The Pros and Cons of Associate Buyouts for Private Healthcare Practices

10 Aug 2023

Owning a private practice involves making a lot of decisions, both clinical and business-related. One such decision is how to handle the sale or transition of the practice when the time comes. For many business owners, particularly those who remain heavily involved in treating patients, an associate buyout may seem like the best option. There’s an undeniable romanticism associated with the idea of passing one’s life’s work and legacy on to a trusted associate. The feeling of continuity and preservation of ethos can be deeply fulfilling, but is it the right choice for every practice? Let’s delve into the pros and cons of this option.

Pros of Associate Buyouts

Continuity: One of the most apparent benefits is the seamless transition for patients and staff. Since the associate is already familiar with the business, disruption to the practice’s operations and culture will likely be minimal. A smooth transition is understandably appealing, particularly to business owners who have built up a tight-knit team and established their place at the heart of their community.

Rapport during Negotiations: Having already built a relationship with the associate, perhaps over many years, negotiations often start from a place of trust. Both parties usually understand each other’s priorities and are often more flexible in their approach to agreeing on a deal. This can make the negotiation more straightforward, but not always, as detailed later.

Preserving the Practice’s Legacy: Often, associates have been coached by the practice owner and share similar values. Having likely worked in the practice and alongside the owner for a substantial period, they are more likely to want to preserve the business culture and approach to service delivery.

Light Touch Due Diligence: An associate will already be familiar with the practice’s day-to-day operations, making the due diligence process more straightforward. A less invasive due diligence process reduces the burden and emotional strain on the owner. However, the overall time to close a deal will not be any shorter as the associate will likely be less experienced than other external buyers.

Cons of Associate Buyouts

Emotion and Friendship Can Complicate Negotiations: While trust and rapport can be beneficial, emotional ties may hinder financial decisions. The line between business and personal can blur, making standing firm on certain terms challenging. The main objective of an associate buyout is often centred around the owner stepping away and passing on responsibility rather than achieving the best financial outcome. Many owners sell their practice significantly below market value without proper advice.

No Fallback Option: If negotiations falter or the associate pulls out, the business owner may find themselves back at square one, having wasted a lot of time and resources. We often see practice owners approach associates in good faith, engaging in discussions to the exclusion of all others, only to be let down months or years later.

Higher Deal Failure Rate: While deal failure is possible with any buyer, the failure rate is typically higher for smaller businesses, individuals, or associates. Associates are often first-time business buyers, and deals break down due to lack of experience, inadequate funding, or just last-minute ‘cold feet’.

Post-Completion Challenges: This could significantly impact the practice’s continuity for staff and patients. The former practice owner may feel obliged to step back in to help or may want to as part of an earn-out, but with less control over day-to-day decisions.

High Reliance on Deferred Payment Structures: Individuals not backed by a larger company may only be able to pay part of the purchase price upfront. While most deals include an element of deferred payment, associates are often more reliant on seller finance. This means less money for the practice owner on day one and may pose a greater risk of not receiving the whole consideration, especially if the business encounters difficulties under the new ownership.

Conclusion

If you want to sell a smaller, owner-operator-run practice and have an associate lined up to purchase the business, an associate buyout could be the right option. There are some advantages to associate buyouts, but the challenges can’t be overlooked.

Larger practices usually opt for a brokered sale to take advantage of a more structured and objective sale process. This is typically the more reliable and lucrative choice, with the owner having multiple buyer options, better deal terms, and higher upfront payments.

Whatever decision you make, it’s essential to be well-informed, seek professional advice, and weigh the benefits against the potential risks carefully. After all, your finances and the future of your practice, patients, and staff depend on it.

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