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I have never forgotten an extra special moment I spent with my young daughter. We were ready to launch her little sailboat into the big blue swimming pool at home. She was so trusting and I was so intense with the success of this experience together. She started to just pitch the boat into the water but that vision seemed to have so many unforeseen and uncontrolled consequences that I asked her to wait! Instead, I asked her to enter the water with me and gently push and extend the beautiful sail boat on its course, out of the shallow waters and into the depths of water to perform the functions for which it was designed. This is the essence of what Agenda B provides to the buyer and seller of a professional business. It provides planning and consideration after the sale to share and make certain that unusual circumstances do not compromise the practice’s original design.
Agenda A is, of course, to sell the professional business. Over the 12 plus years we have designed Agenda A, we have found that precise timing and contingency issues were difficult to find compatibility between buyers and sellers. The most popular option at the time was to speak with multiple buyers. But a few years ago the timing and contingency problems got worse. Following the world economic recession of 2009 we began to find that seller’s retirement funds were suddenly depleted in double digits and their timeline for retirement had to be extended by several more years. Financial institutions that provided loans for professional practice sales quickly slashed their underwriting requirements where many qualified buyers now did not qualify for financing and new terms including interest rates and guarantees produced larger secondary notes to be carried by sellers. Faced with this new and more complicated set of circumstances, the idea to sell a package of old personal relationships with the seller completely disassociating themselves from the buyer and practice became a very sobering concern with buyers and lenders. The risks were raised as well as everyone’s concern.
Although we already enjoyed a high success rate for negotiating fixed price deals and successful transitions between buyers and sellers, the time had come for more inspiration and definition of terms for sharing future unknown circumstances and joint concerns and goals of buyers and sellers. We could no longer only rely on buyer covenants to control the success of a transition.
Sellers like Agenda B for a number of reasons. We can negotiate terms of the sale to give them opportunities to continue working and getting paid for overflow work in extra busy seasons and perform special projects for the buyers and also supplements retirement fund shortages. Generally the seller is listed as an associate of the buyer’s new firm and clients and staff tend to feel more comfortable with the old and new blend of ownership and reduces the risk of default and supports a higher price. There are also opportunities for sales commissions to be earned for continuing to support and refer new business contacts to the new firm. And there is an enormous amount of pride and loyalty that the seller, clients and staff share. In what other business or profession are clients and staff also called friends?
Buyers especially like Agenda B. Most buyers are experiencing some sort of rapid change. They may be moving to this practice from another part of town or city or state. They usually have never met a single client of the new firm, may not even have a residence in the city, get lost even finding the office and actually have not tried the key to the front office door. They hope the clients and staff will like them and find their credentials and personality equal or suitable to the seller. Many buyers are bringing clients of their own into the new practice and wonder how they and existing staff can rapidly learn to work together and not compromise the quality and efficiency of services. Buyers can’t even comprehend how long and the effort necessary to promote and grow the business. And what happens if the timing is now for unforeseen circumstances like health or life’s emergencies? Or prior year’s work or special plans come under current scrutiny and the circumstances warrant the counsel of the seller? And if this is not enough uncertainty, lenders financing the practice sale are notorious for twisting the terms of loans at the last minute. So when we explain to the buyers that we have already negotiated these conditions favorably with the seller…..there’s this significant sigh of relief.
There certainly are critics of Agenda B. Some sellers have heard stories about friends that sold their own practices and did not receive a fair price and were not paid all that they were entitled to. These critics generally believe you need to get all of your money up front and leave town. We find these situations are usually isolated to sales of practices by owners without professional planning and multiple buyer prospects. This approach might be reasonable in circumstances where the practice is a franchise operation and the ownership of the goodwill is with the franchisor and not the seller. But the key advantage of Agenda B is the blending of the mutual interests of buyer and seller.
If the practice you are selling or buying was built and focused on years of planning, study, licenses, ethics, pride, hard work and the resulting gratification of growth by referrals, then you have been blessed with the loyalty of clients and associates and you can’t just pitch that sail boat into the water. You need Agenda B.
Gary W. Hankins, CPA