Is Leasing a Practice a Viable Alternative to a Practice Sale?
I had a very interesting discussion last year with a practitioner about the concept of leasing a firm rather than making an acquisition. Whilst I pondered this thought at the time, I hadn’t reallyhad the opportunity to think more about it until recently when I spoke with another practitioner who made a similar comment; essentially the concept of ‘lease the clients’. Again, it spiked my interest and got me thinking, how would that work? Therefore, I thought I would seek some boarder comment and opinion from the profession.
So let me lay out the two scenarios that I had been given.
The first suggestion was around the idea of leasing a practice from a principal (presumably a sole practitioner) who was ill, had lost interest, wanted to go on an extended holiday or similar, but they didn’t necessarily want to sell. The practitioner with whom I was discussing this concept wasn’t particularly concerned about the location of firm and was willing to relocate either regional or interstate. The general idea would be that the replacement would step in and run the leased firm for an agreed term or until the partner on leave wanted to return. As compensation, they would receive a proportion of the fees as payment. I can’t actually remember whether it was proposed that this percentage would be based on gross revenue or profit, but, nonetheless you get the idea. The practitioner acknowledged that the appropriate agreement would need to be put in place to protect the owner of the practice once the arrangement had come to an end. Essentially, it sounded like a long term locum type role.
The second scenario, again seemed to be around the situation where the practitioner didn’t wish to keep personally servicing the client base but wanted them to continue to be well looked after by a trusted adviser. This adviser would then have an option to acquire the fee or client base at a future point in time, in this case, once the new service provider had had the opportunity to save up a little more money to pay for the purchase. Discussion was really around any exchange of compensation for this right so it’s a little unknown what happened in this respect.
Appreciating that both scenarios are a little light on with detail, obviously there are several concerns that come to mind. Primarily it needs to be recognised that this type of interaction with clients is based on relationships, so regardless of what is agreed between two parties, the client can and will do what they wish. Noting that allowing another skilled person the opportunity to develop relationships with your clients could be most dangerous. Therefore, is it really possible to adequately protect the practitioner who is acting as the lessor? Likewise, a similarity between approaches to client servicing will be paramount. We don’t want clients leaving because the lessee services clients in a significantly different manner. In additional, what about clients, formal contracts/agreements pertaining to the firm’s expenses, other liabilities, registrations, insurances, staff and other similar factors?
Yes, I appreciate much of this can be documented; however, is all the effort worth it and can it really be documented sufficiently to protect the underlying asset of the original practitioner? What happens if the lessor then wants to sell the practice but the lessee doesn’t wish to buy?
Nonetheless, it’s an interesting consideration. What are your thoughts? Is this the new way to solve our upcoming succession interests; retain ownership but lease out the clients?
I would love to hear from any practitioner regarding their view of practice leasing rather than purchase and how they would propose to structure such a proposal. Email your comments to email@example.com.