Selling a private practice is an exciting but complex process, especially when it comes to the buyer’s assumption of risk. Understanding this risk safeguards what you’ve built while laying the foundation for a seamless transition. Whatever type of professional service you’re selling, knowing the risks the buyer assumes and your obligations can enhance the success of the sale.
Here’s what to know about the buyer’s assumption of risk, including its definition, why it matters, and how to approach it effectively.
The buyer’s assumption of risk refers to the responsibilities and potential liabilities the buyer agrees to take on when purchasing a business. With the purchase, the buyer inherits specific risks associated with business operations, industry regulations, and financial obligations.
For private practice transitions, mitigating these risks begins during the negotiation phase. Common risks include employee turnover, client relationship liabilities, and market fluctuations affecting future revenue. When selling service-based practices—like physical therapy practices or CPA firms for sale—the buyer typically assumes the responsibility for active client contracts, ongoing projects, and operational adjustments necessary for growth.
It may sound like the assumption of risk is the buyer’s problem, but that’s not so. Both sides should be aware of the potential issues it involves and especially how it can help facilitate a deal. Thoroughly understanding these factors ensures the sale benefits all parties involved.
For example, the assumption of risk can prevent legal disputes. Clear outlines of risk responsibilities protect both seller and buyer from future disagreements. Further, buyer confidence is higher, as buyers feel more secure when they fully understand what they’re taking on. Finally, appropriate risk allocation reinforces the valuation of the business for fair seller compensation.
Buyers in almost any private practice sale take on the following risks:
Financial liability is the biggest risk most buyers face. Liabilities include outstanding loans, existing leases, pending payments from clients, and the like. The buyer requires full transparency regarding accounts receivable and payable to gauge financial risks.
Client base accounts for a significant portion of a private practice’s value. When a buyer purchases a private practice, they should assume some clients may leave once the business is sold and the ownership changes. The seller can mitigate this risk by offering to stick around during the transition and arrange introductions between clients and the potential new owner to establish a relationship.
Continuity is another concern. Daily operations may be affected by the sale as the new ownership assumes responsibility for employees, operational workflows, and the various technological and other tools required by the business.
For example, outdated technologies and processes may be considered risks that could affect the business since the buyer may need to replace them. A seller may mitigate such risks by addressing the above inefficiencies and providing documentation of how operations work within the business well before the sale.
A proactive seller should take steps to make a private practice’s purchase more attractive by doing the following:
Perform a comprehensive internal review long before you put the business up for sale. Address any outstanding liabilities. Bring all accounts up to date and provide verification. Ensure all client contracts and agreements are honored as well. Buyers appreciate due diligence, as it builds trust.
Ambiguity creates uncertainty and diminishes trust. Provide clear documentation of potential financial, legal, and operational risks. Outline the ways you’ve worked to mitigate them. Transparency demonstrates professionalism and boosts buyer confidence.
Everyone appreciates the gift of time. As suggested earlier, welcome buyers and secure client retention by agreeing to a transition period. Staying on for a predetermined amount of time after the sale ensures continuity and eases the buyer’s entry into ownership. When introducing clients to the buyer during this phase, explain the value the new owner brings to maintaining the excellent service they’ve come to expect.
A fair, accurate business valuation reassures both buyer and seller by showing that the risks assumed align with the purchase price. Present financials honestly and reliably.
The assumption of risk directly affects the valuation and sale price of your private practice. Buyers factor in the type and extent of the risks they’re absorbing into their offer. One common example: the way client retention risk leads to lower sale prices if buyers feel uncertain about retaining the business’s current revenue base.
Here are other ways to preserve your private practice’s valuation:
During any private practice sale, the purchase agreement formalizes the legal allocation of risk. Both parties must fully understand the implications of the agreement’s terms, specifically in relation to indemnifications, warranties, and representations.
Enlist legal counsel with experience in selling businesses to ensure the terms are fair and appropriately allocate risk.
That’s what to know about the buyer’s assumption of risk. Understanding what risk the buyer assumes—and how that risk affects business valuations and sale terms—empowers private practice owners to negotiate fairer deals for smoother transitions. Do you need help buying or selling a private practice? Contact us for a consultation.