In the previous column, we discussed the importance of building a sellable private practice, and we looked at formulas for valuing a service business. In this column, we’ll review 11 ways that you can make your business worth top dollar to an acquirer.
In the counseling industry, many practices are named after the owner, as in “Amy Smith Counseling” or “Smith and Associates.” This type of name could make transferring the business to an acquirer tricky.
Once upon a time, psychologist Dr. Wagner purchased a psychological testing practice called “Powell Associates” from a Dr. Powell. Dr. Wagner added his name, changing the business to “Powell and Wagner Associates.” Today, if the practice is resold, what happens? Will it become “Powell, Wagner, and Smith Associates” even though Dr. Powell hasn’t been with the company for over 20 years?
A personal brand runs the risk of communicating to customers that the value of a company resides in the founder—not the business’ mission, product, service, or team. However, this seems to become less the case the larger and older a business is. For instance, no one walks into a Walgreen’s and demands to speak with Mr. Walgreen. No one goes to Ruth’s Chris and expects their steak to be grilled by Chris, or Ruth (by the way, the restaurant got it’s name when Ruth Fertel bought Chris Steak House). As for Dr. Wagner, he explains, “Someone might call and say ‘My Grandfather used to see Dr. Powell.’ They don’t expect him to be here, but they still trust the brand.”
While not insurmountable, life is a little easier for an acquirer when the founder’s name is not inextricably tied to a practice. If you want to build a practice to sell, consider a brand name other than your own.
2) Beyond a Solo Practice
Solo-practices are often worth less than group practices. For this, there are two reasons. First, simply based on their size, solo-practices often produce lower revenues than group practices. Second, with a solo-practice, the business owner is the lead clinician. Hence, when the owner sells (and leaves the practice), the business stops generating revenue. A new owner has the daunting task of finding a new clinician, and building his/her caseload. In contrast, a group practice with several clinicians will continue generating revenue even when the original owner departs.
3) Consider an Earn Out
An “earn out” is when a seller accepts an offer for his/her company that is contingent on the company achieving specific financial goals over a period of time. For example, a company might receive a purchase offer of $200,000. However, a percentage of the purchase price is contingent on the company earning their anticipated revenues the next three years.
If you are confident that your company is stable or growing, and if you’re willing to stay involved in the management of your business for a while, accepting an earn out could help you to receive top dollar for your business.
4) Finance the Buyer
Many businesses are purchased in installments (this is also called “financing the buyer”). In an installment sale, sellers receive a portion of their purchase price up front, and then the remainder is paid in installments (perhaps over 3 years).
There are some perks to an installment sale, for sellers. First, a seller can charge interest (often 5-10%) on the outstanding balance. Also, with and installment sale, the seller can include a “claw back” provision in the sale agreement, which means that if the buyer defaults on payments, the seller can repossess their business and resell it to a new buyer.
5) Focus on New Clients, not Existing Caseloads
Current caseloads are worth less than new client inquiries. For example, one practice for sale has four clinicians, each with full caseloads of long-term clients. The practice receives 20 new client inquiries per month. In contrast, another practice for sale has only two fulltime clinicians, and 100 new client inquiries per month.
While the former practice is generating higher revenues, it also places a buyer at higher risk. At only 20 inquiries per month, the business won’t recover in the event of clinician turnover, as the practice is not generating enough leads to build a new counselor’s caseload. Hence, even though the second practice serves fewer clients, it could be more valuable than its counterpart.
Tip: Having a rigorous system in place to document the volume of incoming inquiries from various sources (email, website, yellow pages ads, etc.), and what portion of them become new patients, will increase the value of your practice to certain buyers.
In many markets today, accepting clients’ health insurance is important to a counseling business’ success and stability. Hence, it is increasingly important to buyers to find a practice that is credentialed with insurance companies.
A business seller should make sure that their credentialing is such that it will transfer to an acquirer. When possible, a practice should have group contracts with insurance companies, as well as individual provider contracts.
7) A Committed, Compatible Staff
Sometimes, when a practice is sold, staff doesn’t survive the transition. Here are two real-life instances wherein existing staffs were incompatible with new management.
a. A psychiatry practice is being purchased from an absentee owner/manager. A few weeks before the close of the sale, the new owner begins working in the practice and begins to implement some basic rules of operation for the administrative staff. They revolt! The staff destroys documents, cancels appointments, refuses to answer the phone, and creates a hostile work environment (they were also, as it was later discovered, stealing from the company). The new owner has no choice but to fire the staff, and hire a new administrative team.
b. A buyer of a counseling practice discovers that the previous owner has overpaid his clinicians by compensating them heavily for completing basic administrative tasks the previous owner did not want to do. The new owner realizes that the practice cannot survive without the clinicians forgoing their administrative duties (along with the extra income). The counselors do not respond well to receiving what they perceive as “a cut in pay”, and several leave the practice. Revenues drop by over 40%, and the practice doesn’t recover for over a year.
In both these instances, the owners had little choice but to start over with new staff.
However, a buyer will almost always want an existing team to stay. Hence, anything that commits employees to the business, such as a “long term incentive plan” (a bonus accrued and paid on a rolling basis over years of service) could be valuable to a buyer, as it helps to improve staff retention.
8) Quality Hard Assets
To the extent that a buyer can utilize them, hard assets have value. Recently, I visited a counseling practice for sale in New England. The owner valued her furnishings (chairs, desks, computer equipment, etc.) at $12,000. However, almost everything in her offices was tired, old, and generally below our standard of quality. Hence, to us her ”furnishings” would have to be replaced entirely and therefore had zero value. In contrast, if we visited a practice with therapy offices that were “move in ready,” such assets would be worth top dollar, as we wouldn’t need to put out the cost (and effort) of furnishing the space.
If your practice rents space, the lease your business holds can affect the sale. Buyers always want low rent guaranteed for multiple years, as well as the flexibility to cut and run anytime. This, of course, is unlikely! As a seller, you are in good shape with a fair lease, with some amount of security for the buyer. Avoid these three bad lease situations:
•The practice has a 5-year lease in a bad location. The buyer would prefer to move the office, but breaking the lease will be too expensive.
•The lease is non-transferable, and the landlord wants a 20% rent increase from any new tenant/owner.
•The lease terminates within a year, and the landlord plans to raise the rent more than 4%.
10) Be Honest and Open
As part of our growth strategy, my company has started looking for counseling practices to purchase. We talk with many providers who have listed their businesses for sale. At times, even after we sign a confidentiality agreement, some are reluctant to talk openly about their practices’ weaknesses (owners never have a problem talking about their strengths). This evasiveness often ruins the potential for a sale.
Sometimes owners will overestimate the size of their practice. I recently met with an owner who claimed that her practice was scheduling 5-10 new clients per week. However, when we looked at her practice’s record of first sessions, it was actually scheduling 6-12 new clients…per month! That’s a forth of what the seller reported! Either this seller had did not understand her business, or she was trying to mislead.
Misrepresenting one’s company to a potential buyer will slow down the acquisition process, and could result in future legal action from a buyer. So be honest! No business is perfect, and a serious buyer isn’t looking for perfection.
11) Finish Strong
Many practices are for sale by clinicians who are nearing retirement. This is a great reason to sell! However, clinicians commonly make the same mistake. That is, they begin winding down their practices while (or before) their companies are put up for sale. For example, a counselor who once saw 30 clients a week, while trying to sell her practice, might decrease her caseload to 20. This ill-timed decrease lowers revenues, and increases the risk for potential buyers, who will need to try and rejuvenate a shrinking practice.
My father once told me, “When painting, stop while you still have about 20% of your energy left.” His reasoning, “You’ll need energy to rinse out your brushes, and clean up the room.” It’s good advice. Similarly, counselors are much better off selling their practices while they still have energy to finish strong. To attract good buyers and to earn top dollar, make sure your numbers are stable, even trending upward!
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.