CHOICES IN SELLING A CHIROPRACTIC PRACTICE

Introduction
When a doctor is ready to sell his or her practice, many questions come to mind: “how do I do that?”, “should I sell all or part of the practice?”, “what are the legal documents I will need to achieve my goals?”, “what if I am not quite ready to sell all of my practice?” etc. In this Outline we briefly describe the options available to a doctor who contemplates a sale of his or her Chiropractic Practice and discuss the transaction structures, document packages necessary to be prepared for each of these options, as well as the key legal issues that arise during this important process.

Option 1 Complete Sale – Complete Payment - Cash at Closing

Transaction Structure Description

This is the most straightforward option from the legal prospective. Practice is being sold completely and unconditionally; all assets owned by Seller are being transferred to Buyer. Most practice sales are “Asset Transactions”, not “Stock Transactions”. Buyer does not receive shares of the Seller’s medical corporation but, rather, ASSETS owned by such a corporation. “Assets” include equipment, patient charts, trade name, etc.

Note 1: If a doctor operates not as a legal entity then he or sells assets personally. If a doctor DOES have a legal entity but it is a limited liability company (LLC), the transaction structure similar, although some legal/tax steps are somewhat different.     

Documents Package:
 

1. Asset Sale Agreement;
2. Bill of Sale;
3. Lease assignment or Lease “novation” (if there will be a new lease);
4. Corporate resolutions approving the sale and resignation of the selling doctor;
5. Independent Contractor Agreement – if the Seller stays on after the sale;

Asset Sale Agreement is the main document of the transaction, providing details on how such practice is sold and assets transferred. The key points in the Agreement are:

• Assets categories and price allocation among them;
• Accounts receivables – whether they are included and if not, how collected;
• Work-in-progress – how the on-going treatment is distributed among the parties;
• Non-Compete and Non-Solicit restrictions;
• Representations and warranties by Seller and Buyer; 

 Note: “Non-Compete” and “Non-Solicit” restrictions are not the same. “Non-Compete” restricts the selling doctor from opening or working for a chiropractic office after the sale for a period of time within certain mileage, while “Non-Solicit” prohibits him or her from contacting patients. Both restrictions must be carefully worded to be enforceable.

Bill of Sale – a document required by the Uniform Commercial Code that transfers clear title to the goods from Grantor (Seller) to Grantee (Purchaser).

The difference between “Lease assignment” and “Lease novation” is as follows: the first document transfers the existing lease on the same terms to a new tenant (Buyer or Buyer’s company), while the second one terminates previous lease and approves the new lease in the name of a new tenant.

Corporate Resolution is a document by which the medical corporation through the vote of its director(s) approves the sale and accepts resignation of such director(s) after the sale.

Option 2 Complete Sale – Partial Payment at Closing plus Owner Financing
(“Self-Financed Sale”)

Transaction Structure Description

A Self Financed Sale is a sale of the chiropractic practice when all of its assets are immediately transferred to the Buyer as in Option 1 but Seller receives only a portion of the purchase price and accepts the promise of payment for the remaining part of the price (“Financing Terms”), secured by a promissory note or other document.  

Documents Package

1. Asset Sale Agreement;
2. Bill of Sale;
3. Lease assignment or Lease “novation” (if there will be a new lease);
4. Corporate resolutions approving the sale and resignation of the selling doctor;
5. Independent Contractor Agreement;

(Same as in case of a Complete Sale – see above)

Note: Asset Sale Agreement ought to reflect the pricing structure and financing.

In addition to the above package, the following additional documents are needed:

6. Promissory Note;
7. Security Agreement

A promissory note is a notarized written document, by which a debtor who owes some money (“Debtor” or “Maker”) unconditionally promises to pay to creditor (“Creditor”) certain amount of money in multiple installments (usually, monthly) or in a single installment with interest and within a pre-agreed time frame.

Note: Although in the context of a sale of the practice promissory note stipulates the payment of the financed portion of the price, promissory note is still an unconditional promise to pay that can be enforced on its own terms, irrespective of Buyer’s claims that a practice transferred was defective or any other Seller’s alleged misrepresentation.

Under a security agreement Debtor/Purchaser agrees to guarantee the prompt payment of the remaining portion of the price under the Asset Sale Agreement and Promissory Note and offers some property as collateral, so that if such payment is not made or is late or incomplete, Creditor/Seller can take possession of such collateral. The Security Agreement works like a mortgage, e.g. when a real estate is purchased.   

Option 3 Gradual Sale – “Installments Sale” (a/k/a “Associate Buy-in”)

Transaction Structure Description

This Option reflects a sale of the practice not in one transaction but in installments, so that Buyer purchases only a part of the practice at first, while the agreement calls for the subsequent sale of the remaining part(s) of the practice within the pre-agreed time. Why a Gradual Sale? Factors dictating this choice generally fall into two scenarios:

(a) Selling doctor may not want to sell the entire practice just yet, because he or she may want to continue to work, keep making retirement contributions, etc. or (b) Buyer can’t secure sufficient funds, or is unwilling to pay for the entire practice.

From a legal prospective, a graduate sale is almost always not an “asset sale” (unlike Options 1 and 2), but a “stock sale” (assuming the selling doctor has a legal entity).

Note: The transaction under Option 3 often is referred to as “Associate Buy-In”. This is because Option 3 is usually used by a current associate who “buys-in” into the practice and acquires some percentage of the corporation's stock (or an interest in LLC) for a period of time until the entire practice is finally sold, Seller retires or other event. 

Documents Package

1. Stock Sale Agreement;
2. Corporate resolutions approving the sale and appointing Buyer as officer/director;
3. Shareholder Agreement with optional “Buy-Sell” Agreement
4. Employment Agreements for both co-owners

Note: If the practice operates as a sole proprietorship prior to co-ownership, the incoming doctor may acquire a proportionate interest in the assets of the practice and both owners would contribute such assets to a newly formed LLC or corporation. 

When an associate begins work, they usually sign an employment agreement. If that associate now becomes a co-owner, the terms of such an agreement may change.  

Further, if a medical corporation is owned by two or more co-owners, it is highly advisable to sign a shareholder agreement. That document regulates such issues as company management, decision-making process and the procedure to follow in case of significant changes in the life of the owners, such as retirement, death, or disability.

A buy-sell agreement should provide for the right of co-owner to mandatory or optional purchase of the other owner's interest if a specified triggering event occurs. Such an event can be death, permanent disability or retirement age. The “buy-sell” can be signed either as a stand-alone document or as an integrated part of the shareholder agreement.

Option 4 Partial Sale – Part of the Practice Sold, Part Retained by Seller

Transaction Structure Description

Unlike Option 3, Option 4 addresses a situation when only a designated part of the practice is being sold, while the rest of the practice is retained by Seller who may continue to work and to own that remaining portion of the practice.  

Option 4 is more complex and probably less desirable that the other options discussed above as it presents some challenges from both the business and legal points of view. However, it may be helpful in some situations. For example, many lenders won’t agree to finance the sale of practice, unless that sale is structured as an asset sale. Consequently, there may be not enough funds to cover the entire practice. Another reason for using Option 4 is to address Buyer’s reluctance to purchase or Seller’s reluctance to sell the entire practice. Buyer may feel that some patient files are too old or that Seller practices in several medical specialties (personal injury patients, sports medicine, etc.) which Buyer does not work in. In those cases, the parties “carve-out” certain parts of the practice that have an independent value and transfer only those parts.
 
Documents Package

Same as in Option 1, provided that the Asset Sale Agreement ought to identify the assets that Buyer is purchasing as “assets sold” and the assets that Seller retains as “excluded”.
Seller and Buyer must address the challenge of separating the assets between these categories in such a way to avoid any uncertainty or conflict in the future. 

ote: If, as a result of partial sale Seller continues to operate a practice, it is very important that the parties clearly identify the line of division between the two practices, address the patient care issues and otherwise establish parameters for their practices.