Most of the massage and bodywork profession is an uncoordinated patchwork of one- and two-person practices, each doing his or her own thing and each trying to capture a fair share of the existing market. While effective for many, this way of doing business is not always economical and can even be a waste of talent and resources. In today’s economy, these solo practitioners might consider adopting a more modern model, such as merging with one or more competitors. Although there are some drawbacks to this arrangement, merging practices is one way to beat the odds in tough economic times.
Advantages
Client satisfaction and retention, as well as exemplary service, are musts for massage practitioners hoping to survive in today’s business environment. A merged practice of several therapists, each with different skills, can offer an even wider range of services for those clients you’re trying to keep. For example, one therapist may be more interested in sports massage, another in craniosacral work, and another in infant massage or reiki. In a larger practice, therapists are in a better position to provide specialized and remedial services to clients, effectively opening the door to a variety of clients seeking more directed work. Handling the clients most interested in your area of expertise, while passing others to an office mate, allows you and your coworkers to grow within your specialties, all while meeting the clients’ needs.
Other advantages to merging practices include a greater ability to adapt to changing circumstances and improved negotiating skills with insurance companies, managed
care organizations, and other third-party payers.
Many professional practices are merged for synergistic reasons, primarily financial. The group benefit is greater than the sum of the individual practices. Or, two plus two equals five or more. Economies of size often create cost savings. Greater utilization can be made of the fixtures and equipment, waiting room, office area, bathrooms, storage, and common areas when they are shared. There will also be less duplication of ancillary and clerical staff, services, billing systems, and the pooling of financial resources.
Challenges
When partnering with others, you’ll face some challenges. The new structure may not eliminate all of the problems faced by individual therapists, and, in fact, it could exacerbate some. Efficiencies are not created by the merger alone, but by the participants who must now commit themselves to operating as a harmonious group. The principal challenge is incompatibility with other merging partners and differing expectations of what the merger will accomplish.
If the objectives are fuzzy, the results will be, too. Not everyone is a team player. Yet, this is what each must be if the merger is to be successful. Incompatibility problems can take different forms. There are conflicting objectives, as well as differing talents, abilities, work ethics, and financial contributions. Some may wish to work hard and develop the practice, while others are more interested in family life or recreation.
In a merged practice, there is a loss of autonomy and individual control. The hierarchy among individual therapists must disappear. This implies central control, physical integration, and at times sacrificing personal preferences for the good of the whole. Without these commitments, the merger will be nothing other than a collection of individual therapeutic massage practices whose cost of doing business could be even greater than before the merger.
In a larger practice, more direct management will be required. Not all massage therapists are good managers, and some who might be good managers do not want to assume the responsibility. Time spent managing is time away from professional practice duties. Cost savings per individual practitioner must be counterbalanced by the group’s cost of administration. Agreeing on suitable compensation can also be a touchy issue.
Getting Started
The starting point for this venture should be meeting with all prospective merger candidates and having a general round table discussion of what is wanted, what is expected, what each participant hopes to achieve through the merger, and what each brings to the table. If everyone isn’t prepared to invest time, talents, and treasure to make it work, find some new candidates.
When there is a melding of objectives, all have agreed to the basics, and some rudimentary guidelines have been outlined, the next step is to undertake a detailed pre-merger assessment of each individual practice. It is best to have one neutral professional analyst and/or professional practice appraiser conduct this task. The analysis should include:
• The market value of each individual practice; the tangible and intangible assets, including goodwill.
• A history of each practice, annual billings, and collections.
• Details of the services each practice offers, particularly specialties not available everywhere.
• A staff list from each practice, including salaries, duties, competency, length of service, etc.
• Facilities that could be occupied by the merged practice.
• An economic analysis of each practice with a clear understanding of what each brings into the merger. (Senior professionals are seldom interested in supporting poor performers.)
• A personality analysis of each therapist to ensure that all are compatible.
• The assurance that each entity will be better off after the merger.
Bringing It Together
A successful merger takes time and money to put into motion. Six to 12 months is the norm for this process. There must be a demonstrated commitment from all parties. The larger the number of participants, the more complicated the process. You will need a good accountant, lawyer, and a business analyst qualified to value professional practices, and, depending on the number of prospective partners, perhaps a facilitator to get everyone to agree and tie it all together.
When you start out with good resources for this analysis, the process can be quite expensive. But many prospective mergers don’t happen because the participants lack sufficient guidance to plow through and resolve the decisions head-on, or they feel uncertain the end result is worth the up-front costs. Don’t be too disappointed or surprised if some of the pending merger partners fall out along the way.
Type of Organization
Your lawyer will render qualified advice applicable to your particular situation, but there are several ways your combined practice could be organized. The most common is the incorporated or unincorporated partnership. Frequently this is expanded whereby each therapist (assuming that your state will permit it and most do) forms a professional corporation and that professional corporation becomes the partner. Either way, each partner remains responsible for their individual income tax, outstanding or pending liability claims, and anything connected with the past performance and conduct of an individual practice.
An alternate route is to have the senior therapist (the one with the most valuable practice in assets and goodwill) form an incorporated company (if it does not already exist), and have all other participants in the merger contribute their respective equities for shares in this corporation.
From there you could form a limited partnership, with the senior partner acting as the general partner and all others being limited partners. This works well where there is a significant gap between the contributed value of the senior partner’s practice and that of the others, or where the value of each therapist’s practice is far different than one another.
Although not a merger as such, sometimes the best organizational route is to have each therapist continue as a solo practitioner, yet have an office-sharing agreement covering common areas, such as the waiting room, bathrooms, storage rooms, display areas, and clerical staff. In this arrangement, it is necessary to structure your agreement so that it is clear to all that this is not a legal partnership, only an association of individual therapists who share some expenses.
An ideal situation to strive for is to equalize the contributions of each partner to the merger. However, most times this is not possible. The first draw on the group’s profit would be to provide a stated return on the contributed interest from each. So, if Therapist A sold $100,000 in assets to the group, she would be entitled to a 6.0% return or $6,000, for example. If Therapist B sold only $50,000 to the group, he would take home $3,000, and so forth. This profit sharing would be in addition to the compensation for performing massages and other duties.
The merged practice should assume joint responsibility for the premises lease, be responsible for payment of all accounts incurred for the benefit of all, and own or lease all furniture, fixtures, and equipment. It could be beneficial to form a holding company for this purpose. It would own the furniture, fixtures, and equipment, and the real estate (if part of the merger), and then lease these capital assets back to the partnership.
Not all partners need to be shareholders in the holding company, but this arrangement gives added protection in that the capital assets of the partnership cannot be attacked in the event of legal action against any or all of the partners. It is important to set this up as if dealing with a third party—capital assets and the massage practices are kept separate from each other, and those assets rented to the joint practice are rented at fair value. Each participant should also have individual liability practice insurance, in addition to the group policy.
The Profit
Fixed expenses and operating expenses, regardless of differing billings, should be equally divided between the therapists. They do not change if one therapist generates $1,000 or $10,000 a month. Variable expenses should be a percent of the total expenses based on individual billings. As all surplus income is distributed to the partners, there is no income tax concern. However, this formula may be overly simple for the larger professional practice. A senior therapist may be entitled to a greater share of the spoils than one of junior status. Therapist A may generate more clients than Therapists B to Z, and may expect extra compensation for this. Then, there is the previously mentioned challenge of compensation for management. It’s not possible here to point out the myriad ways a compensation package could work. Those involved in the merger need to discuss and negotiate a compensation package agreeable to all, assisted by their facilitator or team leader.
It’s Business
Mergers are not for everyone, but they are a viable alternative for many massage therapy practitioners as they face the challenges of the future. In any merger, it is good to remember that you never know who your business partner really is until you have been in business together for some time. It is important at the outset to establish the policy and asset distribution procedure for several scenarios, including opting out, retirement, getting out for medical reasons, involuntary exits where a partner is wanted out, the shuttering of the practice, etc.
The legal language and the agreements about who does what and how each is compensated can be negotiated, agreed upon, and formalized. However, no legal document can ever take into consideration relationships—how well the therapists will get along with each other now or in the future. Yet, compatibility is the most important part of making it all work. The potential for competition and dissension with the joint practice partners must be eliminated, or at least reduced to a minimum.
Often, by joining two or more borderline massage therapy practices, you create one successful unit, which through the efficiency of size, diversity, and cost savings produces substantial benefits for the therapists and enhanced services for their clients. Although they must be properly established, judiciously managed, and constantly monitored, most merged practices exist on an act of faith. You get as you give. Quid pro quo.
Lloyd Manning is a semi-retired business and commercial real estate appraiser who now writes articles for a variety of magazines on business topics. He resides in Lloydminster, Alberta, Canada. Contact him at lloydmann@shaw.ca.