How to Position your Practice for Sale and Maximize the Value!

by Sally Stuart 30th of September, 2020

Practice owners who are looking to sell often adopt a wait-and-see approach, which can be risky. Making a sale is not as easy as it appears, of course, but practice owners who avoid waiting too long to sell their practice may enjoy a more successful outcome.

Waiting too long to sell, or not planning ahead, can cause practice owners to miss a valuable window of opportunity. Because it takes an average of 6 to12 months to sell a practice, long-term planning is necessary for any successful sale.

Never Wait Until You Have to Sell

One of the keys to a successful practice sale is selling when you don't absolutely have to. If a buyer sees that you've been planning this move for quite some time and that it's not a desperate “I've had enough” step, you can dictate a much higher price. Proper planning means careful financial records, a detailed practice history and an extensive sales portfolio.

Many practice owners make the mistake of waiting until their practice is on the decline to sell, which is exactly the opposite of what you should do. The best time to sell is when your practice is at its peak, at the top of its game.

The Right Conditions for a Sale

In an ideal situation, a clinic sale would be completed when two conditions are met: when demand in the industry is strong, and buyers with deep pockets are available. It's a smart idea before selling to take a look at market conditions for your industry in order to achieve the best return.

Working with practice brokers can be beneficial in this case, as they often closely monitor market conditions and can advise you on when conditions are favourable for your industry.

What Can Harm Your Practice's Value When You're Trying to Sell?

Many factors can affect the asking price of a practice, including industry competition, current market conditions and the overall economic climate. Events such as a recession or a practice downturn can affect your practice's value and lower the asking price. This is why it's beneficial to sell when the economy is healthy.

Of course, even in the healthiest economic climate, having too high an asking price can lead to a dead-end street. Deciding on the right price for selling your practice is important, and it's one that practice brokers can help you determine. They take a careful look at your overall profits, the state of your industry, similar practices and the marketplace when choosing an asking price.

Pricing is crucial to selling your practice. The right price draws in buyers, but the wrong price turns them away. Many owners make the mistake of overpricing their practice. An unjustified value can make buyers walk away — for good. And if buyers walk away, your practice is sitting on the market for longer, quite possibly losing even more value. Take the time to get the price right, and you’ll find it much easier to sell your practice.

You Can’t Sell on Potential

The first thing to understand is that a buyer is not interested in what your practice might be able to do. They’re interested in what the practice is doing. The truth is, every practice has potential. Converting that potential to dollars is going to require the new owner to invest time, money and skills, and the potential may not even be realised. Valuing based on potential means the new owner is paying you in advance for the improvements they make.

If you claim your practice is full of potential, a buyer will also question why you haven’t exploited it yourself. Your broker can help you talk about potential in ways that make your practice attractive to buyers, but you can’t rely on potential to raise the value of your practice.

Maintainable Earnings

Many practice owners get caught up in the value of their assets and weigh them heavily in their valuation. Assets can help increase the value of your company, but buyers are interested in how those assets translate to cash flow. It’s no use being asset-rich if you don’t have enough money coming in to maintain those assets and any loans associated with them.

Buyers also look at whether earnings can be maintained. If your profits have held steady or risen in the past few years, this will be reflected in offer prices. In the same way, if your profits have been decreasing, you will have to lower your valuation.

Keep in mind, your buyer will also look at industry trends when deciding on an offer. Changing demographics, government policies or environmental concerns can affect the value of your practice. Technology can have a particularly large effect on value. If the potential buyer is aware of technological advances in the industry, they may think your earnings aren’t maintainable.

Outside Valuation

It’s very rare for owners to value their practices accurately. In fact, some experts believe that as few as 10 percent of practice owners have a realistic view of the value of their practice. Owners have usually spent countless hours, effort, sleepless nights and plenty of stress on building their practices. As a practice owner, you want to include all that sweat equity in your appraisal, but potential buyers aren’t interested in that. They’re only interested in whether they’ll continue to make a profit from their purchase.

The other issue you have as an owner is that you know what you need to make from the practice. Owners often want to retire, travel or invest in a new enterprise so they reverse-engineer an appraisal, naming a price that matches their wants rather than on fair market value. Because objectivity is difficult in the appraisal process, going to a broker is the best way for you to get an accurate idea of your practice valuation. Brokers understand the different ways to value practices, the standard in your industry and current market trends, which all contribute to a fair price.

In the end, your practice is worth what someone is willing to pay for it. If you have a realistic view of the value of your practice, you’ll be able to find the right buyer. Here’s some ideas on how to add value to your practice by making it less dependent upon you as the clinic owner:

1. Ask Questions: What will your business look like when it’s ready to be sold? Will all your patient offerings remain the same, or will you pare them down to the most profitable products and services? How essential are you to these products and services? Asking these questions allows you to get clear
on how to make your practice as attractive as possible.

2. Decide on the Critical Functions: What are the things that must happen to ensure your clinic continues to make money? These are the critical functions and should not be limited to providing your service. Are you critical to any business management processes and how can you ensure someone else can handle the task?

3. Document the Processes: A large part of the sale of your clinic relies on being able to transfer knowledge to new owners. If this knowledge is trapped in the current owner’s head, it means a long handover period, or the information is lost when you depart. Well-documented processes are essential to making yourself redundant when selling your business. A business with everything written down looks a lot less risky to prospective buyers.

4. Build a Strong Team: Once you have the procedures documented, it’s time to hire a strong team to handle critical functions. Having an established team reassures a prospective buyer that the business will continue to run as the ownership transitions. Ensure your team understands every aspect of the business. If you’re the one that normally undertakes anything other than clinic duties, make sure you have a new staff member who can take over these jobs. Spend time training the new staff and creating your dream business.

5. Take a Step Back and Let Your Team Work: It’s time to get out of your business’ way. Take a break. Fly overseas, renovate your bathroom or visit your in-laws. Don’t check your emails. The purpose of this step is to ensure that your business can run without you. You’ve created it, helped it grow stronger and now it’s independent and you can leave it to run on its own. This is an essential step. When you go back to the clinic after a break, your team will be able to point to holes in the process and places where you are still needed. Or, hopefully, you’ll come back to everything running smoothly and a continued profit. This will tell you what you need to fix for prospective buyers or if you’re ready to get your practice on the market.

Owner dependence is one of the most important factors in the valuation of a business. Buyers know that in an owner-dependent business, much of the value can be destroyed as soon as the owner departs. Taking steps to make your business independent will help you get the best price when you’re ready to sell your practice.

So….when you have decided it is the right time to sell…and the practice is ready to sell, it important to consider how to position the clinic for sale. All buyers will be looking for the following in their search for a good business:

Quality Information – the more transparent the business information, the more trustworthy it is. Buyers won’t make decisions if the quality of information is poor.

Realistic Price Expectations – Most sellers have unrealistic expectations of their business’s value and believe it’s worth more than the market is prepared to pay.

Well Presented Sales Collateral – A complete business information memorandum with comprehensive details about the business, the industry, its resources and its future opportunity for growth or expansion. This document needs to make an impression so you can ‘sell the sizzle’.

Owners Who are Prepared to Stay Involved After the Sale – Expect buyers to want to retain owners for a period of time to ensure a smooth transition and to download all of their IP to the new owner. Depending on how your deal is structured, your final payment from the purchaser may be determined or incentivised by future business performance which you’ll want to ensure is optimised.

Do Your Own Due Diligence - Most business owners review their financial performance on an annual basis and judge the ongoing performance through their business bank account. Compliance, contract and employment documentation is often poor or non-existent, and the value in documenting business processes and operating systems is never even considered. When the time comes to sell, there is no documentation to demonstrate the value of the business aside from annual accounts which have often been prepared to minimise tax rather than demonstrate financial value. A failure to identify business weaknesses in advance can often lead to the withdrawal of an offer or be cause for a price reduction when uncovered.

Prospective buyers typically review every detail of the business in a process called due diligence. As a seller, you’ll need to anticipate the buyer’s questions and scrutiny and prepare your answers and arguments in advance. In order to do this, the owner needs to be their own biggest critic. This is usually the first time since starting the business that such a detailed review has been performed. After completing this process, many owners have a much more comprehensive understanding of their business – some even identifying that had they known what they learned through the process, they might have been more successful.

If you want to sell your business to create retirement funds in the future, take the time now to create an appropriate business exit strategy. Identify your critical assets and your potential buyers. Carefully structure your plan so you understand what liquidity should be there for you. Make it an objective to run your business in a manner that if you received an irresistible offer today, you would be confident that the buyer’s due diligence wouldn’t uncover anything that would cause them to withdraw their offer. Once or twice a year look at your business as though you were interested in buying it.