Last week, David the CPA sent me a great question that I thought would be relevant to the market at large. He asked, “Is it possible to buy part of a practice or must we be willing to purchase all of it?”
First, let’s separate the market between the single owner practices and the multiple partner practices. In the later, buy-ins occur particularly when the practice has a gross over $2 million and several partners of varying ages. It is not uncommon in a firm of this nature for an outside practitioner to buy in to replace a retiring partner.
However, for a majority of the market, which grosses less than $1 million in annual gross the situation is quite different.
Partial buy-ins, buy-outs and carve outs are possible. It obviously depends on the goals and plans of both the seller and buyer. For example, if the seller has health issues, plans to relocate or wants to retire immediately or even in the next year or two, then a partial buy probably would not work. It might be possible if their plans are a year or two out to structure a two phased purchase*, buy a portion today and buy the rest in a year or two.
From the buyer’s perspective, most acquire with the goal of gaining control and autonomy, which probably will not be the case in a partial buy. It takes a lot for most sellers to let go in the best scenarios, but it is certainly not a realistic expectation if they are still a working owner in the business.
Another concern for a buyer, if they separate some of the clients into a separate business (a carve out) should be retention. The strongest point of retention is going to be the combination of an endorsement of the buyer by the seller and the fact that the seller is no longer available to the clients. If the seller is still practicing, some clients may try to return to the seller instead of transferring to the buyer.
A partial buy also depends on the economic needs of the seller and the buying ability of the buyer. Unlike a full purchase, a bank will not get involved with a partial buy, so any down payment will rely entirely on a buyer’s cash and terms will rely on how much of a note the seller is willing to carry. This is usually the largest stumbling block in a partial buy.
So, yes buy-ins, buy-outs and carve outs occur and can be successful. The key to a successful outcome, as in any endeavor of this nature, is being aware of what you are getting into and what the acceptable and unacceptable risks may be.
Let us know if you have any additional questions.
* A note on two-phased purchases: even with an "airtight" agreement, we have seen buyers change their mind and decide to not buy the rest of the practice at the appointed time. This is particularly true when the buyer “acquired” the first portion with zero or little money down. The result of this failed second half of the acquisition is huge mess for both parties.