Eyeworld

G by Michael D. Brown, C.H.B.C. Succession plan … or lock the door! A critical topic in today's ophthalmology market- place is the decision when to begin the efforts of retirement and/or suc- cession planning. It is a known fact that the plan- ning for retirement should begin 7- 10 years before that date. In our decision tree, let's look at three criti- cal decisions that have to be made: • When will I retire? • How much will I get for my prac- tice? • What are the terms to be negoti- ated? The above shows the three criti- cal decision tree criteria. You need to be definitive on the timeframe that you are looking to retire, such as, "I want to retire on December 31, 2018." This gives you time to get your house/practice in order. You have to get the practice, op- tical shop, ASC, and whatever enti- ties you have appraised. How much are you expecting? That could be to- tally different through fair market value. Also, a potential buyer may want to get an appraisal done, too. You may also need to get a third, neutral appraisal of the practice. You may need to get separate values on the clinic, optical, and ASC, if appli- cable. What will the terms be on the buy-out? Is it a cash deal, a deferred compensation deal, or a stock deal? What is the structure? Is it an asset deal with stock acquisition and over what time period? What are the crit- ical terms of the deal/succession pro- gram? Let's now break down and dissect each of the three critical deci- sions: a. You need to decide on a date that is realistic and stick to it. You can't be changing your mind over and over again. Keep in mind you have a buyer, so if it is December 31, 2018, plan and stick to it. Don't make promises you can't keep. It is called seller's remorse. Plan for that date with a buy-in strategy and make sure you check with your CPA. There are significant tax ramifica- tions in this deal. There is a big dif- ference between an asset deal and/or a goodwill deal. Furthermore, there is a difference and critical tax im- pacts between enterprise and per- sonal goodwill. All of these discussions could mean 30% differ- ence on your tax burden. b. You need to come up with a price. What is the value and further- more, what is the value in the com- ponent parts: clinic, optical, and ASC (if applicable)? What consti- tutes value is the composite of two components: • Tangible assets • Intangible assets (goodwill) Tangible assets—you are look- ing at origination, replacement, and book value of cost. Then you aver- age the three and determine tangible asset value. Intangible assets (goodwill)— shows clearly that the computation is art and not always science. Here you are running models that measure excess earnings, com- parable sale, excess future dis- counted cash flow average, and determining what is the intangible value. In determining a price, the central theme is to determine fair market value IRS Revenue Ruling 59- 60. What the buyer thinks is fair market value is normally different than what the seller thinks. This is where an outside, non-biased ap- praiser needs to come up with a fair market value. The theme of these discussions may center around nego- tiations. Always keep in mind the saying, "What is good for the goose is good for the gander." c. The essential third area of the succession plan is the terms. It is not always price, though this is a highly sensitive determination. It is also about the terms and conditions. Basic first question: Is the deal going to be a stock deal, an asset deal, or a hybrid of both? What are the tax ramifications of the deal? Is it differ- ent in regard to the tangible assets in regard to origination versus replace- EW Ophthalmology Business 98 October 2011 ment versus book value? Another question centers around what do you do or how to handle the ac- counts receivable? In this regard, most sellers keep and collect the ac- counts receivable. What will you do? Other critical terms of the deal involve the employment agreement if the seller remains with the prac- tice, which normally occurs. What then will be the base, incentive, bonus, benefits, and terms of the contract? These are all critical issues to get resolved prior to any sale oc- curring and/or closing date sched- uled. There are many essential items to consider, but as I have always said, the term and conditions of the deal are just as important as the price. To summarize, there are three critical decisions that everyone has to make when it comes to succession planning: • When • How much • Terms These are the three key subjects. The key to any plan is that you plan. In other words, the first step is to recognize the process. I need to plan my retirement. Once you have the concept in mind, then you can begin making decisions relative to date parameters, relative to pricing (appraisal), and then relative to the terms. I state, as I did in the begin- ning, this is a 7-10 year process nor- mally. There are of course deals that occur in a year or two but those are in the minority. Ophthalmology is a unique and different specialty. It is unique in that it is a blend of prac- tice, clinic, retail, and surgery. You may sell all or parts and with differ- ent pricing and terms. Keep in mind that the key to this is planning and recognizing you need a succession program. If you don't have a plan of attack, your strategy may be to leave one day and lock the door, getting zero dollars from your investment. EW ABOUT THE AUTHOR Mr. Brown is president of Health Care Economics, Indianapolis. He can be contacted at 317-576-9600. 94-99 OB_EW October 2011-DL2_Layout 1 9/29/11 4:26 PM Page 98

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