BUYING A COUNSELLING PRACTICE

George K. Bryce, BA, BSc, MHA, LLB
Legal counsel for the BCACC
Published in Vol 12:3 Insights (Winter 2001)

INTRODUCTION

At least once in their careers, most counsellors are likely to consider whether they should buy an existing counselling practice, rather than put up their own shingle. This may arise for a counsellor who has been working as a salaried employee for many years and is looking for new challenges, or for a new graduate just starting up a private practice.

In this article, I will ask and then discuss a series of questions that a counsellor can use as a framework to help guide his or her decision whether or not to buy an existing practice, as well as to whether or not to hire a lawyer to help structure the deal.

I will speak from the perspective of a counsellor who is thinking about buying a counselling practice. But what I have to say may also be relevant to counsellors who are thinking of selling their practices.

I will also keep the discussion focused on what I hope will be useful, practical advice. I will avoid the lawyer's temptation to get into an in-depth review of obscure points of law, tempting as that may be.

What are you buying?

The first step for the buyer of the counselling practice is to answer what on its face appears to be this simple question. But to ensure the answer is as complete as possible, the buyer will want to consider a series of related questions.

1) Is the counselling practice owned by an individual or by a corporation?

It can make a big difference for the buyer if a counselling practice is owned by a corporation rather than by an individual. If the seller is a corporation, for example, the actual legal transaction of the practice changing hands could be through a purchase of the shares in that corporation. This is because the corporation would own the assets of the practice the buyer wants to purchase. On the other hand, if the seller were an individual, the purchase would be of that individual's assets.

Of course it is possible to buy the assets of a practice from the corporation that owns those assets, but there may be a very important reason to buy the corporation itself, rather than the assets— the corporate name. It may be that the name of the counselling practice is well known and respected in the community. Therefore, the buyer may want to purchase that name, as well as the practice's other assets. But if the seller is practicing using his or her own name and not a corporate name, then it is unlikely the buyer will want or need to purchase that aspect of the practice.

2) Are their partners involved in the practice with the individual or the corporation?

If there are partners in the counselling practice, it will be important for the buyer to ascertain what their business relationship is like. It may be that two or more professional corporations have formed a partnership, or that two or more individuals have taken this step. If there is some sort of partnership arrangement in place, the buyer would be wise to ask to see and then carefully review any partnership agreement that may be in place, and do so long before reaching a final purchase agreement. There can be a number of subjects raised in a partnership agreement that the buyer may want legal advice on before proceeding further. It would be a wise idea to invest some money in hiring a lawyer to review any partnership agreement before going further.

On the practical side, the buyer will want to make sure that he or she can get along well with the potential new partners of the practice. There is no use spending thousands of dollars buying into a partnership, only to find out later than the other partners have quite different treatment philosophies or styles.

3) What are the assets?

In addition to buying the name of the counselling practice, the buyer will want to carefully consider what assets he or she may be buying. Unless the seller has already prepared a list of assets that are for sale, the buyer should ensure that all the assets that are essential to the future success of the practice are listed in some fashion and agreed to by the seller.

A list of assets may include obvious items such as office furniture and clinical files, but may include less obvious things such as phone or fax numbers, internet addresses, and signage. It can also be useful if the seller was to specify items in the office that were not part of the sale agreement, such as works of art that the seller does not want to part with. It may be tedious to prepare a detailed list of assets being sold (or excluded from the sale), but such a list can help avoid costly confusion later in the process.

4) Does the seller own or lease the assets?

Once the assets have been listed, the buyer should ensure that the seller owns each asset and is therefore in a legal position to sell it. Or, if the asset is being leased and the buyer wants to assume the lease, that the leasor will let the buyer do so (with or without penalties), or the leasor will establish a new lease for that same asset.

If there were leases involved, it would be wise for the buyer to carefully review those documents, to ensure the buyer can assume the lease and to ensure the buyer agrees with the terms of the lease. In some cases, the buyer may not want to assume an existing lease, but enter into a new lease on better terms.

5) What are the liabilities?

While leases can be considered to be liabilities, in that the seller may have continuing financial obligations under the lease that can affect the practice, it would also be important for the buyer to ensure the seller discloses any and all active or potential liabilities. This would include legal actions the seller may be involved in or expects may be commenced. Such disclosures are critically important if the buyer is buying the shares of a corporation, rather than the separate assets of the practice.

6) Municipal bylaw requirements

A buyer should not assume that - simply because the seller is selling a practice located in a business area - that the seller has obtained the required permits or licences to practice counselling in that area. A wise buyer would ask to see a copy of a current and valid municipal permit or licence that authorizes the seller to practice counselling from the location of the practice. This would be particularly the case if the buyer was going to take over the seller's lease on any office space. The counselling practice could suddenly become worthless if the buyer discovers after-the-fact that it was not possible to obtain a municipal permit or licence to practice counselling from that office. The buyer could thus be holding a long-term lease for an office space from which he or she cannot practice counselling.

Even if the seller can present a current and valid municipal permit or licence, the buyer should ensure that either the permit/licence is transferable to the buyer or the buyer can obtain his or her own permit/licence for the desired office location. This should be confirmed before any agreement is completed.

For more details on municipal bylaw requirements on a counselling practice, see Bryce, G. "The Impact of Municipal Business Licensing and Zoning Requirements on the Practices of Clinical Counsellors", 9:1 Insights at 10, 22-23 (March, 1997).

WHAT IS THE PRACTICE WORTH?

There are many ways to set a purchase price and there is no particular formulae that can provide an objective measure of the worth of any counselling practice. The buyer will have to be careful to ensure that the practice is viable, as that ultimately will effect the value of the practice.

This may involve having the seller disclose financial records, if not also clinical records, service contracts, etc. to the buyer. The buyer would be wise to review such materials before agreeing to purchase the practice, rather than make disclosure of such information a condition of sale (and thus, if the practice does not look viable, an excuse to back out of the deal after it has already been established). To deal with issues of confidentiality, it is possible for the buyer to enter into a separate agreement with the seller wherein the potential buyer agrees not to disclose to anyone the information the seller will disclose to prove that the practice is viable.

The buyer will also want to ensure that the practice would continue to be viable after it is sold. It is perhaps obvious that the personality of a particular counsellor may have a lot to do with the current success of a counselling practice. If that counsellor leaves the practice, the clients may follow, thus making the practice less viable than it was at the start of the new ownership. But there may be other things the buyer will have to take into consideration when establishing the purchase price.

There may be things happening in the neighbourhood where the office is located that are totally unrelated to clinical practice but which could adversely effect the long-term viability of the practice. For example, a proposal to have a new highway in front of the office could destroy the practice as effectively as the demolition crews would destroy the buildings across the street to make room for eight lanes of asphalt.

To ensure that the practice will maintain its value, the buyer could also require a provision in the agreement that would set out a formulae to ensure a minimum cash flow through the practice for a defined period of time, and — if that cash flow is not met for certain stated reasons — then the buyer could seek a price adjustment from the seller, even after the deal has been closed.

The buyer may also want to consider having the seller agree to a non-competition clause. While such terms in an purchase/sale agreement are not looked upon favourabily by the courts, the non-competition clause can be drafted in such a way that the buyer can make a good case why the seller should be prevented from simply setting up a new counselling practice close to the former office, and why that restriction should apply for some reasonable period of time after the sale. A non-competition clause that purports to stop the seller from ever practicing counselling anywhere in the city or the province for the rest of time is unlikely to be upheld by a court of law, if the buyer later has to sue the seller for breach of that term. This is one aspect of buy a practice where it would be useful to obtain legal advice before finalizing the agreement. (I will have more to say later about hiring a lawyer.)

HOW SHOULD THE DEAL BE STRUCTURED?

Once the buyer has a clear understanding of what he or she may be buying, the buyer should give careful consideration to how the transfer of the practice's assets and liabilities will take place. While deals can be made with a simple handshake and an oral promise, and can be enforced in a court of law, the specific terms of such type of deals can be very difficult to prove.

A written agreement has the advantage of setting out in some detail what the seller is selling and the buyer is buying, as well as dealing with other important and related issues, such as disclosures, representations and restricted covenants. Because each deal is unique, caution should be exercised in assuming that a written agreement the buyer's friend used to purchase a dental practice, for example, can be used to draft an agreement for the sale/purchase of a counselling practice. In brief, one size does not fit all. The buyer may well want to hire a lawyer to help evaluate and structure the deal.

SHOULD THE BUYER HIRE A LAWYER?

While as a lawyer I have a certain bias when answering this question, I have see too many situations when a health professional has bought a clinical practice and later gotten into very complex and costly problems long after the deal has been finalized with the seller; problems that could have been avoided if legal advice has been obtained before the agreement was finalized.

While some of the things I have outlined above should help to ensure the purchase of the counselling practice contains no nasty surprises for a buyer, hiring a lawyer can be cost-effective in the long term to minimize the likelihood of such surprises. Even if the buyer simply talks to a lawyer for a few hours and does not hire the lawyer to draft a practice purchase agreement, that investment may yield substantial benefits in the future, in particular if major problems are avoided from the start.

A CHECK-LIST FOR A SALE/PURCHASE AGREEMENT

The following are the types of items that can be addressed in a written agreement to cover the sale/purchase of a counselling practice. Some of these are items I have discussed above, others raise new issues that I have not discussed, but which can be an important part of an agreement checklist. This is not an exhaustive list, nor will every item necessarily apply to every deal. Each agreement has to be fashioned to meet the unique circumstances of the buyer and seller.

1) Disclosures and representations

Even though the buyer will (hopefully) have researched the deal carefully, it can be useful to make the seller agree to certain disclosures and representations to confirm what the buyer understands to be the nature of the practice. Thus, if problems arise later on that the buyer did not anticipate, it may be possible to back out of the deal or sue the seller for compensation because of a lack of a material disclosure or an incorrect representation. Some of the topics that can be set out in the agreement are answers to these questions:

• Just what is being bought/sold (shares in a corporation or practice assets)?
• Can the seller sell or transfer the asset? If "no", what needs to be done by the seller or the buyer to ensure the buyer would have ownership or control over the asset?
• What type of practice, clients, etc. is involved?
• How viable is the practice? What is disclosed in the financial statements, income statements, appointment books, etc
• Are there any known liabilities (e.g. indebtedness, pending lawsuits, etc.)
• What arrangements have to be made for current employees? Will they be retained or will the seller have to give them notice and pay in lieu? Do any unions that represent those employees and what does the collective agreement say about transfer of ownership?

2) Common terms of an agreement

The following list items that are commonly found in the sale/purchase agreements of health care practices:

• Name of the practice being sold
• Use of phone/fax numbers, internet address or website, and signage
• Client files - ownership and transfer, number and type, accuracy, etc.
• Furniture and other assets (the importance of preparing a list of assets to be purchased and excluded assets)
• Letter of introduction / notification of clients of sale of practice (who will write the letter, what will it say and who will mail it)
• Assumption of leases, continuity of permits, valid licences, etc. and letters confirming assumptions, etc.
• What are the seller's known or reasonably anticipated liabilities?
• Retaining employees - employment standards and labour relations issues
• Restricted covenants (i.e. non-competition clauses)
• Non-disclosure agreements
• Intellectual property issues (unregistered or registered trademarks, etc.)
• Municipal zoning requirements
• Risks (seller's continue until closing date, etc.)
• Resolving disputes after sale is completed

• Setting the purchase price and any supporting representations
• Allocation (payment over time?)
• Holdbacks and contingencies
• A price adjustment clause for refunds in defined circumstances
• Form of payment (certified cheque, transfer from lawyer's trust account, etc.)

• Timing of the deal and setting a closing date
• Special considerations, such as timing of letter to be sent to the seller's clients.
• Conduct of practice between date of the agreement and the closing date; maintenance of insurance, etc.