Signing with a Medical Practice Broker – What’s in it for You?

How listing agreements align incentives, give breathing room to a deal

If you’re about to sign a listing agreement with a medical practice broker, you shouldn’t just be thinking about selling your practice: you need to be ready.  Signing the agreement means you have decided you will sell and are fully committed to the process.   There is no more batting around the idea or talking to colleagues about what they did.  You’re selling.

Curious about where you are in the process?  Download Your Process Map below to find out.  

Proven Process Map - Where Exclusivity Agreements Come Up and Why

Selling your practice will likely be the largest financial transaction of your life, and signing a listing agreement, or an “exclusive,” ensures incentives are aligned from the beginning.  

In this article, we’ll discuss:

  • What is a listing agreement?
  • What’s in it for you? 
  • What’s in it for the broker?
  • Why 12 months? 

What is a listing agreement?  

A listing agreement is a contract that both the seller, in this case, the practice owner, and the medical practice broker sign.  Also known as an “exclusive,” or an “exclusivity agreement”, a listing agreement details the following:

  • That the broker exclusively represents the seller 
  • A timeline defining the length of the agreement
  • A price the seller will pay the broker -usually a percentage of the sales value  
  • When the seller pays the broker – usually at close  

What’s in it for you?

Listing agreements benefit a seller by: 

  • Committing them fully to the process
  • Defining a timeline by which the practice will be sold
  • Providing clarity on what it will cost to sell the practice
  • Understanding what the likely outcomes will be
  • Getting the broker invested

Let’s break it down:

As we wrote in the introduction, one of the largest (though often unspoken) benefits of signing an exclusive agreement is a mental commitment to the process.  Before an exclusive, you can bat around the idea, talk to colleagues, and get some perspective.  You never have to dedicate significant time and attention, but you also never get the benefit of selling a medical practice to private equity.  Committing to an exclusive prepares you mentally for what’s to come.

Logistically, an exclusivity agreement defines the timeline by which you can expect the practice to be sold – usually 12 months.  

It also defines the broker’s fee, usually between six and 10 percent of the value of the sale.  

When you sign an exclusivity agreement with a good broker, you have also discussed what you want from the sale – cash up front, a walk-away deal, etc.  The listing agreement memorializes this conversation so you know the likely outcomes when you commit to your broker.

Think about it like this:

Think about it like a contractor building a house: If the contractor building a house suddenly had to live in it for five years, they might  think, “Damn, I have to get this right because I’m going to have to live in it.” 

And that’s what you want – a medical practice broker that recognizes that they have to get the deal right because they’re the ones that are going to have to live with the outcome.  

What’s in it for the medical practice broker? 

You’ve probably heard the Charlie Munger quote, “Show me the incentive, and I’ll show you the outcome.”  We’d say the same about exclusivity agreements on deals.  Incentives are nuanced and complex to get right.  But when you get them right, you get exactly what you want.

Brokers require exclusivity agreements to align their incentives with yours and get you what you want.  For most of our clients, what they want is a top-of-market sale to a buyer they trust. In addition, good advisory firms invest their entire teams in your deal.  At PTG, each practice owner/seller gets a financial analyst, a CPA, a former practice manager overseeing the reports, and an analyst focusing on pulling reports confidentially and securely.  And this is just for underwriting.  Advisory firms spend tens of thousands of dollars underwriting and packaging the practice.  Without guaranteeing that you, as the seller, are equally invested, there’s simply no incentive to do that level of work.

All downside, no upside

Plus, the broker can no longer control the outcome of the deal.  Here are a few ways that could play out:

  • The broker leads a complete and thorough underwriting process, calculates a valuation, adds value that preps the practice for sale, then the seller takes that info to the market by themselves.
  • A buyer figures out two different brokers are pitching the same deal and they don’t know who to talk to, trust, or who has the terms. They end up not taking the deal seriously and bail.
  • Multiple brokers, and maybe even the doctor themself, are shopping the deal around.  Word gets out that the practice is on the market.

A seller going rogue doesn’t make the practice more valuable or sellable.  It’s confusing for the market and certainly removes the incentive for the broker.  

Finally, be wary of brokers who opt for non-exclusive arrangements, and understand this could be due to desperation or a belief that more exposure increases the chances of finding the right buyer.

Why 12 months?  

We often get health care lawyers pushing back on our exclusive agreement without any reasoning.  “It’s too long,” they write back in an email and attempt to shorten the contract by four to six months.  But health care lawyers are not selling a medical practice to private equity buyers and can’t control their processes, which sometimes eat up a third of the timeline.

There are two sides to the story – how long it takes you to get your financials to us and how long the buyer takes to complete due diligence. 

On the seller’s side:

On one side, our team can underwrite a single practice and have the complete CIM ready in 2 to 3 weeks if the information is clean and the doctors are accessible.  The underwriting team and your advisor will be personally working on the deal; they will be laser-focused on it. 

However, sometimes it turns out the financials are not as clean as they seemed during the “First Look” process.  In that case, the practice(s) can take 6 to 8 weeks or more to underwrite.

To be clear, the doctor’s time in underwriting is about 1.5 to 2 hours.  Our team handles the bulk of the work via technology, but reconciling reports will take extra time if financials haven’t been kept up to date or personal expenses are being run through the business. 

On the buyer’s side:

On the other side, the buyer takes their time with due diligence.  Due diligence generally lasts 3 to 4 weeks, with the broker consistently working to move the deal forward by supplying the buyer with additional information, answers to nuanced questions, and more.  However, just like messy financials lead to prolonged underwriting, buyers – for many reasons – can take their sweet time in this phase. 

We tell clients selling a medical practice to private equity to expect some turbulence in the sale process, and being flexible about a timeline is certainly a part of that.

When does an exclusivity agreement come up in the practice sales process?  See the entire journey by downloading Your Process Map below.

Proven Process Map - Where Exclusivity Agreements Come Up and Why

Summary

Exclusivity agreements offer many benefits to the seller, one of the most important of which is the mental preparation to sell the practice. 

Upon signing the agreement, you essentially become short-term partners with the broker, exclusively focused on selling the practice.  The relationship is that of a business partner without actually being one. You and the broker are tied at the hip to the outcome.  And if you don’t have an exclusive – that’s not the case. 

This partnership generally lasts twelve months, allowing the broker to underwrite and package the practice – even when financials are messy – and the buyer to spend the time needed in due diligence to make a confident decision to purchase. 

Practice Transitions Group

Related Articles

Your credibility and your reputation are affected by whether or not you take these first three steps. Once you’ve followed up on these items, you can then begin to consider if you want to stay around for some time, or retire right away and think through who you want to buy your practice.

The Best Way to Sell a Dental Practice

You’re ready to sell your practice, but what really happens once you close the deal?

The Truth Behind Taking on Corporate Partners

A sale can absolutely be kept confidential.

Can the sale be kept confidential?