By: Thomas Law Group On: February 24, 2023 In: Health Care Professionals Comments: 0

The sale of a professional practice has many considerations for both the selling and purchasing parties.  From the seller’s perspective, the payment of a purchase price that is in line with the seller’s expectations and that the seller believes reflects the fair value of the practice is of paramount importance.  From the buyer’s perspective, the buyer wants to ensure that the revenue stream of the business continues on a similar (same or better) pattern as the presale numbers provide (and on which the buyer has relied in his/her agreement to pay seller the requested sales price), so the seller may be required to continue in the business after closing and the payment of the purchase price may be paid over a period of time after the closing. This “earn out” period may range from 1 to 5 years after the closing on the practice sale and consequently may require that the seller continue in the business as an employee in order to ensure that established revenue markers are met.  While perhaps an earn out period is not ideal for a seller (the lack of benefitting from the time value of money when paid all at once) it affords the buyer some protection it may require in order to complete the sale.

Special considerations for the seller to consider when the purchase price is to be “earned out” include 1) preserving the capital gains tax treatment of the purchase price payment (not having it be characterized as ordinary income); 2) ensuring that upon a seller’s death before final payment of the earn out that a death beneficiary has been elected by seller; 3) including language in the agreement(s) that the buyer cannot terminate the seller (if post-closing employment or hire is required for the earnout) prematurely, other than for cause; and 4) seller retains adequate control over the practice revenue in terms of both production and collection to help ensure the productivity marker for the earn out can be met.

Our Thomas Law Group team of attorneys and paralegal support is very experienced in the sale of a professional practice, having represented countless buyers and sellers across that state of Ohio in such transactions.  Please contact us if we may be of assistance.