HEALTH LAW SUPPLEMENT Winter 2018

Selling a psychotherapy practice: So you’re planning for retiring or moving, or just want or need a change and are wondering whether you might be able to sell your psychotherapy practice. The first consideration is whether your practice is saleable, whether the value you have created for yourself can be transferred to another owner. Unincorporated solo practices, practices based in home offices, group practices without group provider contracts with insurers where the therapists each have individual provider contracts and bill under their own names, practices whose referrals are inextricably coupled with the owner’s name, practices where the owner’s departure is imminent and will be complete, practices on the wane often due to the age or health of the owner, and practices where the services of the owner produce the bulk of revenue collected, all may be difficult to sell.
If you think you have a practice worth selling, then preparation for the sale is necessary, often well in advance. That may mean incorporating a practice that had previously operated as a sole proprietorship as a PC or PLLC. In New York State, PC’s can practice only one profession and thus can be co-owned only by professionals licensed in the same profession. A PC can hire other professionals whose scope of practice is wholly encompassed by that of the owners of the PC, however. For example a PC owned by psychologist(s) may employ LCSW’s, LMSW’s, LMFT’s, LP’s, LCAT’s and LBA’s, and likewise with a PC owned by an LCSW/R. Multidisciplinary ownership of a psychotherapy practice is theoretically possible in NYS by means of a PLLC, but because most mental health professions, including MD’s, LCSW’s, LMHC’s, LMFT’s, LP’s, LCAT’s and LBA’s legally have opted out of or are unable to form PLLC’s with other professions, in reality, the only PLLC’s co-owned by members of different disciplines in NYS are those co-owned by psychologists and nurse practitioners in psychiatry.
There are other ways to prepare for selling a practice. Choose or change to a name for the business that is not personal. For example, instead of “John Smith, LCSW PC,” name your practice something like “Midtown Psychotherapy LCSW PC.” Employ therapists as W-2 employees rather than 1099 contractors; the former are considered a more solid base for a practice and are generally more likely to stay with a practice upon its sale. Somewhat paradoxically, choose long-term leases where assignment is possible and without limiting factors as those are preferred by buyers. Negotiate group contracts allowing billing for supervisees with managed care companies and focus especially on developing business with insureds from the companies with whom the practice has such group contracts. But also cultivate multiple referral sources, and if possible assignable service contracts, for example a contract with a school district to conduct outside evaluations. Establish a website with good a Google ranking, solicit good online reviews (former patients only) and have a presence in other advertising and social media venues. Maintain as current any equipment, information technology (EMR, billing programs) and furnishings. Plan on staying with the practice for awhile after its sale. Try to sell when the practice is at its peak; that’s when it’s most saleable and commands the highest price.
A critical aspect of preparation is deciding how to value your practice. An imprecise but easy way is to calculate a multiple of revenue; often 1-3 times revenue is the appraised value of a service business. This formula doesn’t word as well if the owner generates significant revenue and is leaving. Another calculation is EBITDA, meaning annual “earnings before the deduction of interest, tax, depreciation, and amortization.” This is really just a means of defining profits; the sale price is often set at 1-3 times EBITDA. Keep in mind that buyers are usually not interested in capitalizing on opportunities that you foresee for your practice but that you yourself have not taken advantage of. Rather they are looking for an established track record and whether it will continue after you leave. Loyal staff, an advertised telephone number that receives several new referrals a day or week, current information technology, and complete and accurate financial records and tax returns are essential in pricing. Growth opportunities are generally not. An exception to this is documentation of new patient inquiries and, historically, of what portion of them become patients; excess demand for services can increase the sales price. Buyers usually expect and demand that a seller have an excellent reputation; “goodwill” is taken for granted in a sale and does not usually result in an enhanced sale price.
Once you have an idea of the price you hope to be paid, you must find a buyer. These might include your staff, a new practitioner, an established practitioner or larger practice wishing to expand, a hospital, or seldom, in part due to NYS’s strict prohibitions on the corporate practice of healthcare and the complication and expense of “workarounds” to the prohibition, venture capitalists and private equity firms. The means of finding a buyer can be personal contacts, or more typically, a business broker. These brokers can be effective but do charge up to 10% of the sale price. Unless a staff sale is planned, it is usually best not to inform them of plans for a sale as, fearing the worst, they may seek employment elsewhere. You will need an attorney to help structure and document the sale, and a CPA to explain and prepare financial and tax aspects and documents.
If you have difficulty finding a buyer, you might consider offering potential buyers financing, essentially receiving the sale price in installments, in which you receive only a portion of the sale price upon the actual sale, and the rest, with interest, over time. Sometimes these financed sales include a variable price, dependent on the practice earning certain anticipated revenue, with a reduced sale price if it does not, aka, an “earn out.” Installment sales may also include a clawback, whereby if the buyer reneges, the seller can repossess the practice.
Almost always, the buyer will wish you to continue for a set period of time, usually 6 months-3 years as an employee or contractor. You may wish to stay on as a part owner, though in NYS, to do that you must have some active involvement in the practice as passive investment in professional entities is prohibited. Regardless, the buyer will likely ask you to sign a non-compete agreement to prevent you from establishing a competing business nearby.
With your attorney, you will prepare a confidentiality and non-disclosure agreement (“NDA”), in which a prospective buyer agrees not to share any of the information you give them during their examination of the business and finances of the practice, i.e., their “due diligence.” Once there is a tentative agreement, you may prepare a “Letter of Intent” by which you and the prospective buyer memorialize but do not yet commit yourselves to the terms of the sale. Then finally there is the actual sale at a closing (like for the sale of a house). At the closing an Asset Purchase or Stock Purchase Agreement specifying assets being sold and your and the buyers roles and responsibilities as co-owners of the practice if you are continuing as such, an Assignment of Lease, an Agreement regarding Custodianship of Medical Records, and an Employment or Independent Contractor Agreement (of you by the new owner) with Non-Competition and Non-Solicitation provisions, may all be executed. And then a new phase of life begins begins.
INFORMATION IN THIS NEWSLETTER IS NOT LEGAL ADVICE FOR ANY PARTICULAR CLIENT OR SITUATION. CONSULT WITH AN ATTORNEY INDIVIDUALLY FOR LEGAL ADVICE REGARDING THE SPECIFICS OF YOUR SITUATION.
𝄞 HAPPY HANUKKAH, CHRISTMAS AND NEW YEAR TO ALL! 𝄞 WE WISH YOU HEALTH, PEACE AND PROSPERITY AND THANK YOU FOR YOUR TRUST AND BUSINESS DURING THE PAST YEAR!

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