The structure of the transaction may have a significant impact on the net value to both the buyer and the seller. Issues such as methods of payment, timing of payments, business entities involved, tax treatment, etc. carry important consequences that should addressed during the negotiation process. Given that tax law is constantly changing, it is important that each party seek legal and tax advice in determining the best way to structure the purchase or sale.

Incorporating a down-payment into your deal structure is a good way to eliminate those advisors who are not truly interested or don’t have the financial means to purchase your practice. It also shifts some of the risk to the buyer to ensure the success of the acquisition. Although the down payment can be calculated based on a number of methods it is usually structured as a percentage of the agreed upon purchase price. Down payments may range from 10% - 50% of the purchase price.

Installment sales or promissory notes are “owner financed” transactions where the bulk of the purchase price is paid to the seller over a defined period of time. Under this scenario the buyer and seller negotiate the time period, payment terms, and interest rate that will be paid. Under this scenario the payments required to retire the debt service should generally not exceed 25 – 50% of the cash flow of the practice.

Another popular method of financing which helps bridge the gap between the buyer and seller is structuring the transaction on an earn-out basis. An earn-out can be calculated as a percentage of total revenues, gross profit, net profit, or other figure. Usually the earn-out payment is determined based on a percentage of practice revenues over a defined period of time. It is not uncommon to establish a floor or ceiling for the earn-out so that both parties are protected should the practice experience substantial growth or decline.