I am considering selling my TPA practice.

[Guest TPA Firm Seller 2019]

I’m considering selling my TPA practice. I’d like to hear feedback on the process from anyone who has gone through this experience. 

.

[Below Ground]

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.

[ugueth]

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!

[pixmax]

If you are in the New England area, I would be interested in talking with you. 

[Richard Wilson]

Let me know if you are still looking to sell. Where are you located?

[JMP]

any interest in this still?

 

[Retired, but still reading]

Hi -here's a long answer 

We sold our firm (sale closed early 2017).  I'll preface my comments with a few caveats:

 1.  We did our deal in a good market (for sellers)

 2.  With coronavirus, we're living in a totally new world order.  I wonder how our former clients (mostly small and medium sized businesses) are coping/surviving and how they're paying TPA fees.  I have no idea how this has affected the mindset of potential buyers ...

 My wife (also my business partner) and I were ready to retire and since our staff wasn't in a position to take over the business, a sale was necessary.  We were comfortable handling the sale and negotiations ourselves - although we did have both our regular general business attorney and our high-fee ERISA attorney assist with the paperwork as needed.  We also leaned on our CPA for help on the tax ramifications.

 We started by deciding what was acceptable to us - in terms of retention of staff, price and payment terms.  Then we started the process by reaching out to potential buyers - some were friends who owned TPA shops and some were competitors who had (at some time) expressed an interest in acquiring us.  We set up face-to-face lunch meetings with each to start a discussion.  The initial meetings were informal and we didn't bother with a non-disclosure agreement for the preliminaries.  We also were approached by a TPA business broker who introduced us to a potential buyer who we met with (but didn't sell to).

 For the meetings, we put together a 2-sided sheet - on one side was some info about our firm:  brief history, client geographical demographics, description of billing practices, overview of software/IT, mention of E&O coverage, my willingness to work for a year after closing, gross income for past 2 years, listing of staff (not by name) with brief job description and salary, our selling price and the reason that we were selling.  On the other side of the sheet were the questions we had for the potential buyer:

 1.  Purchase transaction

    A.  Price

    B.  Timing of payment(s)

    C.  Contingencies (including death/disability of working seller)

    D.  Effect of rebranding on price/contingencies

 

2.  Role of seller

   A.  Duties - during and after transition

      1.  Transition of client relationships

       2.  Transition of professional/referral relationships

       3.  Software conversion - CRM, admin, docs

       4.  What can I add to acquiring firm?

    B.  Expected hours/week & schedule & duration of employment w/buyer

    C.  Time tracking?

    D.  Pay

    E.  Time Off

    F.  Continuing Education

    G.  Dress

 

3.  What can I do afterwards and not compete?

    A.  Work for software vendor/investment platform

    B.  Write/teach

    C.  Contract work

 With the answers to our questions from each prospective buyer, my wife and I selected the buyer who was the best fit for us and then we proceeded to work out the details with the buyer.  We began with mutual non-disclosure agreements.  Then there were a lot of meetings, emails and disclosures.  From there we started working on the purchase agreement and related documents.  The buyer provided the first draft and there were a LOT of revisions - most of them ours, but then we had to run them through our attorney and then the buyer had to have them reviewed - then more negotiations on terms in the agreement and finally we all signed it!  In working out the details, we focused on keeping it simple - especially on cutoff date for fees/collections.

 We insisted that there would be no buyer meetings with staff until we (buyer and seller) had put together a fully detailed and orchestrated transition plan.  As part of that plan, we insisted that we wanted to announce the sale to our team without the buyer's team present.  That was important for our culture and so that our team could have a full and frank discussion about it.  We flew in our remote employees (at our expense) and met in the afternoon.  The next day, the buyer's team started first thing in the morning - covering their firm, HR, benefits, etc. 

 I worked for a year and then retired.  I don't know how we could have done such a smooth transition without me hanging in for that year - I worked my butt off that year.  It's been over 2 years since I retired and our team members are still employed by the buyer.  I run into clients when I'm bopping around town and they all seem to be pretty happy (if they weren't happy, they'd let me know).  The buyer's checks didn't bounce, so I'd have to say that everybody's happy.

 If you've got some specific questions, let's take this off-line and I'll try to answer them.

 Cheers!

 

[Below Ground]

On 5/12/2020 at 11:26 PM, Retired, but still reading said:

Hi -here's a long answer 

We sold our firm (sale closed early 2017).  I'll preface my comments with a few caveats:

 1.  We did our deal in a good market (for sellers)

 2.  With coronavirus, we're living in a totally new world order.  I wonder how our former clients (mostly small and medium sized businesses) are coping/surviving and how they're paying TPA fees.  I have no idea how this has affected the mindset of potential buyers ...

 My wife (also my business partner) and I were ready to retire and since our staff wasn't in a position to take over the business, a sale was necessary.  We were comfortable handling the sale and negotiations ourselves - although we did have both our regular general business attorney and our high-fee ERISA attorney assist with the paperwork as needed.  We also leaned on our CPA for help on the tax ramifications.

 We started by deciding what was acceptable to us - in terms of retention of staff, price and payment terms.  Then we started the process by reaching out to potential buyers - some were friends who owned TPA shops and some were competitors who had (at some time) expressed an interest in acquiring us.  We set up face-to-face lunch meetings with each to start a discussion.  The initial meetings were informal and we didn't bother with a non-disclosure agreement for the preliminaries.  We also were approached by a TPA business broker who introduced us to a potential buyer who we met with (but didn't sell to).

 For the meetings, we put together a 2-sided sheet - on one side was some info about our firm:  brief history, client geographical demographics, description of billing practices, overview of software/IT, mention of E&O coverage, my willingness to work for a year after closing, gross income for past 2 years, listing of staff (not by name) with brief job description and salary, our selling price and the reason that we were selling.  On the other side of the sheet were the questions we had for the potential buyer:

 1.  Purchase transaction

    A.  Price

    B.  Timing of payment(s)

    C.  Contingencies (including death/disability of working seller)

    D.  Effect of rebranding on price/contingencies

 

2.  Role of seller

   A.  Duties - during and after transition

      1.  Transition of client relationships

       2.  Transition of professional/referral relationships

       3.  Software conversion - CRM, admin, docs

       4.  What can I add to acquiring firm?

    B.  Expected hours/week & schedule & duration of employment w/buyer

    C.  Time tracking?

    D.  Pay

    E.  Time Off

    F.  Continuing Education

    G.  Dress

 

3.  What can I do afterwards and not compete?

    A.  Work for software vendor/investment platform

    B.  Write/teach

    C.  Contract work

 With the answers to our questions from each prospective buyer, my wife and I selected the buyer who was the best fit for us and then we proceeded to work out the details with the buyer.  We began with mutual non-disclosure agreements.  Then there were a lot of meetings, emails and disclosures.  From there we started working on the purchase agreement and related documents.  The buyer provided the first draft and there were a LOT of revisions - most of them ours, but then we had to run them through our attorney and then the buyer had to have them reviewed - then more negotiations on terms in the agreement and finally we all signed it!  In working out the details, we focused on keeping it simple - especially on cutoff date for fees/collections.

 We insisted that there would be no buyer meetings with staff until we (buyer and seller) had put together a fully detailed and orchestrated transition plan.  As part of that plan, we insisted that we wanted to announce the sale to our team without the buyer's team present.  That was important for our culture and so that our team could have a full and frank discussion about it.  We flew in our remote employees (at our expense) and met in the afternoon.  The next day, the buyer's team started first thing in the morning - covering their firm, HR, benefits, etc. 

 I worked for a year and then retired.  I don't know how we could have done such a smooth transition without me hanging in for that year - I worked my butt off that year.  It's been over 2 years since I retired and our team members are still employed by the buyer.  I run into clients when I'm bopping around town and they all seem to be pretty happy (if they weren't happy, they'd let me know).  The buyer's checks didn't bounce, so I'd have to say that everybody's happy.

 If you've got some specific questions, let's take this off-line and I'll try to answer them.

 Cheers!

 

Thanks for your long answer.  I recently had a battle with cancer, which I was not expected to survive.  In fact, the surgeons have all expressed that they are amazed by not only my survival, but my level of recovery.  Regardless, given the severity of the illness and certain permanent "effects", I am thinking I should at least look into the sale of my firm.  This is not something I really want to do, but feel it is the responsible thing for both my family, staff and clients.  Your detailed overview was very helpful.  Thanks again!

[Catch22PGM]

Best of luck Below Ground - on your continued recovery and your sale.  I am still at least a decade away from selling my firm but the information Retired, but still reading provided is going in my files.