THE BUSINESS OF PRACTICE: MERGERS


make the combined practice stronger than the two individual practices.


3. Who Are You and Would You Fit With Me?


Once you have identified what it is you are looking for in a merger partner, you can then begin investi- gating specific practices. Each possible candidate should be compared to the “perfect” merger candi- date to determine just how close that individual practice is to your ideal. Obviously, we are not talking about comparing one bunch of bananas to another at the grocery store. There will be a very limited number of possible practice candidates but comparing any potential candidates against an ideal merger candidate is a very helpful exercise and should help to convince you to move forward, or not. In order to determine if a merger partner is a


match, you will need to examine information on the potential merger candidate. This information is very similar to the information you would use to understand your practice’s identity. You will want to review the financial information as well as prac- tice demographic information about the merger can- didate. It is usual and customary to enter into a confidentiality agreement prior to examining the in- formation of another practice. This due diligence investigation is concluded when the parties either agree to not proceed or agree to investigate a poten- tial merger.


4. How Would We Work Together?


The next step to a practice merger is both parties determining if they want to be partners. This in- volves many aspects but is mostly about personality and practice habits of the owners and whether they can work together. We all know practitioners that we might respect professionally, but for one reason or another, we would never want to be their partner. This analysis takes some time and relationship building. One way to accomplish this is for each potential partner to spend time in the practice of the other potential partner. During this period, the two (or more) potential partners should work with and around each other. They should work with the staff of the other potential partners. By doing this you will get a “feel” for what it is like to work with this potential partner and whether your practice habits and styles are compatible.


5. What is a Potential Structure?


After determining that both parties would like to pursue a potential merger, it is then appropriate to begin to discuss the structure of a possible transac- tion. Typically, mergers involve one practice merg- ing into another with the combined practice having combined ownership. The key to this process is determining the value of each practice and then using that value to determine the new ownership percentages in the new combined practice. For ex- ample, if two single owner practices wanted to merge and one practice was worth $400,000 and the other was worth $600,000, the ownership of the com- bined practice would be 40% and 60%, respectively. This illustrates how important the practice value


is when you are trying to determine the structure of a merger. Obviously, value is like beauty, it is in the eye of the beholder, and there are many ways to value a practice. It is important that the same method is used to value both practices so that both practices are treated as fairly as possible when you use those values to determine ownership of the merged practice. Once the ownership of the new combined practice


is determined, it is then important to put in place all of the documents necessary for the new practice partnership. These include partnership agree- ments, employment agreements (outlining how the combined practice will pay for the efforts of the partners), and buy-sell agreements that detail how the partners stop being partners. You should never enter into a merger without having a clear under- standing, in writing, about virtually everything that has to do with money. Potential misunderstand- ings can be avoided with clear written communica- tion involving all of the business aspects of the new practice.


6. Conclusion


Should you decide to explore the possibility of a merger, you must know who you are, have an exten- sive due diligence process to determine who they are, become comfortable with the structure of the transaction, and, last but not least, know your fu- ture partner(s) almost as well as you know your own family.


Acknowledgments


Conflict of Interest The Author declares no conflicts of interest.


192 2014  Vol. 60  AAEP PROCEEDINGS


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