all paid up in 7 or 8 years. Does that make sense to you?

He told me that he is concerned the other partner and I will have voting control of the practice once I get my first 6% share of equity (50 + 6 = 56%). He is particularly concerned that we will not allow him to see patients after he is paid off. 

Should I do this? Does he have a real concern? 

Dr. Juno in Jackson.

Dear Dr. Juno,

This is a classic case of “the cure being worse than the cough”.

While his remedy is more severe than it needs to be, your senior doctor does have a valid point as a minority owner.

Don’t Rely On Verbal Agreements

I recently heard about a case where a solo OD sold his practice 100% to a new doctor with the verbal understanding that he could continue to work an unspecified amount.

Apparently, the senior doctor told his buyer “I don’t do it that way” one too many times. One Friday afternoon, the new owner unceremoniously informed the founder of the practice that his services would no longer be required. Effective immediately.

This came as a shock to the seller. But, he had nothing in writing, and thus, no easy recourse.

So, your seller is wise to confirm his ability to continue working in the practice. Assuming, of course, that is what you both have agreed to. 

When Should Buyer’s Equity Vest?

Hopefully, the senior doctor can talk to some advisers and find out that practices don't typically sell on layaway. Not over 6, 7 or 8 years anyway.

In my experience, practice buyers almost always receive their equity as they make their payments. It’s kind of like asking someone to pay off a 36-month loan before they get to drive the car. Who is going to do that?

Having said that, I could see a scenario where if the buyer is new to the practice, vesting might not start until 12 months after the first payment. In this case, if either party decides the chemistry is not right, they could cancel the deal and refund any payments with interest. 

(We'll save this discussion for another blog, but it's actually a good idea to have a 'bust up' clause in your sales agreement that spells out what happens in the event that one partner decides to leave the practice.)

Use The Contract To Specify Deal Terms

For some reason, many doctors, and some lawyers, equate the three keys of a partnership — Income, Control and Equity (ICE) — solely with the percent of ownership. That would be a false assumption. 

Control does not have to depend on majority share. A good lawyer can write the purchase contract in a way that reflects virtually any agreement two or more partners want to make about how they share ICE. 

For example, if you and the other partner agree to it, the selling partner could specify that he gets the prime parking spot out back, final 'say so' on all hiring and firing decisions for five years, and the right to see patients at a specified compensation level for ten years.

As the buying partner, you could ask for veto rights on all equipment expenditures over 1% of practice gross and every Friday off in the months of June, July and August. 

My examples are a little silly, but serve to illustrate that the terms of your agreement are limited only by what you want out of the deal.

Plus, of course, what you can get the other party to agree to. 

Regards,
Jerry Hayes, OD

Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.