Get Ready Now to Sell Your Practice

by Corporate Relations and Business Strategy Staff

When psychologists retire, relocate or shift their focus to a new professional activity, few consider selling their practices. The relative rarity of a successful practice sale, coupled with a lack of available resources to guide practitioners through this challenging endeavor, leads most to simply "close up shop." In doing so, they miss valuable opportunities that can provide lasting benefits to their clients, community and the next generation of professional psychologists.

Making the most of these opportunities requires a lot of lead time. This article presents one approach to selling your practice and touches on a number of things you can do now to lay the groundwork for a successful sale in the future.

Even if you are years away from closing or selling your practice, the following steps will help strengthen its performance now and facilitate a smoother transition later.

Craft a solid business plan. Creating a business plan is the necessary first step in charting a path to successful practice. In addition to helping you set goals and make good business decisions, your business plan will help you paint a clear picture of your practice to potential buyers. Additionally, having a business plan demonstrates your seriousness as a small business owner and the care you have taken with regard to the business aspects of your practice.

Determine the best legal model for your practice. There are a variety of choices for the legal organization of your practice, each with advantages and disadvantages. If your practice is currently structured as a sole proprietorship, you may want to consider other models that can better protect your personal assets and facilitate transfer of ownership in the event of a sale.

Although some practitioners choose a general partnership model when bringing a colleague into the practice, it is important to take steps to adequately protect yourself. Not only are your personal assets at risk, but you also take on responsibility for your partner's actions. Opting to create a corporate structure adds complexity, but limits your personal liability and can streamline the transaction via the sale of stock to the buyer (an approach that may also provide you with tax benefits).

Join and actively participate in professional associations. Your state, provincial or territorial psychological association (SPTA) is a valuable resource for practitioners in many ways. As it relates to selling your practice, the SPTA represents the practice community from which prospective buyers will most likely come. Joining your SPTA can facilitate developing close connections with your colleagues at the local level, which can help you spread the word when you begin the process of putting your practice up for sale.

When you actively begin your search for a future buyer, word-of-mouth communication through your network of professional contacts often produces the best results. You might also consider placing a notice in your SPTA newsletter or on their website. Another valuable resource for identifying potential buyers is your SPTA's Early Career Psychologist (ECP) representative. ECP's, defined as being within seven years post doctorate, are a target audience that may be interested in the opportunity to join an existing practice and learn the ropes, with a plan to take over ownership of the practice in the future (see "A win-win approach to selling your practice," below).

Market your practice. Having a well-developed network of professional contacts and referral sources can open the door to a variety of professional opportunities and help you reach those who could benefit from your services. When it comes time to sell your practice, the years of network building can have the added benefits of helping you spread the word to potential buyers and actually increasing the appraised value of your practice.

For a practicing psychologist, much of your competitive advantage comes from your own professional image and reputation. While not inherently problematic, relying on the value of your personal involvement can negatively affect how much your practice is worth when you transfer ownership and are no longer present. This has the potential to drastically reduce the price you can command for its sale and leave the buyer with a floundering practice that was otherwise thriving before your exit.

Your marketing efforts should, therefore, work toward building the name recognition of your practice and transferring your positive image and reputation to the business entity itself. This will add to the "goodwill" value of the practice. When selling your practice, as much of the value as possible should come from goodwill and other intangibles, which are considered capital gains and taxed at a lower rate than regular income.

Have the right players on your team. Your accountant, financial advisor, attorney and other practice consultants can serve as trusted advisors and help you think through the business and legal issues related to selling your practice. By developing strong working relationships with these experts, you can create a long-term strategic plan and take the necessary steps to streamline the process and maximize your financial gains when the time comes to sell your practice.

Get your financial house in order. When you sell your practice, part of determining the value will involve looking at its financial performance over the past few years, so don't wait until the last minute to shore up your practice finances. Work with your accountant to develop a solid understanding of your financial position, monitor trends and manage revenues and expenses in a way that improves your bottom line.

One approach to selling a practice involves bringing a partner into the practice and working side-by-side for a period of time, while the seller gradually transitions out. According to David Ballard, PsyD, MBA, the APA Practice Directorate's assistant executive director for corporate relations and business strategy, this approach offers potential benefits to all parties involved.

"A gradual transition minimizes the disruption for clients, gives the buyer an opportunity to develop relationships with business contacts and referral sources and allows the seller to wind down while monitoring the hand-off," says Ballard. Plus, he adds, you get the satisfaction of handing off your business, which took years to build, develop and nurture to a competent successor, so your practice will live on and continue to provide beneficial services to the community.

Here's how it works…

1. After laying the groundwork well in advance of your decision to sell, determine your timeline. Plan to bring a partner on board at least a year before the time you want to transition out completely. Two or more years can provide for an even smoother transition. 

2. Utilize your network, professional contacts and organizational affiliations to announce your search for a partner who is interested in gradually assuming ownership of the practice. 

3. Identify a partner (or partners). When finding a potential buyer, "goodness of fit" is key. Only consider someone with whom you are comfortable. Important factors to consider include the individual's background and training, professional reputation, theoretical orientation, personality and management skills. 

4. Have the potential buyer join the practice part time (or full time, if your referral stream is strong enough), while you continue full time. Work side-by-side, while you introduce your partner to your referral sources, clients, consultants and other business contacts. Help your partner get on any panels your practice contracts with. Be sure your new partner has opportunities to gain visibility in the community in a way that connects him or her with you and the practice. 

5. Transition your partner to full-time hours, while you cut back to part time. Be sure to inform your business contacts of the change and have your partner start serving as the primary contact for the practice. 

6. Phase out your practice hours completely and transfer the ownership of the practice to your partner, but remain available for consultation for a set period of time.

You might need to streamline your approach if you have limited time available to sell your practice. In such a situation, some practitioners may consider using a business broker to facilitate the transaction.

Selling a practice isn't easy. It will require your active effort at every step along the way, from finding potential buyers, to negotiating the contract, to helping the buyer get up to speed and make the necessary connections to keep the practice afloat following the transition.

Be ready to compromise. When selling a practice, as in most business transactions, the various parties involved have different goals and perspectives. For example, although it is in the seller's best interest to get the highest price possible for the practice and most will have a strong opinion about what they "should" get for it, a practice is only worth what someone will pay. Buyers, on the other hand, have an incentive to get the best deal possible.

Because of the circumstances unique to the sale of a psychology practice (e.g., few tangible assets such as expensive equipment, buyers who typically don't have access to the capital for large up-front payments), neither party typically gets exactly what they want. The final sale price will likely be lower than the seller wants, higher than the buyer wants, and spread out over a term that is longer than either party would prefer. Despite the challenges that come with selling a practice, with the proper planning the results can benefit all parties involved: buyer; seller; client and community.

The many complexities of selling a practice, including partnership arrangements, buy/sell agreements, practice valuation, payment terms and other clinical, legal and ethical issues are beyond the scope of this article and will be covered in future issues of PracticeUpdate.

For additional information about preparing to sell your practice, contact the Corporate Relations and Business Strategy Department in the APA Practice Directorate by e-mail, or by calling 1-800-374-2723 ext. 5900.

Note: The information presented in this document is for informational purposes only and does not constitute financial or legal advice. Every practice is unique and will have specific issues that need to be addressed. Psychologists thinking about selling a practice should consult with their attorney, accountant and other practice consultants, as appropriate.