September 2, 2008 Features

Buying or Selling an Audiology Business

The hearing industry is ripe for audiologists to increase their presence in the market. With the move to advanced degrees and greater autonomy, audiologists can position themselves as primary health care professionals to individuals with hearing loss. Audiologists traditionally work in clinics, hospitals and physicians' offices—important delivery models for audiology care—but many audiologists are embracing autonomy with ownership of a private practice.

Entering the private-practice arena may begin by starting a business from scratch or purchasing an existing audiology or hearing-aid business. Although creating a new business has unique challenges and opportunities, the purchase or sale of an existing business is quite complicated—buyers and sellers have important responsibilities.

Buying a Business

The first step in your buying decision is to identify the type of business you'd like to own and which purchasing path you prefer—buying the practice of a departing owner, working with a buying group, or buying a franchise business—and then to target your search and identify specific business opportunities.

Many veteran private-practice clinicians have an eye toward retirement or exploration of other interests. Some may want to focus solely on providing clinical services. Taking a staff position in the practice of an owner considering retirement facilitates your learning about business management and operating a clinical practice. The discussion about the owner's intention—and yours—should take place during the interview process and include an acquisition time frame. The owner should have a plan including an anticipated departure date. The buyer should know when he or she may be ready to purchase the business. A novice clinician should consider a three- to five-year plan; a one- to three-year plan would be a good guideline for a more experienced clinician.

Another option is to work with "buying groups" that offer discounts on hearing aids/equipment and provide marketing/advertising and other business support. To learn more about buying groups, ask your colleagues or explore professional periodicals and other audiology and hearing aid resources. Buying groups can be very helpful in navigating the purchase or sale of a business. Some groups help owners prepare their business for sale and match prospective buyers and sellers. Financing guidance is often provided. Additionally, the groups offer ongoing business operation and support after ownership. These groups give the advantage of being in business for yourself, but not by yourself.

A third option is to pursue a franchise business. Similar to buying groups, franchises offer start-up and ongoing support during the buying and selling process. There are few franchised hearing aid businesses in the industry, but some audiologists find this option to be a win-win situation. Your attorney needs to be knowledgeable about your state's franchise laws and to ensure that the transaction complies with federal and state requirements. The U.S. Federal Trade Commission (FTC) regulates franchise businesses; information on franchise laws can be found on the FTC Web site.

Step 1.

Finding a Business to Purchase

A business consists of tangible and intangible items. Tangible items include fixed assets including the business name, equipment, office furnishings, and active patient files. Intangibles include the patient database, referral sources, and community reputation—those things that can change. In the acquisition process the intangible items are called "goodwill." Most sellers calculate the goodwill in developing their asking price, and buyers must do their homework to ensure the price is in agreement with the value of the "goodwill." When surveying potential businesses, put the following items on your checklist:

Good reputation. A business with a good reputation has a solid patient and referral base. Don't be discouraged if the business is a little out-of-date; in the hands of skilled professionals, these businesses can be turned around by the new owner.

Established location. Unless there is a serious problem, do not change the office location or decor. Patients are familiar with the location and the layout and look of the office. Make any upgrade modest—add a fresh coat of paint and replace old furniture. You want a clean, pleasant office—no extreme makeovers.

Testing equipment. If you need new equipment, prioritize what will support the scope of the practice. Remember that ethical codes of all professional organizations have strict regulations regarding conflicts of interest with vendors.

Established patient base.The patient database, which is considered goodwill, may change after you take over, but overall it is a good starting point for the new owner. The seller may exaggerate the patient files, but your due diligence will indicate the true value of the patient database.

Step 2.

Negotiating the Purchase

Don't get emotional about the business opportunity—stay calm until the keys are in your possession. Remember that the seller wants to sell the business as much as you want to purchase it. The asking price of the business is a starting point. A well-conducted due diligence period will reveal whether the asking price is justified. If the price is too high, the buyer will counter-offer. If the seller is not willing to reduce the price, then the buyer has the option of paying more than the business is worth or walking away from the sale.

Goodwill is the greatest asset of an audiology practice. In his discussion of audiology practice valuation, Randal Drullinger (2006) describes two methodologies, book value and historical precedent valuation. Book value identifies the tangible assets of a practice and assigns a fair market price and usually is used with a newer practice with limited financial history or a practice that is being liquidated because of bankruptcy or other legal actions. The book-value methodology generally benefits the buyer.

A valuation based upon historical precedent provides information over a longer period of time. The acquisition process described below (Step 4) follows this method. In his description, Drullinger assigns a multiple variable to the income of a business. The multiple varies, but the average of multiples used in the hearing industry range from 2.0 to 6.0, with an average of 3.5 (Drullinger, 2006).

During the purchase process and throughout your tenure as a private practitioner, you need two first-rate professionals—a business attorney and an accountant. Your attorney should be well-versed in acquisitions and state and federal laws, including the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA). Your accountant should have expertise in business and state and federal tax issues.

You probably already have an accountant who handles your personal taxes. If purchase and acquisitions is not within your accountant's scope of practice, ask for a referral or ask colleagues, family, or friends. The same holds true for finding a good business attorney. You can also ask other health care providers in the community. State and local resources, including directories and the local chamber of commerce, also can provide information on area business attorneys and accountants with knowledge in this area.

Step 3.

Financing the Acquisition

Rarely will a clinician have the cash to purchase the business outright. As a result, financing plays a key role in the purchase process. There are a number of potential sources for capital, some recommended and some involving risk.

Lending institutions. A professional, detailed business plan, along with financial background information, is a must when seeking out lender financing. Lenders want to see that you are prepared to operate your business plan and generate the revenue needed to repay the loan. Present your plan to all the lenders in your community, and present yourself as a long-term service provider in your town. Information about business plans can be obtained from the Small Business Administration (SBA) and business experts in audiology. Although you can create your own plan, it is better to use one of the many template business plans that can be purchased online.

SBA. In its loan programs the SBA acts as a guarantor—not the lender—of loans made by private lenders. The SBA is allowed to guarantee loans under specific programs; the loan guarantee provides transfer of the risk of borrower non-payment to the federal government.

Owner financing. In some cases the owner will provide financing for a set period, which is a win-win for the buyer and seller. Usually, a cash payment is made at closing with an agreed-upon amount to be paid monthly for a set time. Because the monthly payment will include a negotiated interest rate, it is to the buyer's advantage to have no pre-payment penalty. A promissory note, a personal guarantee, and a life insurance guarantor are necessary for this option.

Manufacturer financing. There are ethical and legal issues related to financing a business purchase with money provided by a hearing-aid manufacturer or other vendor. A commitment to repay the loan through hearing aid sales or service violates the ethical code of our professional organizations and the federal anti-kickback statute. This law prohibits payment for referrals, and the prohibition covers the solicitation, receipt, offer, or payment of any kind of remuneration that may be paid wholly or partly by a federal health care program. This law is relevant to audiologists because of financial relationships with hearing-aid manufacturers and vendors.

Step 4.

The Acquisition

The acquisition process usually takes a few months. To ensure the process goes smoothly, rely on your attorney and accountant for guidance. Below are some of the documents and information that play an important role in the acquisition of a business.

Due diligence. Due diligence is the process of gathering important information as it affects the purchase of the business. If the agreement must be signed before due diligence can be conducted, include a clause stating that the agreement can be reversed if unsatisfactory information is revealed. Inadequate due diligence can result in the buyer paying too high a price, misinterpreting the scope and condition of the business, being unaware of financial and/or management problems, and being unaware of pending lawsuits or other contingent liabilities. Information learned during the due diligence process may be used to re-negotiate the price or terms of the acquisition.

Confidentiality agreement. The seller will be disclosing proprietary information and will require the buyer to sign a confidentiality agreement restricting the use of the information for the transaction of buying the business.

Letter of intent. In this letter to the seller, the buyer expresses the intention to buy the business and puts in writing the principal terms of the proposed agreement. Items in the letter usually include the type of acquisition (assets or stock purchase); purchase price and financing terms, if applicable; details about closing; and confidentiality between buyer and seller.

Step 5.

Purchase Agreement

Your attorney will draft the purchase agreement, which will be revised before it is approved by both parties. This legal document outlines the general and specific terms of the sale.

The purchase agreement states whether the owner will stay on for a transition period, and provides details about this arrangement—whether the seller will be an employee or consultant, his or her responsibilities, and the transition timetable. It is important to execute a noncompetition and nonsolicitation document as part of the agreement to prevent the seller from becoming a competitor.

After the closing, your accountant will prepare the appropriate tax forms. Your attorney can help with local, state, and federal requirements to establish the new business.

Selling Your Business

If you plan to sell your business, note the data about your business that prospective buyers will want to review. It's a good idea to plan ahead for your sale—at least three to five years in advance.

When selling your business, decide to whom you plan to market. There are a number of national corporations purchasing audiology practices. These large entities have the financial backing to make attractive offers.

You also can market your practice to an individual, small corporation, or employee. You could hire an audiologist who is interested in private practice and offer the first right of refusal when you are ready to sell. These last two scenarios provide the smoothest transition for patients and referral sources.

Owner Financing

Owner financing will attract more potential buyers, as this saves the buyer from obtaining conventional financing. If this works for both parties, the terms of the financing will depend upon your need to sell and buyer financing.

As a seller, you usually can get a higher price for the business if you finance the sale. A buyer using a conventional lender may not qualify for the full loan amount. If you agree to owner financing, you should secure additional collateral, such as a life insurance policy, depending on the amount and time of financing. If a corporation is buying the business, get a personal guarantee. Check the buyer's credit rating and be confident the buyer can pay the loan.

Owner financing offers the buyer greater flexibility than working with a conventional lender. Since the buyer and the seller are working toward the same goal, both parties have an incentive to create a suitable financing and payment plan.

Will You Stay or Leave?

Usually the owner stays for a specified time to help transition patients and referrals. An owner who departs at closing has an obligation to notify patients and referral sources.

Tax Consequences

Once the business is sold, the tax you owe will depend on the internal structure of the business and the structure of the sale. Your tax advisor will help you minimize your tax liability on your capital gain from a sale. If you provide financing, it is preferable to arrange not to pay tax on the capital gain until payment is complete, because the tax rate for capital gains is less than that for ordinary income.

Corporate Structure and Privacy

If you are a sole proprietor or partnership, explore the possibility of incorporating your business so that the corporation, not the individual, is liable for taxes and debts. The tax structure of an S corporation or an LLC (limited liability corporation) is not a taxpaying entity, which eliminates the possibility of being taxed twice.

Under HIPAA, business operations allow patient files to be transferred in all or part of the covered entity to another covered entity or to an entity that following such activity will become a covered entity (45 CFR 164.501, Health care operations…). Your attorney will include this in the acquisition document, but basically the patient records cannot be sold. There should be no documentation indicating the sale of patient records nor any monetary amount associated with patient records.

Purchasing a business is a great opportunity, and being knowledgeable about the process can eliminate fears, stress and anxiety. And selling your business—which you have built with your blood, sweat, and tears—to a qualified professional leaves you with the assurance that your patients are in good hands. 

This issue contains several business-related articles. Any ASHA member considering entry into private practice should conduct due diligence on all aspects of business practice. 

Ann DePaolo, AuD, CCC-A, owns The Audiology Offices, LLC, a five-office company based in Kilmarnock, Va., that provides audiology services to children and adults in a 250-mile region. She started her first audiology business from scratch and has bought and sold subsequent businesses. Contact her at ann@audiologyoffices.com.

cite as: DePaolo, A. (2008, September 02). Buying or Selling an Audiology Business. The ASHA Leader.

Due Diligence: A Checklist for Buyers and Sellers

Whether you're buying or selling, be sure to review these items carefully with your accountant and attorney:

Financial Data

  • Profit and loss statements for the past 3-5 years
  • Accounts receivable, if they are part of the sale
  • Business tax returns for the past 3-5 years
  • Gross and net profit for the past 3-5 years

Business Operations

  • Scope of audiology, hearing aid, or speech-language pathology practice
  • Business activities, including history of sales, service, private pay/insurance adjustments
  • Patient database, including active, age, repeat activities
  • Current and past advertising and marketing history
  • Referral sources, including length of activities
  • Community demographics and competitive businesses

Additional Recommendations

  • Review a sample of the files to ensure accuracy
  • Avoid purchasing accounts receivables; having to collect the funds may be more than a new owner needs to take on
  • Secure six months of personal expenses; loan money will be needed to pay overhead expenses
  • Keep current employees if they want to stay, but also work with them as new hires
  • Have the seller help you negotiate a new lease, rather than assuming the current lease
  • Have your attorney conduct a legal search on the business to verify there are no judgments, liens, or other legal activities against the business


References

All Business (Subsidiary of Dun & Bradstreet, San Francisco, CA). Due Diligence When Buying a Business. Online media and ecommerce company allbusiness.com. Accessed July, 2008.

American Speech-Language-Hearing Association. (1991). Considerations for Establishing a Private Practice in Audiology and/or Speech-Language Pathology [Technical Report].

Bloom, S. (2006). In an era of corporate consolidation, can the independent still thrive? Hearing Journal, 59, 19-26.

Drullinger, R. (2006). Practice valuation: The buying and selling of an audiology practice. Seminars in Hearing, 27, 57-76.

Foltner, K.Financing Options for Starting a Private Practice. May 19, 2008.

Foltner, K. How Do You Determine the Value of an Audiology Practice? March 17, 2008.

Liang, B. (2006). Law and audiology practice: Understanding malpractice and conflict of interest rules. Seminars in Hearing, 27, 48-56.

Nemes, J. (2003). What to consider before buying or starting a hearing healthcare pracice. Hearing Journal, 56, 21-25.

Nemes, J. (2006). Ready to sell? Experts offer advice on doing so successfully. Hearing Journal, 50, 19-25.

Traynor. E. (2008) Starting a private practice. Online CEU Course.

Taynor, E. Editor. The business basics of audiology. Seminars in Hearing, 27 Number 1, February 2006.

Worthington, D. Protocols for Sale of an Established Practice. August 1, 2005.



  

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