Eleven Ways to Kill Your Practice Sales
FEATURE
PRACTICE SALES
Crystal Misenheimer
The signs are clear that it�s a buyer�s market in most areas of the country. Baby boomers are retiring, and younger doctors are looking to move to areas that suit their lifestyles.
Buyers have choices, which makes transactions fragile; nervous buyers want to avoid a financial blunder, and they�re quick to move on to better options. Anything that raises a red flag will send them packing. If you�re worried, having a broker to represent you can help avoid missteps that put your sale at risk.
Here are some of the most common ways we�ve seen sales get killed:
1.Make Your Financials Messy
Location, equipment, and growth potential will attract buyers, but they won�t be the deciding factors.
Numbers will be important because 99% of the buying decision is based on a clinic�s cash flow and profit.
If those numbers are disorganized or unclear, cautious buyers will fly the coop.
Errors in your financials are even worse. These will be discovered in the due diligence phase after an offer has already been negotiated. Either the price will change to reflect accurate information, or the sale will fall apart.
2.Focus on Me, Me, Me
Business sales are built on trust. Anything that shakes that trust, such as a buyer sensing that you�re only looking out for number one, is likely to bring matters to a halt.
You want to achieve maximum value in a sale, and buyers understand that. However, for a sale to happen, neither party can be entirely self-centered. If they are, the sales process will be a nightmare, and the odds of success will decrease dramatically.
3.Expect Business Sales to Look Like Real Estate
Real estate sells based on appearance, condition, and location. Selling a business is vastly more complicated because it involves the many data points of assets and cash flow. For all this data, the buyer has to believe the seller (one more reason why trust is so important).
What�s more, funding a clinic sale is nothing like a mortgage. Mortgages have fixed timelines for closing, while business loans have estimated timelines and an estimated closing date. These are like a due date for a baby—an educated guess, but ultimately out of your control.
If you come in expecting a simple sale, you�ll wind up frustrated. Worse, you�ll make the process more difficult for everyone involved.
4. Cut the Transition Short
Many sellers come to us burned out and looking for an expedited timeline. Once a buyer has been located, they find every reason to shorten the transition and hurry out of the clinic.
This is a mistake. The buyer is aware that they have a learning curve ahead of them, and the transition period is their opportunity to learn from the previous owner, which they see as a valuable part of the purchase.
The standard transition for our sales is four to six weeks after closing, with pay wrapped into the purchase price. Some buyers will want additional time, and if the clinic acquisition is funded by the Small Business Administration, or SBA, (as 90% of our sales are), the guidelines allow sellers to stay on in a paid position for up to a year.
5. Dramatically Increase Expenses
Remember that buyers purchase based on the numbers, and that the net profit of the clinic is used to determine the price point. If you raise your expenses, your net profit will drop. In a best-case scenario, this will reduce the sale price.
Often, however, it can make buyers walk. If the new profit margin doesn�t meet their criteria, they�ll look for a clinic that does. Other times, the clinic may no longer have enough cash flow for a bank to approve the deal.
6. Dramatically Lower Expenses
On the other hand, many sellers will try to cut costs in a sale year to boost profits. In some cases, this is wise. Letting go of an unneeded employee or cutting an ineffective marketing program might be a smart way to trim before a sale.
If expenses drop dramatically, though, the buyer will assume that the current profit is inflated. They�ll be less likely to pay full price. Worse, many buyers will find the cuts to be a sign of dishonesty.
Once you�ve entered into a contract with a buyer, it�s critical to continue operating the clinic at its current level. That means investing in marketing, inventory, and maintenance so that the clinic is in the same (or better) condition when the buyer takes over.
7. Draw Things Out After the Sale
Some sellers can�t wait to move on, but others try to stick around and collect more pay. This might be for personal reasons, or on the �helpful advice� of an advisor or attorney, �My cousin sold his (unrelated business type) for a way better multiple! You need to put your foot down... �
The buyer is taking on a massive loan, and they know where that money goes—into your bank account. They�re already nervous about the new debt payment, and it doesn�t help to have a seller turning around to demand more money.
What�s more, clinic cash flow often won�t support two doctors with the loan payment factored in. See the transition through, but don�t drag things out.
8.Kill the Noncompete
The standard noncompete agreement in an SBA-funded sale is clear: no chiropractic services within five years and 15 miles. But even sellers who plan to retire or move may suddenly decide they want a less stringent noncompete �just in case.� The urge to have a backup plan is understandable, but it can be fatal.
First, it gives the buyer the sense that you plan to practice in the same area. This destroys any accumulated goodwill and is one of the biggest red flags a buyer can spot.
More importantly, the funding bank generally dictates the noncompete. Even when sellers do negotiate the agreement down, the bank will often increase it back to the standard numbers.
9. Charge High Rent
When sellers own the clinic�s real estate, they may try to make up for an unexpectedly low valuation by charging higher-than-market rent.
Savvy buyers inevitably discover this quickly. Inflated rent sows the seeds of distrust from the start, leading the buyer to wonder what else the seller might try to sneak through.
10. Withhold Information
Once the letter of intent (LOI) has been accepted, the buyer has a certain amount of time to conduct due diligence and confirm that the clinic stands as advertised.
It�s the seller�s responsibility to provide any requested information, which includes bank statements, full tax returns, clinic records, and allowing the buyer to shadow in the clinic.
Some sellers drag their feet during this phase. Any reluctance to provide information will be taken as an attempt to conceal something, which will—you guessed it—eliminate trust.
The rule of thumb is to be as transparent as possible. Exceptions should only be made for things that could be considered trade secrets.
11. Fight the Bank
If your buyer isn�t able to make a cash acquisition, the funding bank gets a great deal of control over the terms of the sale.
This is one major benefit to working with a broker. We base our valuations on what we know banks wifi fund, which makes for a better listing point and a smoother sale. We have bank-approved templates for the LOI and purchase and sale agreement (PSA). That means your attorney only needs to fine-tune a document instead of writing one from scratch, which is both pricey and risky.
Bank requirements have very little flexibility. Trying to fight them leads to a dead-end, with the seller either walking back their terms or losing the sale entirely.
Whether you choose to work with a broker or not, the best practices for a successful sale are simple at heart. Keep the needs of both parties in mind. Be transparent. Foster trust. Steer clear of the pitfalls, and you�ll be much more likely to walk away happy.
Crystal Misenheimer is the co-founder of Progressive Practice Sales. Their team offers smart, modern solutions to help chiropractors sell and acquire clinics, saving them time, money and effort along the way. She can be contacted at way. 423.225.0021, [email protected], or through progressivepracticesales.com
