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Is it time to sell?
Selling your practice is a major decision!
You have devoted your time, money, and energy into building, running, and operating your practice. It may well represent your life’s work. If you have already decided that now is the right time to sell, you want the very best professional guidance you can get.
This is when working in tandem with a professional practice broker can make the difference between just getting rid of the practice and selling it for the very best price and terms!
For practice Sellers
If you’ve gone this far, then selling your practice has aroused enough curiosity that you are taking the first step.
You don’t have to make a commitment at this point; you are just getting informed about what is necessary to successfully sell your practice. This section should answer a lot of your questions and help you through the maze of the process itself.
The first question almost every seller asks is: “What is my practice worth?” Quite frankly, if we were selling our practice, that is the first thing we would want to know. However, we’re going to put this very important issue off for a bit and cover some of the things you need to know before you get to that point. Before you ask that question, you have to be ready to sell for what the market is willing to pay. If money is the only reason you want to sell, then you’re not really ready to sell.
It doesn’t make any difference what you think your practice is worth, or what you want for it. It also doesn’t make any difference what your accountant, banker, attorney, or best friend thinks your practice is worth. Only the marketplace can decide what the value of your practice is.
The second question you have to consider is: “Do you really want to sell this practice?” If you’re really serious and have a solid reason (or reasons) why you want to sell, it will most likely happen.
You can increase your chances of selling if you can answer yes to the second part of this question: “Do you have reasonable expectations?” A yes answer to these two questions means you are serious about selling.
The First Steps
Okay, let’s assume that you have decided to at least take the first few steps to actually selling your practice.
Before you even think about placing your practice for sale, there are some things you should do first. The first thing you have to do is to gather information about the practice.
Here’s a checklist of the items you should get together:
- Three years’ profit and loss statements
- Federal Income Tax returns for the practice
- List of fixtures and equipment
- The lease and lease-related documents
- A list of the loans against the practice (amounts and payment schedule)
- Copies of any equipment leases
- A copy of the franchise agreement, if applicable
- An approximate amount of the inventory on hand, if applicable
- The names of any outside advisors
If you’re half way through the current year, make sure you have last year’s figures and tax returns, and also year-to-date figures. Make all of your financial statements presentable. It will pay in the long run to get outside professional help, if necessary, to put the statements in order.
You want to present the practice well “on paper.” As you will see later, pricing a small practice usually is based on cash flow. This includes the profit of the practice, as well as the owner’s salary and benefits, the depreciation, and other non-cash items. So don’t panic because the bottom line isn’t what you think it should be.
By the time all of the appropriate figures are added to the bottom line, the cash flow may look pretty good.
If you’re like many small practice owners, you’ll have to search for some of these items. After you gather all of the above items, you should spend some time updating the information and filling in the blanks. You most likely have forgotten much of this information, so it’s a good idea to really take a hard look at all of this. Have all of the above put in a neat, orderly format as if you were going to present it to a prospective purchaser. Everything starts with this information.
The big question is not really how much your practice will sell for, but how much of it can you keep? The Federal Tax Laws determine how much money you will actually be able to put in the bank. How your practice is legally formed can be important in determining your tax status when selling your practice.
For example: Is your practice a corporation, partnership or proprietorship? If you are incorporated, is the practice a C corporation or a sub-chapter S corporation? There are also tax rules that impact certain practices on seller financing. The point of all of this is that before you consider price or even selling your practice, it is important that you discuss the tax implications of a sale of your practice with a tax advisor. You don’t want to be in the middle of a transaction with a solid buyer and discover that the tax implications of the sale are going to net you much less than you had figured.
Who are the Buyers?
Buyers buy practices for many of the same reasons that sellers sell practices
It is important that the buyer is as serious as the seller when it comes time to purchase a practice. If the buyer is not serious, the sale will never close. Buyers who want to go into practice strictly for the money usually are not realistic buyers for small practices.
Here are just a few of the reasons that buyers buy practices:
- Laid-off, fired, being transferred (or about to be any of these)
- Early retirement (forced or not)
- Job dissatisfaction
- Desire for more control over their lives
- Desire to do his or her own thing
A Buyer Profile
Here is a look at the make-up of the average individual buyer looking to replace a lost job or wanting to get out of an uncomfortable job situation. Chances are he is a male (however, more and more women are going into practice for themselves, so this is rapidly changing). Almost 50 percent will have less than $100,000 in which to invest in the purchase of a practice. In many cases the funds, or part of them, will come from personal savings followed by financial assistance from family members. The buyer will never have owned a practice before, and most likely will buy a practice he or she had never considered until being introduced to it.
Their primary reason for going into practice is to get out of their present situation, be it unemployment or job disagreement (or discouragement). Prospective buyers want to do their own thing, be in charge of their own destiny, and they don’t want to work for anyone. Money is important, but it’s not at the top of the list; in fact, it probably is in fourth or fifth place in the overall list. In order to pursue the dream of owning one’s own practice, the buyer must be able to make that “leap of faith” necessary to take the risk of purchasing and operating a practice.
Keep in mind the following traits of a willing buyer
- The desire to buy a practice
- The need and urgency to buy a practice
- The financial resources
- The ability to make his or her own decisions
- Reasonable expectations of what practice ownership can do for him or her
What Buyers want?
Vast majority of buyers want to buy cash flow
This may be a bit premature if you not have decided to sell but it may help in your decision-making process to understand not only who the buyer is, but also what he or she will want to know in order to buy your practice.
What about the Internet? The Internet is a real “buzz” word – and if its use is appropriate for your practice, then developing a web site is important not only to your on-going practice, but also to a buyer. Many buyers are conscious of what the Internet is doing for many practices. If you have a web site for your practice, it could be a big plus.
Here are some questions that you might be asked – and, should be prepared to answer:
- How much money is required to buy the practice?
- What is the annual increase in sales?
- How much is the inventory?
- What is the debt?
- Will the seller train and stay on for awhile?
- What makes the practice different/special/unique?
- What further defines the product or service? Bid work? Repeat practice?
- What can be done to grow the practice?
- What can the buyer do to add value?
- What is the profit picture in bad times as well as good?
Buyers Wants Cash Flow
The first thing to keep in mind is that the vast majority of buyers want to buy cash flow. Sit down with your accountant or bookkeeper and begin to get your financial statements in order, with cash flow the order of practice. Cash flow is not the same thing as profit. Most buyers look at the profit and loss statement or tax return, as well as owner or family compensation. They will consider any excess compensation to employees and family. Buyers will also look at large, one-time expenses such as a new computer system or remodelling. They will consider non-cash items like depreciation and amortisation. Interest expenses will be reviewed, as will owner prerequisites. These are items that a professional practice broker considers when advising a selling client on a selling price.
What can You do?
You should create an operations manual
The time to replace that old worn-out piece of equipment is before you decide to sell. Don’t assume that a new owner will want to do it or that the price will just be slightly lower because you haven’t replaced it. The time to “spiff up” the practice is now, even if you aren’t selling. Fix the sign, replace the carpet, paint the place – make it look good. Even if you’re not selling, it’s just plain good for practice, and you never know when the time to sell will occur. Keep in mind that anything that increases sales also increases profits and the all-important cash flow!
There are other things that add value to your practice. Don’t discount the value of customer lists, proprietary products and/or techniques, well-maintained equipment, secret recipes, customized software programs, or good employees. These are termed “off-balance sheet items,” and although not used in most pricing models, they add to value. Look at your practice very carefully so you don’t overlook those items that make your practice more attractive to the buyer.
Long before you put your practice on the market, eliminate the surprises! Review every facet of the practice and remedy any problems that could appear during the sale process. No one likes surprises – most of all potential buyers. Whether legal, accounting, environmental, or anything else – solve it now.
This may sound like something that should have been done when the practice first started, so it may be “after-the-fact”. You should create an operations manual. You may already have one, or started one years ago, or simply, have thought of doing one. Now is the time! It may actually create added value to the practice. Even if it doesn’t, it will impress buyers that you have your practice “act” together and should help you sell more quickly and effectively. Preparing a manual on how to operate your practice can also be helpful even if you don’t want to sell. It doesn’t have to be elaborate, just cover the basics. A collection of ads that you have placed in a catalog or sample of products, publications, or menus (if the practice is food related) is also impressive. Include anything to do with the practice that might be helpful for a new owner. However, don’t include anything that is proprietary, such as customer lists, suppliers or secret recipes, etc.
Buyers who want to go into practice strictly
Usually are not realistic buyers for small practices
It might also be helpful if you took a good look at your practice from the perspective of a buyer. Try to put yourself in the place of a prospective purchaser of the practice.
Below you will find a few friendly recommendations that will help in our marketing efforts when you decide you are ready to sell:
- Tidy-up outside premises.
- Repair non-operating equipment or remove it if you are not using it.
- Remove items that are not included in the sale and unnecessary items, especially if inoperative.
- Maintain inventory at a constant level. If you let your inventory slide, your practice will look neglected. If anything, increase it so your practice will look busy.
- Repair signs, replace outside lights, etc. You don’t want your practice to look as if it has been neglected.
- Keep normal operating hours. There may be a tendency to “let down” when you put your practice up for sale. However, it’s important that prospective buyers see your practice at its best.
- Spruce-up the inside of the practice.etc.
What would you do to make it more attractive or more saleable?
Obviously, the financial records of your practice are critical to the sale of your practice, but how it looks is also important. First impressions really count! If a potential buyer doesn’t like the appearance of your practice, the rest of it may never get a chance. If you have any questions, please don’t hesitate to call us. We look forward to hearing from you!
Do you have other questions?
Be sure to visit Selling FAQ to answers to the following questions.
- How long does it take to sell my practice?
- What can practice brokers do – and, what can’t they do?
- What can I do to help sell my practice?
- What happens when there is a buyer for my practice?
- Why is seller financing so important to the sale of my practice?