How to protect your business (and keep it running) when you ARE the business (Part 2)

Elena Volkova, Esq. on March 14, 2016

In Part 1, we opened the discussion on how to protect your business when YOU are the key component in your business.

Today, we’re going to continue that discussion…

The next problem many licensed professionals encounter is creating a salable or marketable practice.

As much as we may think our businesses are salable, not all of them are.

I recently talked to someone who had a friend with a physical therapy practice. She wanted to sell, but it was really hard for her to package it. It took her a few years to find the right buyer.

So the problem is – when everything is so specifically tied into your talent and your ability to come to work, it’s harder to sell.

So, how do you create a salable or marketable practice?

The trick is to try and take as much as you can out of your head. To create as many proprietary, legally protected pieces of intellectual property, such as training manuals and procedures on how to conduct your practice.

I know that you likely have a very specific method of how you treat your patients. You have procedures around intake, how the course of treatment is followed, and also the follow-up.

So, yes, maybe your specific touch cannot be reproduced. But I would say 80% of your practice can definitely be taken out of your hands and head and put into a replicable operations manual. This way, people who may not be as talented as you – but at the same time are willing and able – could run a practice very comparable to yours.

Another example is if you write newsletters, you already have a lot of interesting content that could be part of your practice and trade secrets. You have marketing materials that would be of definite value to another physical therapist who might purchase your business in the future.

So that brings us into the area of…

How to protect your intellectual property

One of the most promising ways for all of us in the service industry to make sure our practices are valued (outside of our ability to show up for work) is to put our knowledge into tangible medium such as media presentations, writing manuals, books, and training materials.

But don’t just put it in writing.

You also need to protect it.

By that, I mean trademarking and copyrighting.

A word on copyright…

We often think that if we copyright something, it cannot be reproduced. Unfortunately, that’s not always the case. Copyright infringement is quite rampant and is still fairly expensive to prosecute in courts.

What I often find is an easier and more effective (and more predictable) way to protect your intellectual property is to make sure people sign confidentiality agreements when they come into possession of your trade secrets.

If someone does breach your confidentiality agreements, it’s easy to file a fairly inexpensive court action to make sure replication isn’t taking place.

Let’s talk about business partnerships.

A more long-term way to secure the value of the practice is to look at business partnerships.

Having several owners in a physical therapy limited liability company or corporation, with proper legal protections in place, creates stability – and a tremendous peace of mind for its owners (assuming that everyone gets along).

Negotiate what will happen in terms of distribution of profits, contributions of capital, and salary payments.

And negotiate the business plan. When you have to map out things more long-term, it forces you to focus on the things that are going to make money in the practice.

You’ll also want to negotiate buy-sell agreements (or, as I call them, “business prenups”).

It’ll give you peace of mind when you have a blueprint for what will happen if there’s a disability, death, disagreement or dispute.

Once you figure out how to negotiate the multi-manager, multi-owner situation, it helps secure the value of the practice, but it also protects your income on a day-to-day basis. Because when people own the business together, they have a much more vested interest to maximize the bottom line and to protect the long-term value of the business.

Now, sometimes finding the right co-owners is not that easy. It’s a personal decision in addition to being a business decision.

Even in my own business, I went through a partnership and then became a solo owner. I’m still a huge proponent of business partnerships, though.

The trick when starting a business with somebody else is – do your due diligence. There’s a legal due diligence (understanding the financial situation and the intellectual property elements the other person brings to the table).

But there’s also due diligence around doing a personality fit assessment.

I find sometimes a good business coach can really help you figure out the right fit for a potential business co-owner.

What about business brokers?

Business brokers often act as matchmakers in finding business owners to buy and to sell.

They have a listing of businesses available for purchase, or people looking to acquire a particular business.

It’s one avenue that is not often explored in the services profession, but I have seen a few announcements of physical therapy practices being sold out on Long Island.

The business brokers in my own network have a successful track record in matching professionals, helping solo practices become multimember practices.

What about insurance?

One of the elements that people overlook is having a key person life insurance on the owner.

This kind of insurance helps the company survive the blow of losing the person who actually makes the business work.

It’s worth looking into as early as possible. Key-woman or key-man life insurance becomes an asset of the business. If something were to happen to the owner, the business will have cash to be able to either hire other practitioners to carry on the operations while permanent arrangements are made, or it will be a very attractive acquisition target for another physical therapy practice.

It’s fairly inexpensive, and when you’re just starting out, you’re not necessarily paying large premiums because the value of the business is not great. But if you continue to grow, the key person life insurance policy becomes a bigger and bigger asset.

We often think we’re too small for it and that’s not true. Instead, the key person insurance is actually particularly important for the small business owner because there’s so much hanging on the success and wellbeing of that one person.

To sum up business valuation…

If we were to take away one important lesson from everything that we discussed so far, both in Part 1 and Part 2, business valuation is not a one-time deal.

It’s not a one-day exercise where you sit down, look at your profit and loss statement, cash flow and balance sheet, and decide, “Okay, my business is worth X, Y, and Z right now.”

That’s just a starting point.

So let’s say we took a physical therapist and looked at their financials, their current practice, and their contracts. We find out that, right now this practice is worth $100,000.00.

Now, that doesn’t mean that five years down the road it will remain at that particular level.

If that business owner were to now implement more formal referral agreements, or create what I call “passive intellectual property products,” there could be additional streams of revenue coming in, as well as more protection going into the future.

The hardest part…

Now that you’ve seen all the different possibilities to protect your business, to build value, and to make it more salable, the hardest part might be simply getting started.

Which is why I’d like to extend you an invitation to discuss any questions you may have around these issues.

For more information or to schedule a consultation, please email me at elena@volkovalaw.com. I look forward to working with you!

This material may be viewed as attorney advertising and does not constitute legal advice. This information does not create an attorney-client relationship between you and the author. This article strictly represents the personal views of the author on the date it was written and such views are subject to change without notice.

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