If you have an Associate Doctor working in your practice (as either an employee or an independent contractor) and you are looking to sell or transition your chiropractic practice, there are two details you need to take care of to avoid a major financial dent in the proceeds you will get from your sale.
Let me explain:
We are well beyond the days of the handshake agreement for most business dealings, but even if you’ve done business with your associate and/or your independent contractor on the strength of your word, things need to change before you sell. Here’s why:
A lack of a contract can be the source of several critical problems. Specifically, one of the most important elements living inside the contract you have with your associate is the “covenant-not-to-compete and non-solicitation agreement.”
In a perfect world, you have both. The covenant not to compete prevents your former employee from going across the street and setting up shop. The non-solicitation agreement prevents them from soliciting your patients (and/or your staff) to come on over and join them.
Why the Bank Will Beat You Up Without a Contract
Some generous spirited chiropractors think these items are overkill and unnecessary because they have confidence that their associate won’t steal their patients, or that their patients are so incredibly loyal that they would never leave. Or perhaps even because they are so busy, they can afford to lose the few patients that would jump ship.
All of this may be true, but if you are looking to sell your practice, you need these items in place, for no other reason, than the bank will completely make mincemeat of your sale without them.
Here’s how the bank sees things:
If your associate has worked in your practice for the last three years without a contract (and the accompanying non-compete and non-solicitation agreement), during this time, the associate has, in effect, freely acquired the goodwill of the patients he or she has treated.
Now, you (the owner) come along and want to sell your “$600,000” practice. Your collections are $350,000 and the associate’s collections are $250,000. And of course, when it comes time to value your practice, you believe that the chiropractic appraisal should be based on the $600,000 of collections your business produced.
But the bank has a different opinion.
How the Bank Sees No-Contract Chiropractors
Despite your strongest arguments, the buyer, the buyer’s accountant and attorney, and the lender will not support paying the seller for goodwill that actually “belongs” to the associate.
The way they see it is that your associate can leave with his or her patients and establish a new practice or associateship nearby (because you have nothing preventing them from doing so). And the bottom line is that banks do not want to lend and buyers will not pay a seller for goodwill that the associate owns and the buyer does not expect to receive.
So, in the bank’s eyes, the potential loss of $250,000 of goodwill due to the possibility of the associate leaving translates into a loss of $250,000 from the calculations of how much they think your chiropractic practice is really worth.
And you just paid a VERY steep price for not having a written agreement with your associate.
Independent Contractor Complications
If you have an Associate Chiropractor working under your roof as an independent contractor, I’m sorry to tell you that your problems may be about to multiply. For those of you who have an Associate (functioning as an Independent Contractor) without a non-compete or non-solicitation agreement, you will face the same challenges as above when you go to sell. But the really bad news is that you have one additional big bomb waiting to go off…after your sale.
Sit down and keep reading…
Unfortunately, it’s a fairly common occurrence to see chiropractors employ their Associate on some sort of percentage split compensation arrangement (not a problem) and in the process, they declare that their Associate is an Independent Contractor. The owner’s logic is that the Associate isn’t paid a straight salary and they aren’t paid hourly, so the IC label fits – or so they think.
Actually, this is a very big potential problem and you could have a potential tax nightmare awaiting you.
The issue at stake is the status of your associate doctor and whether or not the IRS would deem that associate an employee or an independent contractor. It’s no secret that owners the designation “independent contractor” means that you get to avoid paying employer withholding taxes –unless or until the IRS determines that you really don’t have an independent contractor on your hands. But what you do have (in the eyes of the IRS) is an employee on whom you have failed to pay taxes.
If You Fail the Test, You Will Feel the Tax Pain
In all likelihood, the tax status of your Associate will not hinder your sale from going through, but it will absolutely cause some potential for unfriendly taxation afterward. Since the sale of your practice is likely to produce a big boost in your income compared to your previous year’s income, you may increase the likelihood of a tax audit.
And while they are busy with their nose inside your business, the IRS will ask itself (or you) some questions to see if your associate actually meets the criteria for an employee or an independent contractor.
They will ask if your associate provided his or her own chiropractic equipment, supplies or staff? They will ask if the former associate (now owner) set his or her own schedule and work without any supervision? And other potentially uncomfortable questions.
Unfortunately, if you fail the test and the IRS determines that you actually had an employee, instead of an IC, they will then pursue you for back taxes. You will be expected to pay the IRS for all past withholding and payroll taxes, with possible additional penalties and interest.
And this can become a very expensive and very unwelcome surprise to you in your retirement.
What to Do Next
If you are not thinking about selling your practice or transitioning well anytime soon, let this post serve as a warning to get contracts now and get clear with your employee or independent contractor before the mess happens. You can thank me later because you will have avoided a lot of trouble.
On the other hand, if you are going to transition anytime soon, you need these items in place before you go to the bank. The bad news is that your associate (and potential buyer) may not be very agreeable to the change and, worse, you don’t have a whole lot of leverage this late in the game. Make whatever concessions you may have to, but get things in writing and/or get off the employee / IC fence as soon as you can!
Finally, if you are looking to transition and this article was a bit of an eye-opener or if you are wondering if there are potentially other dangers and disasters awaiting you, the short answer is “yes.”
The good news is that help is available! For a limited time, you can view our FREE WEBINAR Sell, Switch or Slow Down: How to Maximize Value for Your Chiropractic Practice Sale or Transition and Minimize Costly Mistakes or see our services page for help on Transitioning Your Chiropractic Practice by clicking the link here.