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Guest TPA Firm Seller 2019

I am considering selling my TPA practice.

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I have NOT been involved recently, but have had some experience with firms that I worked for but did not have any ownership stake.  Going back 25 to 20 years ago, this is what I saw in position that involved my direct involvement.

Price is a very big issue, and typically is based upon the number of clients that remain with the new TPA after a specified period of time.  For example, the fee will be based upon clients that are retained after a 1 year period following the buyout.  Because of this trait, the "old owner" often stays on with a negotiated salary for a 1 - 2 year period.  Time and amount are negotiated.

The next item is determination of purchase price will often be 3 - 5 times annual earnings.  Again, revenue projects are based off of the number of retained clients after a defined period.  I have actually seen this value determined with as low as 2 times earnings, and I heard about a deal that was 7 times earnings.  Not sure what caused this variance.  Something regarding the typical client, perhaps?

A big thing is how clean the caseload.  Obviously, a messy caseload will not be as attractive as a cleaned up caseload.

Hope that helps.  I know it's old and may be dated, but that was my experience for what it is worth.

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Years ago, it was common practice for a sale price to be set as a multiple of gross revenue, usually anywhere from 90% to 150% of gross revenue. Sale prices now are more frequently determined as a multiple of EBITDA, since two firms with the same revenue can have very different profitability. "Discretionary" expenses are also sometimes added back into the income figure.

The most important advice I can give you is not to even think about doing this without hiring an experienced corporate transactions attorney. They can be expensive, but there are critical considerations most people would never think of that are very important when buying or selling a business.

If you're selling the company's assets, as opposed to stock, you'll want a higher multiple, since gains on the sale are taxable as ordinary income for asset sales, whereas stock sales give you capital gains tax treatment. Be aware that an intelligent buyer should not purchase stock without exhaustive due diligence, since any liability for work done in the past would be transferred. Many other factors also come into play, such as health insurance and other benefits, retirement plans, business relationships, etc.

There's generally some type of retention period, and proceeds of the sale are paid over that period. For example, if you sell for 120% of revenue, you might get 20% of the last three years' average revenues up front, then 20% of collections for each of the next 5 years. In that instance, it's in your best interest to make sure as much business stays on during the retention period as possible. This is one reason why many sellers stay around for a year or two after the sale.

Buying/selling a firm is a complex transaction that involves a lot of time if done correctly. Don't expect this to happen quickly. Get a good attorney!

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