Provided by: Jennifer Kirschenbaum, Esq.
February 10, 2021
Question:
Hi Jennifer
I'm ready to sell my practice. I just do not want to think of replacing any more staff, or worry about paying rent during this difficult time. I'm expecting a letter of intent and I understand I will receive some money up front and the rest over 3 years if the practice meets certain targets. What do you think? Is this a good way to sell?
Talk soon,
Dr. K
Talk soon,
Dr. K
Answer:
Covid is making Earn Outs all the rage! An Earn Out allows the buyer to mitigate the risk of buyer's remorse by leaving the risk element of overpaying on the seller; the buyer, in an earn out structure, only has to pay portions of (or all) of the purchase price (depending on the deal terms) based on whether certain metrics are met. But, is the concept legal, or fair?
Legal - depends where you're located. New York, for instance, has a fee splitting prohibition for professionals. Under New York State Department of Education, professional are prohibited from sharing fees with anyone who is not a partner, employee or contractor, where a buyer/seller relationship qualifies as none of the above. So, why, if that is the case, are earn outs seemingly so prevalent recently? Because of the reason provided above - buyers want to buy, but buyers do not want to take on Covid risk. Buyers are not sure the patients will be back or that costs will normalize or that revenue will recover for certain sellers, but buyers have money to spend and sellers are filled with uncertainty, moreso, lately.
So, if not condoned by the state, but prevalent, are earn outs fair? Totally depends. Totally depends on the terms of your individual deal. What is your practice actually worth? Should the practice be valued as of today or as of pre-Covid or projected post-Covid? Depends. Depends on the specialty, your exact geography and patient population, and how deviated the practice is from last year and year prior to that. There are many factors that go into valuation. Whether or not you are being offered a fair deal also depends on your leverage, including your preferred closing timeline. A buyer who knows you are anxious to sell and unload practice obligations is likely to offer less upfront, and more on the back end if you can meet historical numbers, regardless if achievable in the foreseeable future.
Whether to take a deal is situational-dependent, and often dictated by how you make the deal from the getgo. The situation many sellers find themselves in is a false start - focused solely on the total number they want, as opposed to when/how that number will be paid, and how they will be treated post-close. We can get in to these considerations more on another day. To sum up thoughts on earn outs; legal or not, they're out there and buyers are dangling results oriented pay-days for all to see. Whether the terms are fair depends on the details and achievability. Let's see what the buyer is offering and take it from there...
Legal - depends where you're located. New York, for instance, has a fee splitting prohibition for professionals. Under New York State Department of Education, professional are prohibited from sharing fees with anyone who is not a partner, employee or contractor, where a buyer/seller relationship qualifies as none of the above. So, why, if that is the case, are earn outs seemingly so prevalent recently? Because of the reason provided above - buyers want to buy, but buyers do not want to take on Covid risk. Buyers are not sure the patients will be back or that costs will normalize or that revenue will recover for certain sellers, but buyers have money to spend and sellers are filled with uncertainty, moreso, lately.
So, if not condoned by the state, but prevalent, are earn outs fair? Totally depends. Totally depends on the terms of your individual deal. What is your practice actually worth? Should the practice be valued as of today or as of pre-Covid or projected post-Covid? Depends. Depends on the specialty, your exact geography and patient population, and how deviated the practice is from last year and year prior to that. There are many factors that go into valuation. Whether or not you are being offered a fair deal also depends on your leverage, including your preferred closing timeline. A buyer who knows you are anxious to sell and unload practice obligations is likely to offer less upfront, and more on the back end if you can meet historical numbers, regardless if achievable in the foreseeable future.
Whether to take a deal is situational-dependent, and often dictated by how you make the deal from the getgo. The situation many sellers find themselves in is a false start - focused solely on the total number they want, as opposed to when/how that number will be paid, and how they will be treated post-close. We can get in to these considerations more on another day. To sum up thoughts on earn outs; legal or not, they're out there and buyers are dangling results oriented pay-days for all to see. Whether the terms are fair depends on the details and achievability. Let's see what the buyer is offering and take it from there...
