by Deborah Conn

Sooner or later, all O&P business owners face the same question: how to move on. Transferring ownership of their companies means ceding control of enterprises into which they’ve invested years of energy, time, and money.

But wait, you say. It’s not time for me to move on. I have years to go before I retire. 

Nevertheless, the time to think about this transition is right now. Whether you wind up selling the business to an outsider, passing it along to the next generation, retiring at the end of your career or just opening the door to new opportunities, transferring your business can affect your net worth, absorb time and energy and impact your future career. 

Understanding how the process works can help you make appropriate business decisions, avoid pitfalls and have realistic expectations about the future. 

Selling to another company
In 1992, John Schulte, CPO, sold his practice, Anne Arundel Orthopedics, in Annapolis, Md., to the Hanger Orthopedic Group, based in Bethesda, Md. Schulte’s decision to sell had little to do with retirement; he wanted to focus on other interests and expand his skills.

“Selling my business enabled me to do things I couldn’t do when I was there by myself,” he says. “It took the burden of taxes and liability away from me as an individual business owner and gave me access to Hanger’s considerable resources.” 

As part of the agreement with Hanger, Schulte stayed in the practice for a period of time before moving into a corporate position with the company. “This was part of our sale negotiations,” he explains. “I didn’t want to be tied to a practice for the rest of my career. Once we grew the practice to the point where Hanger could recover its acquisition costs—and determine I was the right player to move up in the company—I found a successor for my position in the facility and moved to Bethesda.” 

It’s common for facility owners to remain in the practice after a sale, says Barry Smith of Lloyds Capital Inc., based in Los Angeles. Smith is a business broker who has sold close to 100 O&P businesses totaling $300 million in the last 15 years. 

“In O&P, it’s not a sale of assets, it’s a sale of a service business,” he says. “So it’s usually critical that the owner stays, and if and when he does leave, he has to sign a non-compete agreement.” 

As a Hanger employee at his former practice, Schulte was able to replace some of his management burdens with other activities. “I increased my computer skills dramatically and created a quality assurance program for Hanger,” he says.

Later, at Hanger’s headquarters, Schulte was able to work in education, a longtime interest. He did field management for six years, returned to active practice in Washington, D.C., and recently left Hanger to pursue new challenges. Selling his business enabled him to expand his professional experience. 

Smooth Selling

Business broker and lawyer Barry Smith offers these suggestions on how to make a sale go more smoothly. Have a realistic expectation of what your business is worth. Smith says, “Many sellers are dealing with yesterday’s values. Reimbursement is going down; contracting is a nightmare.” The business climate may dictate a lower selling price than you expect.  Empathize with the buyer. “The buyer is purchasing a business built on one or more individuals’ reputations and will be nervous about the consequences of changing control. Will referrals dry up? Will the seller leave? You need to be aware of those concerns, whether or not they are articulated.”  Be open with your employees. “They are very important to the sales process and should be told what is going to happen and how they will be compensated if they are laid off,” says Smith. “Consider retention bonuses. They will make the buyer feel comfortable and reward employees for years of service."

Making the sale
Brian Gustin, CP, sold his practice in April 2006 to Benchmark Medical, based in Malvern, Pa., largely for financial reasons. “I realized I had a huge portion of my personal net worth tied up in one stock,” he explains.

“As someone with kids looking at colleges, and seeing what was happening with Medicare and reimbursement and the tightening noose of documentation and paperwork, I decided I had way too much at risk. It was time for me to secure some of that net worth.” 

Once he made up his mind to sell, Gustin contacted a business broker—someone to act as an intermediary in the selling process. Unfortunately, the company wasn’t familiar with O&P and was involved in its own restructuring. After a year of going nowhere, Gustin found another broker, Barry Smith, through a colleague.

“Before the broker even signs you on, you need to show you’re a desirable business,” says Gustin. “I forwarded five years of tax returns, then participated in a series of telephone calls and questionnaires to put together a financial picture of my company.” 

Key to selling, says Smith, is determining what the business is worth. “If a seller has unrealistic expectations, there’s no point in proceeding.” 

“The broker helps you set the price,” says Gustin. “He or she can gauge not only the financial situation of your company, but the climate of the market.”

Once the seller and prospective buyer agree on the value of the business, they sign a confidentiality agreement, and the hard part begins. Through a process called due diligence, a buyer requests and examines a vast array of financial and organizational documents, including contracts, bank statements, tax returns, inventory lists, information on personnel, employee compensation, insurance policies and more.

“The buyer conducted a rigorous examination of my business,” recalls Gustin. “I provided two banker’s boxes jammed with information to analyze.” 

An interested buyer will make a preliminary offer, followed by negotiations on price and terms. These will include discussions on the seller’s role after the business is sold, a non-compete agreement, and how financing will be structured. (According to the U.S. Small Business Administration, up to 90 percent of small business sales involve some seller financing.) It’s not unusual for the sales process, from the initial decision to sell through settlement, to take a year. 

Passing along a family business
The O&P industry is known for a high proportion of family businesses, a number of which are now in the hands of the third or even fourth generation. Transferring the family business can be complicated, because so many factors—both financial and emotional—come into play. 

“Estate planning is one component, but frankly, it’s some of the softer issues, the human elements, that derail family businesses,” says Greg Greenleaf, a senior associate with the Family Business Consulting Group, based in Marietta, Ga. “Good communication and good planning are essential.” 

And so is getting a head start, he says. “The key for all family businesses is planning,” he says. “Succession, whether in management or ownership, is not an event, it’s a process.” 

“Start thinking about this when your children are in their teens,” urges Norb Schwarz, a senior advisor with the same organization. “If you complain about work over the dinner table, your kids may not be as interested in joining the business. If you’re more positive, and let them become familiar with the business through part-time jobs during high school, they’ll have the chance to figure out if they want to keep it up.

“When the time comes, when your kids have finished college, maybe worked somewhere else for a few years to get the flavor of what other businesses are like, they can become active participants.” 

Preparing the next generation to become qualified, successful business owners takes a lot of effort and finesse. Families come with feelings, and often those don’t mix with good business practices. Not only that, but there can be tension between family and non-family employees. 

“Family members have a perceived level of entitlement that shouldn’t permeate into the value system of the business,” says Schwarz. 

Both consultants emphasize that the best way to derail potential problems is with clear and frequent communication. Talk about expectations. Decide how the family will handle the different roles and abilities of siblings. Create explicit policies that detail what kind of education and preparation is required for the next generation to join the business, what functions each child is expected to perform, and how each will be compensated. 

When it comes to succession planning, many family businesses rely on outside experts like Schwarz and Greenleaf for advice, or they turn to O&P colleagues who are in similar circumstances. For example, Tom Watson, CP, plans to pass his facility, Tom Watson’s Prosthetic and Orthotic Lab, based in Owensboro, Ky., to his younger son, Jeff Phelps, CPO. Watson decided to withdraw from his business so he can focus on his other job as mayor of Owensboro. He sought the advice of other O&P families with multi-generation experience. 

“My mentor was Ronney Snell [Ralph Snell, CPO, FAAOP, who died in 2003], and he was always a tremendous help when it came to this kind of decision-making,” says Watson. “And as past president of AOPA, I had the opportunity to pick the brains of other families that have gone through this scenario.”

Choosing the right vehicle
Preparing the next generation to successfully take over the family business is only one part of the puzzle. The precise method of making the transfer is critical, because the wrong choice can result in significant tax liability. If you transfer property during your lifetime, you may be subject to federal gift tax; if your children inherit your business when you die, estate taxes could reduce its value considerably. 

According to Schwarz, the most common option is to transfer company stock over time. “Usually the senior generation holds on to voting stock to maintain control and transfers nonvoting stock to the next generation. This is a good strategy, because the owner and spouse can make annual gifts over time without tax consequences.” 

Another method involves setting up something called a grantor annuity trust (GRAT) and giving gifts of stock to the trust, which is eventually passed along to the next generation. The recipients pay gift tax on the original value of the stock, so if it increases in value, the tax consequences are minimized.

In other cases, children may simply purchase the business from the senior generation. “Whatever vehicle you consider, it’s critical to retain competent tax counsel,” emphasizes Schwarz. 

Watson and his son are using a straight sale over five years to transfer his business. “Our attorneys and accountants will be taking care of this,” Watson says. “We need to decide how much responsibility we will be transferring and how much we’ll be sharing. And my older son will also be involved in the transfer of ownership, because we have to take his inheritance into account. 

“Although he won’t be working in the business, he will own half of it, and we need to address the issues that will raise. We’ll probably bring in a consultant after we get the basics down.” 

Change is hard
No matter the reason for the sale, it can be difficult to adjust to no longer being in charge. 

“It can be strange to change your role,” Gustin admits, “even though I wanted to do it. I think it’s very important before you sell to be very sure what you want to do after you sign the deal—and make it known to others.” 

“It’s a learning experience once someone else is the boss,” agrees Schulte. “They did many things very differently than I did. On the other hand, the paycheck was very regular!” 

Get the facts
However and whenever you plan to exit your business, it pays to accumulate as much information as possible. Talk to fellow O&P business owners. Visit the Small Business Administration’s excellent Web pages on “getting out” (www.sba.gov/smallbusinessplanner/exit/index.html). Talk to your attorney and tax advisor, and consider retaining a consultant with applicable experience (such as O&P or family businesses). 

Above all, start soon. Remember how much effort, information and time it took to start your business? Leaving it requires no less. 

Additional Resources

For additional information, visit the U.S. Small Business Administration’s website at www.sba.gov, particularly the “Getting Out” section of the Small Business Planner. It’s likely that a nearby university has a family business center, which can be a rich resource of information and ideas for all phases of your family business, including succession planning.

Deborah Conn is a freelance writer based in Falls Church, Va.