If you’re just getting started in private practice, selling your counseling business is possibly the last thing on your mind. However, it’s never too early to start laying the groundwork for building a counseling practice that will someday be attractive to an acquirer. In fact, realizing at the beginning that there will one day be an ending is good forethought.
There are lots of reasons someone might decide to sell their practice. Consider:
Might you decide to relocate at some point during your career?
Might you ever want to change careers?
When do you hope to retire?
Do you plan to work in private practice until you’re as old as Irvin Yalom (80)?
Think that you’re too young to contemplate an exit strategy? Try this: A recent Stanford University study suggests that looking at an age-enhanced picture of yourself will motivate you to save more for retirement. That being said, counselors today, as a rule, are already in the second half of their careers. Of the AAMFT’s 25,000+ members, the mean age is 55. Also, this year, more than one forth of attendees at the ACA national conference were 56 or older.
As counselors consider retirement, some are finding that the practices they’ve built for much of their careers have little market value, or few interested acquirers. Hence, instead of selling their companies for a tidy sum, counselors are simply rolling them up—locking the doors, shuttering the windows, switching off the lights, and disconnecting the phones. This sounds harsh. A counselor might say, “After decades of work, do I have nothing to show for it?” The answer, “Of course not. Your practice has provided you a good living, rewarding work, and you’ve helped a lot of clients. It’s just that what you’ve created doesn’t have value that can be transferred to another business owner.”
How to Value your Company
There are many formulas for valuing companies. For service businesses, one popular method is to calculate a multiple of revenue. Depending on the industry, a services firm can be worth between one and two times revenue. Businesses can also be valued based on their EBITDA, an acronym that stands for Earnings Before the deduction of Interest, Tax, Depreciation, and Amortization (to keep it simple, let’s just say “yearly profit”). A firm may be worth as much as two to three times EBITDA. While these numbers provide a starting point, they are also flawed for determining a business’s exact worth. According to one expert “The problem is that these formulas are almost always too simplistic to serve as anything more than a very rough guide for the sale of real businesses.”
Your company could be worth a lot more, or a lot less, than the formula above might suggest. For instance, say you have contracts guaranteed to earn your company revenue for the next 5 years (a court contract to counsel DUI offenders, for instance). Or, say that the sale of your business includes material assets—a slew of new high-end equipment, or even a building. Either of these scenarios could raise the value of your business.
However, your company could be worth less than the formulaic value. For example, say that your company’s revenue or profit has been declining for the last several years. This downward trend would be a red flag to potential acquirers.
Second, say that the owner is also the company’s manager, but she doesn’t take a salary. In this case, the company could show a profit of $85,000. However, when one adjusts for a manager’s salary, the business is only breaking even. In this instance, acquirer isn’t buying a business; he or she is buying a job.
Third, the value of a company could be less if the company’s key revenue producer will be leaving after the sale. This happens often in the counseling field. A company for sale will show gross revenues of $250,000. However, $150,000 of that revenue is a product of the owner’s counseling fees. Once the owner sells and departs, the company will stop producing most of its revenue.
A thought to consider as you evaluate you company’s price: “If I leave the practice, what remains that an acquirer would consider valuable?” The answer to this question is not always obvious. A dedicated staff is valuable. A telephone number that generates several appointments a day is valuable. The billing system, email lists, website, relationships with insurance companies—all these things could represent an opportunity for an acquirer.
Common Mistakes in Valuing a Business
You love your practice. You’ve put your heart and soul into it, and to you its value is significant—any acquirer would be lucky to have it! Trust me, I understand. But a prospective buyer is looking at your business without emotion. Their offer will be based on the financial opportunity your company presents. Here are two common mistakes a business owner can make when valuing his or her company:
1) Valuing for Growth Potential
Too often a business owner will value his or her company not based on revenues and profits, but on what he or she believes the company is capable of earning in the future. Below is a real example of a counseling practice making this mistake. The owner is trying to sell the business on the “great opportunity” available for a buyer to grow the practice.
“Potential co-operative marketing with other health related professionals in same location. [A new owner can also] Expand professional referral network. [A new owner also has the] Potential to expand hours/days of operation or add complementary services. [New owner could also] Leverage social media marketing for targeted local advertising.”
What an opportunity! Sure, an acquirer can work harder than the last owner, and grow the company. That’s a given. But a seller can’t value their company on potential growth. As a note, if the seller is convinced such opportunities are low hanging fruit, it’s wise for the seller to capitalize on those growth opportunities before selling the business! Not only will the seller make more money prior to the sale, he or she could command a higher purchase price.
Buyers are looking for businesses with predictable revenues, not a lottery ticket. They will value an acquisition based on what they are actually getting.
2) The Value of Reputation
A seller might say, “We’re very respected in the community. This makes us more valuable than one times revenue.” Not exactly. While having a poor reputation could lower your practice’s value, being “respected in the community” is the expectation, not the exception. Hence, while a great reputation may not translate into a larger than usual purchase price, a great reputation does make your company more sellable. Presumably, your reputation has also helped you to grow revenues, which will command your purchase price!
When selling your practice, be ready to let go. After the sale, your practice might change in many ways: The logo. The name. The location. The specialization. And the list goes on…
I recently had several weeks of correspondence with a woman who had advertized the sale of her sex therapy practice. After talking with her at length, and making several proposals for the sale of her practice, she flatly turned me down. No counter offer. Just, “No thank you.” I asked her,
Have I offended you?
No! You have been very polite.
Have I been pushy?
No! You have been extremely patient.
Is it an issue of money?
No! Your price seems fair to me.
Has another buyer expressed interest?
No! There are no other interested parties.
“Then what!?” I asked. She told me that she decided that she only wanted to sell her practice to another sex therapist. I tried to explain, “I plan to hire a sex therapist to be a key member of the team.”
“That’s the other thing,” she said. “I’ve been a solo practice for 20 years. I don’t like the idea of a larger practice taking over.”
And that was it. She left our negotiation to find a solo sex therapist practitioner she could train to run her practice for the next 20 years, as she’s run it for the last 20 years. To her, the thought of her practice changing was sacrilege.
I hope she finds the buyer she is looking for, as she had been winding down her operations, and is now only open 4 days a week. Also, being in her 70s, she hopes to pursue new activities with her husband while she still has the enough health to do so. Frankly, if she doesn’t find the perfect buyer soon, like so many others, she will find herself turning off her lights, and disconnecting her phone.
A buyer can respect and honor the seller’s legacy. A buyer can show the seller how much he/she will care for their clients and community. However, few buyers are willing to do things exactly like the seller! At some point, sellers need to let go.
Prelude to Part Two
The topic of creating a sellable practice is a big one—an entire book on the topic would still be just a cursory overview. Hence, you’ve just read part one of a two-part column. Stay tuned until next month, when I will be presenting “11 Ways to Increase the Value of Your Counseling Practice.”
AAMFT Media Kit, as of 11/14/2011
Steingold, F. S., (2011). The complete guide to buying a business, 3rd edit. P.84
A direct quote for a counseling practice for sale in 2012.
Anthony Centore is a counselor, and helps other counselors build successful practices. For more information on private practice and insurance panels go to http://thriveworks.com.