Selling Your SLP Practice to Fund Retirement

Just like every business is unique, the sale of any business is a unique process, too.

Although I’m going to focus on selling your SLP practice, there are a lot of things that selling any kind of service business has in common with all other similar types of businesses.

I’m able to apply specialized knowledge for speech language pathologists because I’m an advisor who works exclusively with professionals in this field.  I also have added insights because my wife is an SLP, too.

No matter what the reason is for selling your SLP practice, whether it’s to retire, or to simply move on to something else, the transition is a process that takes time.  You need to be methodical to avoid surprises and thorough in protecting your financial interests.

The good news (and kind of the bad news) is that there are a lot of options you can explore to help you reach your goal.  That flexibility is critical, but it can also be confusing if you don’t know what to do.  This is not a time to be pennywise and pound foolish.

Working with experienced professionals is the key to preserving your wealth and protecting your future.

If you prefer to listen to this article, you can listen to the podcast below.

What to Do Before You Sell Your SLP Practice

Just like anything else you sell, if you want to get top dollar, you need to take the right steps to position your private practice for the best results.  That should come as no surprise, but it can be a large task that could take quite a while before your practice is optimized for sale.

The key is to start early and take things one step at a time.

Let’s break it down into more bite-size pieces.

Your motivations

• Why do you want to sell your business?
• Is it to fund retirement or to perhaps invest in another business?
• Do you know how much money you’ll need to fund the kind of retirement you want?
• Are you burned out and need a break?
• Do you want more financial diversification?
• How quickly do you want to sell?
• What transaction terms would be acceptable to you?

Once you understand why you want to sell, this answer can drive more focused actions for the preparations you’ll need to make.

Financial and legal

• How much do you think your business is worth, and how did you arrive at this number?
• Have you paid up all your business taxes?
• Are your tax return documents available for review?
• Do you have contracts and agreements with partners, suppliers, banks, landlords, and others that need to be considered?
• Is there any pending litigation against your practice that could have a direct impact on a sale? Are your financial statements current?
• Are your accounting systems clean, simple, and easy to audit?
• What is your level of indebtedness, including promissory notes, credit agreements, and other banking or lending agreements?

Any one of these can be problematic at best and potential deal-breakers at worst.  You’re going to have to disclose all of these things before a sale, anyway, so it’s best to get them handled pro-actively to help put your potential buyer at ease.

Also, when you show you’re organized and can lay your hands on any file, it makes a favorable impression on a potential buyer as well.

Corporate operations, contracts, and agreements

• Are all of your shareholder agreements, bylaws, standard operating agreements, and other important governance documents up-to-date and in full compliance?
• What about property deeds, leases, and insurance documentation?
• Do you have any intellectual property issues with patents, trademarks, or trade secrets?
• Can you readily produce verifiable agreements and contracts with clients you service, such as schools, hospitals, or other SLP practices?

This is the nuts and bolts of your SLP practice.  A potential buyer will want to know as many details as possible about how your business operates, your ongoing business relationships, and what they can look forward to on a day-to-day basis when they become the owner.

Your employees

• What does your org chart and employee census look like?
• Are there any confidentiality or NDAs in place?
• Do you have an employee handbook that details all policies and procedures? When was the last time it was updated?
• Do you have any profit-sharing plans or retirement plans in place?
• What benefit packages do you offer?
• Do you have any non-qualified deferred compensation plans or other bonus plans that you offer?

As the owner of a speech-language pathology practice, your business is only as good as the employees who work for you.  Do not overlook any detail when it comes to disclosing information about your workforce.  They can make or break any business, and often do.

These questions just scratch the surface for many businesses, but give you a good idea of some concrete steps you must take to make your business as attractive as possible to a buyer.

If you’re overwhelmed between continuing the day-to-day operation of your practice and simultaneously getting it ready to be sold, keep in mind that a smart move would be to enlist one or more financial professionals to walk you through the steps.

You can’t afford to make mistakes or undermine your efforts if you’re serious about moving on.

Possible Exit Paths

When SLP practice owners start to think about exiting their companies, there are several possible options they can pursue.  Each has several benefits and drawbacks to consider.  Here are the possible exit path options:

• Transfer the company to a family member(s).
• Sell the business to one or more key employees.
• Sell to employees using an employee stock ownership plan (ESOP).
• Sell to one or more co-owners.
• Sell to an outside third party.
• Engage in an initial public offering (IPO).
• Retain ownership but become a passive owner.
• Liquidate

Of these, about 60% anticipate they’ll exit through a third-party sale.  Approximately 30% have considered a management buyout, and there is an overlap among 30% SLP practice owners who also possibly anticipate a transfer to the next generation.

The BEI 7-Step Exit Planning Process

The BEI 7-Step Exit Planning Process was created more than 20 years ago and has been refined to become one of the most commonly accepted paths to follow when you want to exit your business.

Although every exit plan is unique, successful plans share several of the same characteristics.

• They look to increase business value both in the short and long term.
• They are put into writing so that all involved can measure their progress toward the owner’s goals.
• They incorporate accountability by holding the owner and each advisor to deadlines for completing each task.

Owners get serious about exit planning when two streams of thought converge:

• They begin to feel they want to do something besides go to work every day. Either they would like to be someplace else—doing something else—or they simply no longer get the same kick out of doing what they are doing.
• There is a general awareness that:
  • They are close to financial independence.
  • They are making significant strides toward reaching financial independence.
  • They can achieve financial independence today by selling their businesses.

This leads to actively engaging in the BEI 7-Step Process.

Step One: Set Exit Objectives/Goals

This ties into your motivations for wanting to sell your SLP practice.  You need to decide approximately when you want to leave and what income you’ll need to secure your financial objectives after you do.

For many practice owners, who they sell the practice to is important.  There is a legacy component to consider, both with other family members and some long-term and loyal employees.

This requires a lot of upfront thinking so that when you meet with a financial advisor, you’ll be able to hone in on other important parts of the transaction.

You’ll need to determine if a transfer of ownership to an insider is feasible, and what the tax and cash flow implications are if you go that route.

Accurate business valuation is also critical in the early stages of the process.

Step Two: Quantify Available Resources

As part of the valuation process, you’ll need to quantify your available resources and assets.  That is not a simple task but necessary to ensure any transaction is fair and reasonable.

By establishing an appropriate value, you’ll know if your financial objectives can be achieved when you convert your asset to cash or how much the business still needs to grow to meet those objectives.

Doing so will also be a vital part of creating a viable timeline to sell your practice.

You should be doing it anyway, but focusing on efficiency and cutting costs are also critical for maximizing value.  Understand the nature of your cash flow, creating efficient systems, motivating employees, and documenting and tracking key metrics to help support your value position.

Minimizing tax liability is essential, as well.  There are many strategies you can employ, such as ESOPs, defined benefit plans, charitable remainder trusts, and other tools you can use to help achieve this goal.

Step Three: Focus on Business Value

Many owners are so close to the day-to-day operation of their practice that they don’t adequately focus on the long-term significant picture issues to help determine their business’s value.

Valuation professionals have accepted standards and practices to provide a fair and reasonable estimate of value, which you can then use as a starting point for many other tasks.

Step Four: Sale to Third Party

Most SLP practice owners sell to a third party.  Private equity groups often buy SLP practices.  At times another clinician will want to expand their core services and branch out as a multidisciplinary provider.  For example, a physical therapy practice may want to buy a speech practice.

Under this scenario, a seller has the best chance to receive a maximum price for their practice.  It’s also the best way to receive the highest percentage of cash at closing.

The drawback is that with this type of sale, future plans may be at odds with the owner’s vision for the future of the practice.  Many practice owners cite this as an essential reason in choosing who they sell their practice to.  When a sale is made to a third party, often there is a different corporate culture that needs to be integrated into the practice, and roles and working relationships can and often do change.

A sale to a third party could also mean that employees’ jobs are at risk, and their career opportunities are at best limited and at worst, jeopardized.

Step Five: Transfer to Insiders (co-owners, family members, or key employees)

After considering a third-party sale, many practice owners opt to sell to an insider instead.  A sale to a family member, co-owner, or key employee lets the current practice owner retain more control, especially until they have all of their cash in hand.  Sales of a practice to a lead therapist or clinical director are fairly common.

Put a practice in the hands of a person that the owner trusts can allow the owner to remain active in the practice on favorable terms and ensure a smooth transition.

The drawback to selling to an insider is there is almost always more financial risk associated with this type of arrangement.  If the new owner can’t meet obligations, the current owner may be stuck with a bad business deal for years to come.

The best way to minimize problems with selling to an insider is to begin the practice early, well in advance of the actual transfer date.  This gives the process a more methodical way to play out, reducing downside risks.

Sometimes, Employee Stock Ownership Plans (ESOP) make good sense.  When using an ESOP as a financing vehicle, owners can enjoy favorable tax treatment, get more cash sooner, and work with a more motivated workforce through direct ownership of the practice.  The drawback is that setting up an ESOP can be time-consuming and costly, and an owner’s assets can be tied up when securing an ESOP loan.

Step Six: Develop a Contingency Plan for the Business

New potential owners will want to see if you’ve taken steps for the business to survive, even if you do not.  Ideally, this would include some kind of business continuity provision between the current owner and an insider.  But this isn’t always easy when there are multiple owners or the sale to a third party is the preferred way to go.

When you’re selling or not, it’s always a good idea to have a succession plan in place anyways.  You’ll want the business to carry forward if you have a health emergency, so deciding in advance about business, financial, and operational issues protect you in both cases.

Step Seven: Develop a Contingency Plan for the Owner’s Family

Similar to protecting the business, you also want to have a plan in place for your loved ones if something happens to you. Estate planning is critical to avoid a long and drawn-out battle because questions were left unanswered.

You’ll also want to put things in place that will minimize any estate tax issues.

Some strategies are simple such as buying life insurance or disability insurance.  Setting up a will and a trust is advisable too.

Selling to an Insider: An Example of a Deal Structure and Potential Challenges

In many cases, an SLP practice owner will want to sell their practice to a key employee.

If you’re selling to an insider or a third-party, here’s a hypothetical situation to show what a typical buyout will look like.

Let’s walk through the process and see what common challenges can occur during this purchase.

Here are some data points to help illustrate this example:

If you are a 100% owner of your private practice and want to sell it to either a third-party or insider, one way for them to purchase the business from you is by writing you a check for the full business value.

In this instance, the transaction would result in you paying a capital gains tax upon the sale of the business.

Having a third-party clinician, or a private equity group write you a check is much more common than an exit strategy involving a current employee.

If you are looking to sell your business to the lead therapist, the above scenario will be difficult because…

Challenge #1:  Most employees do not have the cash or collateral to purchase the practice in Year 1.

 If a current employee wants to purchase the practice but does not have the financial resources to do so, the buyout could occur from the current cash flow of the business.  Using business cash flow can fund the buyout, but can lead to a highly tax-inefficient strategy.

 Challenge #2:  There will be double taxation during the transaction.

 If the business is worth $1 million, the seller will look to receive a buyout payment of $1 million.  That means the buyer’s required earnings must be grossed up to account for the income tax she must pay to give the seller payment of $1 million.

Tax #1 is the income tax on the earnings required to generate the buyout payment to the seller.

Tax #2 is what the seller must pay as a capital gains tax on that transaction.  Therefore, the total transaction would look like this…

This situation has two drawbacks.  One is the highly inefficient tax result since the effective total tax paid would be $738,462, or 48% of the total transaction.

Also, a business with a valuation of $1,000,000 would most likely not have the cash flow for the buyer to receive gross earnings of $1,538,462.

By trying to close a transaction too quickly, you encounter another challenge…

Challenge #3:  Insufficient cash flow to fund the buyout over a short period.

Since the only financing options available for a lead therapist to purchase the practice is the business cash flow, it would be much more reasonable for a buyout to take place over several years.

By stretching payments out over ten years, the annual cash flow requirement from the business is only $153,846 vs. $1,538,460 in a 1-year period.

 While using installment payments can overcome the cash flow crunch in Year 1, this method still has the same embedded tax liability as funding the buyout in one year.  Also, in this scenario, there’s another challenge because the buyer has added a stipulation to the buyout.

Challenge #4:  Immediate loss of control for the seller.

 Even though the seller gives up 100% control at the beginning of the installment agreement, she still maintains ongoing business risk.  Since this buyout is being funded from business cash flow over ten years, the seller will only receive her earnings out of the business if it continues to operate at its current financial performance.

Without the same levels of revenue and profit, the seller may not receive the full amount in the original agreement.   The seller will be captive to the buyer and her ability to generate strong performance for the practice.

Since you’ve chosen your ideal successor and believe she will take over your practice and guide it to higher levels of performance, this also poses one final risk in a buyout.

Challenge #5:  Entering into a “bad deal” if the business value grows over the buyout period.

Think about the valuation of your business ten years ago.  Was it higher or lower than today?

A lead therapist or future owner of your practice will want to grow the value of the business after taking over ownership.

If the therapist is successful and grows the valuation of the practice from $1 million to $2 million over the 10-year earn-out period, shouldn’t the seller capitalize on this excess growth?

How long does it typically take to sell an SLP Practice?

And, as you might guess, the correct answer is, “it depends.”

It certainly won’t happen overnight.  But it could take ten years if you want or need it to take that long.

There are so many variables involved.  Most you can control.  Some you can’t.

For example, if your records need work, or you have pending litigation or a hundred other things that can negatively impact the value of the business, then the smart thing to do is hold off until you can fix some or all of them.

At other times, an acute health-issue may strike one day, or your situation (divorce) could necessitate a sale for several different reasons.

If you want to sell a business quickly because you need to, then obviously, pricing it below what it’s worth is the first thing that will come to mind.  You’ll need to hire an experienced and well-connected business broker unless you’ve already had discussions with someone as part of a succession plan.  Consider reaching out to a targeted and likely buyer, to employees (through an ESOP), or think about adding a business partner who can eventually buy you out.

Get your financial, legal, contractual, and accounting records in order immediately because there will be due diligence sooner than later if you’re looking at a quick sale.

You’ll also need to be available and do everything you can to collaborate with the new owner for a speedy and successful transition.  If you’re in a position to offer seller financing, that can speed the process as well.

Managing the Transition of Your SLP Practice

Once you have decided to sell your practice, there will be an interim transition period.

We’ve already touched base on what some of the issues are that you’ll be faced with, but there are a few others to consider as well.

One of the big things you’ll face is how does your transition timeframe matches up with your long-term goals and objectives.  Since you’re in the process of becoming more educated about what it will take and how long it will take, the expectation you have versus the reality should start to narrow.  Ideally, the two timeframes will sync up at some point.

The same thing applies to the financial aspects of the sale.   During the transitional period, you may have started out thinking how much your SLP practice is worth so that you could start to make plans for your retirement based on how much money you have afterward.

If you thought your practice was worth $2 million off the top of your head, but it’s really only worth $1.2 million, then that changes things quite a bit.  Similarly, if it is valued at $3.5 million, then you’ll happily need to plan for that eventuality as well.

Depending on who you sell to, you may have a say in the future management of your practice.  Nobody knows your practice better than you, so if the new owners are wise, they’ll at least listen to what you have to say.  If you’re selling to an existing employee, you can begin delegating day-to-day activities that will give that person and other key personnel time to grow into their new responsibilities.

This can also include redefining the scope of the practice, the standards of the practice, ensuring that a code of ethics continues in force, among others.

Generally, any business is healthier when good employees stay long-term.  So if you can sweeten the pot with incentives, bonuses, stock options, or other attractive benefits, you’ll leave the business in a much better position to remain successful after you leave or retire.

A big part of the transition is that you can actually decide to whom you want to sell your practice.  Money shouldn’t be the only consideration if you have the luxury.  Ideally, you want somebody who shares your vision, goals, and legacy for your business.

Along these lines, you can then structure a deal that is favorable for the person or partners that you prefer to sell to.  This might include installment payments, exchange of stock, private annuities, or other similar financing mechanisms.

Finally, even before you start the transition period, think about the tax implications and get help designing a strategy that minimizes the bite that could occur during and after a transfer of ownership.  Make sure to talk to a tax professional who can create the optimal approach for you.

What to Do with The Money After the Sale of Your SLP Business

When you sell your SLP practice, a traditional paycheck and money will stop flowing from the practice, but your need for income will continue!

Unless you’re transitioning to another money-making venture, you’ve got to take steps with the proceeds you receive from the business to protect yourself for years to come.

You’ll need to come up with a new set of goals based on your unique financial reality to produce a comfortable and secure retirement.  Here are several broad strokes to consider:

• Consider a diversified approach. Don’t put all your investment eggs in one basket.  Work with an advisor who can blend the right investment vehicles to produce a stable cash flow.
• Seek out strategies that have low charges, fees, and expenses to manage the investments you choose. There are plenty of them, and there’s no need to give away your hard-earned money unnecessarily.
• Protect your liquidity. Don’t tie up your money in an investment where you’ll pay a hefty surrender penalty.
• Take into account how you want to position your resources so that you can painlessly pass along your assets to your heirs as part of your legacy.
• And finally, consider the tax implications both from the sale of the business and for the future.

The Benefits of Having a Financial Advisor Who Knows The “Ins and Outs” of SLP Practices

While there are a lot of similar things, no matter what kind of service business that you sell, there are also some things that are unique to selling an SLP practice as well.

Experience is the best teacher, and you’ll want a “teacher” in the subject that most closely matches what you’ve gone through to grow your practice to a point where it’s a valued asset.  Sure, plenty of financial advisors can help you develop an exit strategy, set up a sensible retirement plan, help you determine the value of your business, and figure out ways to help the right owner finance the purchase.

But, all other things being equal, wouldn’t you prefer someone to assist you who understands the mindset of an SLP?  That’s the advantage you’ll want and need to help advise you on how to structure the best deal for your particular situation.

ASHA is a Great Resource for SLP Practice Owners

The American Speech-Language-Hearing Association has a wealth of information on how to optimize your SLP practice effectively.  It’s a great resource whether you’re thinking about selling your practice or simply trying to optimize it as the first long-range step to maximize its value.

Would you like to continue this conversation on selling your business with us directly?

To help potential clients make an educated and informed decision about our firm, we’ve designed a no-cost, no-obligation four-step process we call our “Plan of CARE Process”

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