Exit Planning for Practice Owners

Exit planning refers to planning in advance how you would like to leave/exit your business (usually includes selling part or all of your business).  Perhaps you are dreaming of retirement, a change of pace, or pursuing a different line of work.  If you suddenly want to exit your business it can be difficult to find options, so prior planning and consideration can ensure the greatest return for your investment in the business.

You will usually get the best price for your business when it is going well and is profitable.   At this point you are also often able to secure a more attractive buyer, which can make things more pleasant when completing your earn out period.  Many earn out periods are 2-3 years and some sellers decide to stay longer in the business if they enjoy working for the new owners.

The value of your practice is determined by two things.  The profit in recent years (EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization)  of your practice, and the multiple that is currently being paid for similar businesses.  Generally in Australia the multiple is between 3 and 7, in our consultations with you we will provide information about what multiples other practices are receiving in the current market.

• Initial Consultation: Our initial discussion will focus on what your short and long terms business goals are, and how we can help.  We will also provide with you a summary of the current market for practice acquisitions in Australia.
• Practice visit: Whenever possible, we will visit your practice and highlight some of the strengths and weaknesses from a buyer perspective. It also gives us the opportunity to understand the culture of your practice and how we can ensure a good fit with potential buyers. And don’t worry, we will visit after hours or at a time when we can do so discreetly.
• Buyer and Seller Meeting: We arrange a meeting (usually in person) with the prospective buyer and a representative from Alecto, this is very informal and an opportunity for both parties to get to know each other.
• Preparation and Documentation: We work with you to compile a comprehensive information package that provides the buyer with a clear understanding of your business.  This will usually include but is not limited to, financial reports, operating history, information on employees, lease arrangements, licensing arrangements etc.
• Negotiation and Offer Presentation: We facilitate negotiations between you and the potential buyer. Offers are presented and counteroffers may be exchanged until both parties reach an agreement on price, terms, and conditions. We play a pivotal role in ensuring effective communication and helping resolve any disputes that may arise.
• Due Diligence: Once an offer is accepted, the buyer conducts thorough due diligence to validate the information provided by you. This includes reviewing financial records, contracts, leases, licenses, and other pertinent documents. We assists in coordinating the due diligence process and addressing any concerns raised by the buyer.
• Purchase Agreement and Contracts: With due diligence completed, a legally binding purchase agreement is drafted. This agreement outlines the terms and conditions of the sale, including the purchase price, payment structure, transition period, and any contingencies. We encourage you to seek your own legal support during this process.
• Closing and Transition: During the closing phase, final documents are signed, and ownership of the business is transferred to the buyer. We work closely with both parties to ensure a smooth transition, which may include training the buyer, transferring licenses and contracts, and facilitating the handover of assets.
• Post-Sale Support: We offer post-sale support to address any unforeseen challenges that may arise after the transition. This can help ensure the ongoing success of the business under new ownership.

Throughout the entire process, Alecto Australia acts as a mediator, advisor, and facilitator, guiding both the seller and buyer toward a successful transaction while navigating the complexities of the Australian business market and legal landscape.

In the context of an exit strategy for a business in Australia or any other country, an “earn-out period” refers to a specific arrangement or mechanism often used in the sale of a business. It is a contractual agreement between the buyer and the seller that outlines a future payment structure based on the business’s performance after the sale has been completed.

During an earn-out period, the seller continues to have a stake in the success of the business, even though ownership has been transferred to the buyer for a period usually of 2-3 years.  The earn-out period allows the seller to receive additional payments over time, contingent upon the business achieving certain predetermined financial targets or milestones.

The main purpose of an earn-out period is to bridge the valuation gap between the buyer and the seller. In some cases, there might be differences in the perceived value of the business due to factors such as market uncertainty, future growth potential, or the uniqueness of the business’s assets. An earn-out arrangement can help align the interests of both parties and provide a way to mitigate these valuation differences.

An earn-out period can benefit both the buyer and the seller:

Buyer Benefits:

• Reduced Initial Risk: The buyer can mitigate the risk associated with the business’s future performance, as a portion of the purchase price is contingent upon the business meeting specific performance targets.
• Alignment of Interests: The seller’s continued involvement and financial stake can help ensure that the business continues to perform well post-acquisition.

Seller Benefits:

• Maximized Sale Price: If the business performs better than anticipated, the seller stands to receive additional payments beyond the initial purchase price.
• Potential Higher Valuation: If the seller believes the business has strong growth potential that is not fully reflected in the initial valuation, an earn-out can provide an opportunity to capture a higher valuation over time.

It’s important to note that while earn-outs can be a useful tool in structuring a business sale, they also come with potential challenges and risks. Disagreements over financial reporting, differing management styles, or external market factors can all impact the outcome of an earn-out arrangement. Clear and detailed contractual terms, as well as ongoing communication between the buyer and the seller, are essential to the success of an earn-out period.

Our observations are that the Pandemic significantly increased pressures on medical practices (many of which were already struggling) and the market has been very dynamic since 2019.  Challenges such as managing staff shortages, increasing pay demands, shifting from bulk billing, increased regulatory and compliance, and payroll tax ambiguity appear to have resulted in an higher number of practices having been sold over the last few years.

Many of the sales we have observed have been of small to medium sized practices to large organisations that drive profits through economies of scale, as they own large numbers of practices, and there seems to be a strong trend towards corporation of medical practices.

During this time the value of practices declined as profitability remained a struggle.  However since the federal budget announcement in May  2023 that provided for a significant increases in the bulk billing incentive (effective November 2023) we have observed increased interest from groups looking to acquire practices as profitability should increase with the renewed support from the government.    This increased interest appears to be leading to higher purchase prices – making it one of the best times for a number of years to sell your practice.

If you plan to continue working in the practice after the sale, you are likely to get a more attractive offer. There are several reasons for this. Firstly, you are probably generating a significant proportion of the billings. Secondly, your clinical leadership post-sale (as a clinician) will help to preserve stability during the transition to a new owner. It is therefore best to think about selling when you plan to continue working for another 2-5 years, rather than when you are about to quit.

We work with a number of different buyers and we will always canvass alternative options, to find the best match for your practice.  However, some practices may not be as attractive as others, depending on profitability, size and scope for growth.

In most cases, our exit planning services will not incur a fee from the seller. We are genuinely committed to assisting practice owners without imposing financial burdens on them. We are not a business brokerage service seeking commissions; we are your dedicated partners in the journey to maximize your practice’s value.