Could a Mentorship Buyout be Your Ideal Exit Strategy?

Written by Crystal Misenheimer of Progressive Practice Sales

According to the Small Business Administration, only about 30% of clinics listed ever sell. In the current marketplace for clinics, sellers outnumber buyers. And the marketplace will only become more crowded as economic strain puts pressure on more owners.

For a motivated owner, finding a buyer may be the biggest obstacle to selling, as good buyers are hard to find- many don’t have the capital to buy a clinic outright, and credit will likely tighten as the pandemic continues. Younger buyers may not feel they have the confidence to step up and run a full clinic.

So, what can sellers do? For the right seller, a mentorship buyout may be the ideal exit strategy. Properly structured, this strategy makes a purchase accessible for a buyer, increases the likelihood of a successful transition, and may even net the seller a premium in the end.

In this article, I will cover the basics of a mentorship buyout: what it looks like, why it works, what to watch out for, and how to make it happen.

What a Mentorship Buyout Looks Like

In a traditional sale, the owner gets paid for the clinic at closing and walks away after a thirty-day transition. This is convenient for the seller, but it puts a great deal of financial and operational pressure on the buyer.

In a mentorship buyout, the transaction is extended over a period of one to two years. The buyer purchases partial ownership in the practice, and, over time, the buyer earns enough equity to finance the purchase in full.

That’s the “buyout” piece — but the “mentorship” part is just as important. During the transition period, the seller continues to work in the clinic to train the buyer and supports them as they learn the ins and outs of clinic operations. Over time, the seller can scale back their involvement as the buyer gains confidence.

Why Buyers Will Buy In

Many young buyers do not have the skills or expertise to jump straight into running a clinic. They may not have postgraduate training or understand the intricacies of billing or marketing. Avenues for education on these critical components of practice ownership are limited — without a mentor, many young doctors must learn from expensive consulting or seminars.

Under a conventional thirty-day transition, a buyer must download a great deal of information in limited time. Learning and developing a practice is a process of trial and error, which can be expensive, stressful, and frustrating. Many of the skills a veteran doctor takes for granted are foreign to a younger buyer.

Compounding the problem are economic factors. Student loans and the cost of living have continued to rise. Looking at a major purchase, many buyers do not feel comfortable going hundreds of thousands into debt without being confident that they’ll succeed.

A mentorship buyout solves several of these problems. Buyers can learn from experienced owners while earning their way into the equity needed to buy a practice, and the confidence needed to run it.

Why Sellers Come Out Ahead

Opening the playing field to more buyers is a major advantage to sellers. Offering mentorship and support through the transition is one of the biggest ways that a seller can stand out — and therefore increase the odds of a sale.

With a good match, the seller gets the opportunity to train a replacement and hand off the practice they have worked so hard to cultivate. Sellers can help a young doctor grow, benefit from the earnout, and know that their patients will be in good hands.

As the buyer becomes more confident, an owner can become more hands-off. It’s important to provide support where necessary, but sellers can scale back on patient care as the transition progresses. Quality of life improves right away, and income from the clinic continues to flow in.

Finally, the extended transition allows the seller to maximize the value of their clinic. Taking on a motivated associate helps the clinic grow, and the seller adds value by providing mentorship and shouldering some of the risk. This can increase the sales price of the clinic and helps the seller avoid the worst-case scenario: years on the market, deep discounts, and no guarantee of a sale.

What to Watch Out For

A mentorship buyout will not work for every clinic. In clinics with lower net profits, the owner may not be able to afford to sell a portion of the clinic. Even if it is feasible on the seller’s side, if the income a buyer generates from partial ownership does not support a buyer's cost of living, then the sale will never work. Stability is important as a foundation for both parties.

A mentorship buyout will be most useful to clinics in challenging markets. That could mean an area with a high cost of living like San Francisco, or it could mean a rural area with less growth. These practices are often harder to sell via traditional means. An ambitious local associate might make a perfect candidate for a mentorship buyout.

Another important consideration for the seller is their own health and energy level. Providing support is critical for a successful deal. If a seller checks out and starts taking long vacations instead of supporting their buyer, things will go sour. The buyer will feel like they’re carrying 100% of the responsibility for the practice but are taking home just a portion of the reward. Buyers need to see real benefits from mentorship, and sellers should be honest about whether they have the time and energy to follow through.

Conversely, the buyer needs to show up ready to work. It’s best to find a buyer who is motivated and hungry — they’ll get the most from training and be in the best position to help the practice grow. Cooperation is key, and both parties should come in with clear expectations. Ideally, months of training can be mapped out ahead of time.

How to Make it Happen

Mentorship buyouts generally happen in phases. First comes the honeymoon phase: for a few months, the owner and buyer work together under a traditional associate’s agreement. This helps both parties assess whether the buyout is a good fit.

From there, the agreement enters a commitment phase. A letter of intent is signed, followed by a binding purchase agreement. The buyer will then own a portion of the practice, and the buyer and seller will work together for a one to two-year period.  Over this time, the seller’s time spent on patient care and in the clinic will gradually decrease until the buyer has the resources and expertise to buy the practice in full.

Contracts can provide some flexibility in this schedule. If a buyer feels confident after six to eight months, they may have the option to purchase the clinic earlier for a lower price. If the transition runs two years, the seller may add a premium for their continued support.

Sellers still need all the materials required in the usual SBA sale process. That means a prospectus to show the buyer, three years of clean profit-and-loss statements, and detailed financial records. The more information a seller can provide upfront, the better a buyer will feel about moving forward.

Terms of buyout contracts are complex, covering the terms of the phases as well as responsibilities and schedules of the doctors. The whole office needs to be on board with the transition, and staff should respect the buyer and set them up for success.

These agreements have more moving pieces than traditional sales. A good broker can help sellers iron out the details, avoid the various pitfalls, and minimize risk for everyone involved.

Under the right circumstances, however, a mentorship buyout is a win for both parties. Younger buyers have an opportunity to learn from an experienced mentor and take charge of their own destiny.  Sellers who want an exit strategy can scale back their involvement, receive full value for their clinic, and rest easy knowing their patients are well cared for.

The pandemic has strained markets nationwide. For sellers who are willing to adapt, a mentorship buyout may be the perfect way to turn these conditions into an advantage. Stand out from the crowd, and your exit strategy may turn from a desperate sale into an opportunity to thrive.

Visit Progressive Practice Sales for more information on buying  and selling your chiropractic practice.  https://www.progressivepracticesales.com/

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