A buyer approached me about an offer they received from their employer of 3 years to buy out one of the 2 equal shareholders, “sure”, I say “let me see the proposal”. The offer was $450,000 for 50% of a practice grossing $1,000,000 here’s the kicker, they wanted the buyer to buy STOCK ! My first thought was “geeze, what is this, a .com company from the year 2000?”
So my work began.
Basically, the sellers had the practice valued 2 years earlier and even then the practice was doing less than $1,000,000. I’m convinced that the valuation was done for a buy-out transaction relating to their shareholder agreement, maybe for life and disability insurance issues. I also believed that the sellers really hadn’t consulted with anyone before making this offer to their associate, it was an innocently BAD offer and they didn’t know any better.
I wound up having a discussion with all 3 doctors about the fact that NO ONE pays 100% of a buy out or buy in as a stock purchase, they usually pay near book value for the stock and the rest of the buyout buy in payment in the form of either an earn in or severance compensation (an income shift). I also prepared my own “price assessment” for the buyer and shared the results with the sellers and they agreed with my conclusions and seemed happy to get the feedback.
We settled on an asset purchase arrangement for around $300,000 plus 50% of the cash & a/r. Seller still got the majority of their proceeds taxed at capital gains and buyer now has income tax deductions that are NOT available when buying stock. I figured the “tax” savings for the buyer between the original offer and what was agreed to was in the neighborhood of $400,000.
The lesson here is for sellers and buyers. For sellers, make sure you seek advice on how to approach your associates when contemplating a buy-in, otherwise you risk alienating them if your proposal is so far out in left field because you simply don’t know any better. For buyers, seek your own advice on any proposals given to you and don’t assume the owners are trying to rip you off simply because an offer may seem of the wall, it’s quite possible that don’t know any better.