Practice Sales and Valuations

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Deadly Sins in Selling a Practice

  1. Not getting it in writing.  Verbal agreements don’t count for anything.  They allow for “fuzzy memory” and are not generally enforceable in court.  All of your purchase agreements, financing, non-compete agreements must be in writing to protect all parties.  Also, the process of putting it in writing helps to clarify and think through various issues.
  2. Not using professional legal, tax, and other counsel.   Every seller should seek counsel from a professional practice broker, legal, tax, and other professionals.  Get an attorney to draft and review purchase agreements.  Get a CPA or tax attorney to advise on tax ramifications.  The more eyes looking at the deal means less chance of something falling through the cracks.  Few doctors should attempt to “go it alone.”
  3. Not having good financial records.   The selling price is ultimately a function of the practice’s historical income and expenses.  You must be able to thoroughly document the last 3 year’s financial history/records. This means both Federal tax returns and P&L statements.  The more detail the better.  Buyers, and lenders, base the sales price from a financial analysis of these records.  Poorly documented financials generally result in a much lower sales price and/or taking much longer time to sell.  Computerizing the practice and taking advantage of a good practice management software application goes a long way towards documenting practice operating trends.
  4. Not knowing practice value.  Often sellers will base their asking price on needs or emotion rather than market value.  Asking too much generally results from the seller not knowing what is the fair market value in today’s marketplace.  Using any one formula or rule to determine practice value is a setting you up for a potentially costly mistake.  There are numerous factors that influence practice value: equipment, goodwill, profitability, financial history, staffing, buyer debt service, location, etc.  The old rule of thumb "a practice is worth one year's gross" is a fallacy.  Most practices sell for a range of one year's gross.  This range varies depending on the type of practice.  However, some sell for as much as one or two standard deviations above/below the mean.  If real estate is involved then you have to determine if the practice income can support the fair market value of the real estate.  Get help from someone with recent experience in selling and marketing veterinary practices to set a sales price.  Put yourself in the buyer’s shoes.  Ask yourself,  “Would you buy your practice for this price? Could you live on the income after the new debt service?  Is your practice a good deal or a so-so deal at your asking price?” 
  5. Waiting too long to sell.   Don’t wait until you are “burned out,” or in poor health, or are in a hurry to sell.  This ultimately results in a lower sales price.  It may take a two or three years to prepare the practice for sale in order to achieve your retirement goals.  Then it might take another year or more to find a buyer. Plan ahead.  Don’t let income/profit decline in the years prior to sale.
  6. Not staying current.   Keep current with medical protocols and keep your fees competitive.  Outdated equipment is a turn-off to buyers.  Buyers aren’t going to pay you for “potential”; they will pay you only for what is there now.  The more changes a buyer needs to make, the lower the selling price.
  7. Not making cosmetic changes.   The prospective buyer’s first impression is the most important.  Many practice sales have been lost to unpleasant odors, worn carpeting, clutter and junk, unkempt landscaping, old paint, outdated equipment or décor.  Does your practice have the 1970s look?  Then its time to update.
  8. Sweating the small stuff.  Every practice transaction has the inevitable “speed bumps” prior to closing.  Things take longer than expected.  Closing might be delayed a few days.  Interest rates change.  The buyers make some new demands.  An inspector discovers you need a new hot water heater. Etc.  Don’t let the small stuff derail you from the end goal—selling your practice.  Make adjustments and move on.  Expect emotional highs and lows during the process.  Every seller will go through some sort of seller’s remorse after accepting an offer.  This will pass.
  9. Not using an experienced  practice specialist.  When working with a broker you want to have a broker that is skilled and knowledgeable in veterinary practice sales.  A general residential or commercial Realtor/broker won’t have the specialized knowledge needed to market, advertise, and sell your practice.

 

David Greene is President and founder of Medical Practice Brokers, LLC., the Rocky Mountain region’s largest business brokerage firm specializing in sales of medical related professional practices.  Mr. Greene and the associates at Medical Practice Brokers, LLC. have assisted Sellers and Buyers in the successful transactions and valuations of numerous medical practices including: Medical primary care, Medical primary care and surgical subspecialty, Dental, Chiropractic, Veterinary, and others Mr. Greene is a seminar instructor on Buying and Selling Practices, and has been an invited speaker at universities and professional groups on the subject of practice sales and values.  He is a member of the International Business Brokers Association and holds their prestigious Certified Business Intermediary (CBI) certification.

 
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