4 Mar 2016
Selling a practice can be fraught with difficulties and unforeseen pitfalls. Malcolm Wright shares 10 top tips to ensure the process is painless for all parties.
Malcolm Wright
Job Title
Trust and transparency are key to unlocking profitable practice sales.
Selling is a stressful business. One of the main worries practitioners have is what will happen to the practice and their clients when they have left.
You are selling because, in most cases, you are moving on to another stage in your life. The compensation is the freedom and financial security you will hopefully receive and it is important to leave the emotional attachments behind.
Of course, it won’t be run as well as when you had it, but that’s something you will have to accept.
What you don’t have to accept is muddling through the entire process – something that can be avoided by adhering to the following rules:
1. Talking to potential buyers without knowing what your practice could fetch on the open market can be disastrous.
Similarly, discussing matters with local colleagues can often leave you in a disadvantageous position. Would you think about selling your house without finding out from the local estate agents or newspapers what other similar properties are selling for?
Unfortunately, it is not as easy to get comparable information about veterinary practices, but certainly, you should at least take advice from someone who has that knowledge.
TIP: Always keep things close to your chest – at this stage you need to find out information, not give it away.
2. Responding to unsolicited buyers on receiving an unsolicited offer can result in a failure to maximise the practice’s true value.
The purchase market is dominated by the corporates – they have the funds available, the knowledge to make a
commercial offer and the skill to complete a purchase quickly.
However, you must remember there are three main buying major corporates, and several up-and-coming smaller national groups, each operating in a different manner with different needs. Having knowledge of the maximum potential price can ensure you speak to the best corporates for your practice sale. If you think your practice is worth, say, £500,000, getting an offer of £700,000 can result in a knee-jerk response, when the practice/company could actually be worth £900,000 to another buyer. Remember, no one will offer the top price as an opening offer.
TIP: Listen to the offer and get professional advice on whether it is viable for you to consider accepting before considering responding. Remember, you will only sell once, so get it right and take your time.
3. Setting too high a price/underpricing your practice – overpricing is not the same as maximum pricing; many practices will sell for 20 per cent to 70 per cent more than the assumed value due to a mix of circumstances and buyer desire.
The market, however, can be divided into two groups – corporate purchasers and private purchasers.
Both types need to be able to show the practice has maintainable profits – for the corporates because profit is what they are buying, and for the non-corporates to allow them to fund the purchase through loans that are supported by those profits. Obviously, some practice/individuals will not require external funding, but they are unlikely to want to buy a loss-making business and, if they do show interest, the price offered will probably reflect that.
Many practice sellers underestimate or overestimate the value of practices and what they are selling for. Every practice is different, but the five key factors that will determine this value are on a sliding scale are:
Overpricing is easily done and is often based on the historic traumas that went into developing the practice. The buyer will not be interested in the history, only the present and future of the practice. If overpriced, the practice will stick, and the longer it is on the market, the more difficult it will be to sell.
Underpricing is where what you think is a fantastic offer may be well below the true achievable value market – a figure you may never find out.
TIP: Consider how many surgical procedures you have undertaken in your career, and the skill that has come with experience. Then consider how many practices you have sold over that same period. Then decide whether to do it yourself or take advice from someone with that experience.
4. Making yourself indispensable – running a veterinary practice is hard work, especially if you are the sole owner.
The total commitment put in by many principals removes the delegation that would normally take place in other sectors. The result can be you become indispensable to the long-term success of the practice. A corporate buyer prefers to purchase a readymade structure that is not reliant on one particular person and, as such, will normally only be interested if the principal stays on for a period of time to maintain the continuity and allow a more delegated structure to be developed.
TIP: Its not just about the sales value of a practice, but delegation and developing a structure of responsibility will also increase the long-term profits and pleasure in running your practice. The ideal practice for a corporate structure has everything in place it requires to allow it to bolt on to its model. So anyone who shows potential or the desire for advancement within the practice should be encouraged and trained to improve your management team.
5. Failing to assemble a professional selling team before putting it up for sale – selling larger, high value practices requires a professional team to deal with the buyers to both maximize the price and look at the tax and legal issues of the sale.
Your accountancy firm must be able to produce information quickly and in a structured manner. It should be used to dealing with commercial sales.
Your legal team is vital as tax law changes all the time and every individual has a different taxable position, so it is essential to check out what your liability will be after selling your practice. This is especially so when you are incorporated, as there can be some complex issues that may arise that can relate to the incorporation and sale. If you are incorporated and the purchaser wishes to buy only the assets rather than the shares, this can leave you in a difficult position when it comes to accessing the funds post-sale.
Use solicitors with good commercial experience who have an in-depth understanding of the legal issues associated with commercial and corporate sales.
Your practice sales team should offer a professional service and undertake marketing, introductions, negotiating, work with both the lawyers and accountants and help throughout the process. They should be able to achieve at least a 10 per cent to 20 per cent higher sale price for your practice that should easily cover any fees.
TIP: You need an accountancy firm that has specialist tax accountants, a legal team experienced in commercial sales and should be large enough to allow the process to progress at the right pace.
Having a one-man band going on holiday for three weeks in the middle of the process is not ideal. Your selling team should have the drive to maximise your practice value and expertise to deal with your legal and financial advisors.
6. Failure to negotiate the best deal – completing a successful deal is not just getting the price right, it also involves the add-ons that may come with the offer; whether the property is purchased, its price, the terms of the lease if rented, any employment considerations and other factors relating to the assets.
If your practice is incorporated, a buyer purchasing the assets as opposed to the shares can have tax consequences for the seller. All of these factors should play a part in agreeing to an acceptable offer. Ideally, when you sell it is better to have at least two interested parties – this will always put the seller in an advantageous position.
Simply trying to auction the best price between two or more parties can result in failure. Similarly, making excessive demands can lose a buyer. Most buyers are not happy to go into a bidding war; however, negotiating skills can allow the best price/deal to be obtained from a potential buyer.
Once agreed, it is essential to write up a heads of terms, or memoranda of understanding. Although not legally binding this avoids problems later. Your broker will normally do this as part of his or her service.
TIP: Buyers do not know whether there are one, two or three other interested parties. If the seller wishes to reveal this, it should only be disclosed when the time is right as the negotiations progress. Having a good and honest relationship with the buyer is essential to get the best result.
Remember to keep a note of everything you discussed and agreed when the offer was accepted, as this can save stress if any disagreements or different interpretations of the agreement come up later.
7. Insisting on including property as part of the deal – this is difficult if the practice is part of the seller’s residence.
Larger practices are not interested in using funds to invest in property, their aim is to buy businesses and the profit business can make. Private buyers are in a different position and often want or need the property to get security for borrowing. When deciding, be flexible – if you want to sell and the buyer only wants to rent you may lose the sale.
Consider if you do rent to a good tenant, the property could then be sold at a later stage to a property investor to allow you to realize your capital. If you do sell and get cash, what would you do with it? Rental returns could average 5 per cent to 10 per cent; bank saving rates offer 1 per cent to 1.5 per cent return.
TIP: It is always better to keep the practice property and your residence totally separate – it may save you money during your working life, but it can be a millstone when it comes to selling your practice. Often, the residential part of the premises will have a value not supportable by the profits of the practice. My advice is to always ensure they are two separate entities early on in your business career.
8. Inability to produce management accounts on time and not producing transparent financial reports – the quality and frequency of the financial reports produced are essential for the buyer.
He or she will monitor the management accounts from the day of the sale agreement to the purchase date. He or she is probably paying a lot of money for the practice and obviously does not want to see a sudden drop in sales or profit during the build-up to completion. The level of financial detail sought by corporate buyers from the date of the head of terms to the completion of the sale is often beyond what the average veterinary practice produces to manage the business effectively.
TIP: Try to ensure the practice continues to improve on the previous year’s turnover and profits, as this is comforting for the buyer. Regarding accounts and declarations, you must be totally transparent and everything should be declared. Any HR issues past and present, tax issues and legal issues, if such things arise during the purchaser’s due diligence without having being informed earlier, could affect the sale.
If you undertake some veterinary work, which does not show in the accounts, such as ministry inspections or kennels, this should also be declared as failing to do this could result in warranties being enforced that can be very costly.
9. Failing to allow enough time to both prepare and undertake the sale – you should start to undertake the preparation for the sale of your practice at least 18 months before selling.
Thinking about selling does not mean you have to stop enjoying practising and running your business. The longer you allow, the more time you have to make changes that could affect the final sales price – an increase in net profit of £15,000 could produce £40,000 to £80,000 extra in the goodwill. Obviously you have to balance your circumstances when doing this and many well-run practices show sufficient profitability to allow a sale to go through quite quickly.
TIP: Ideally, the sale of the practice should be simply another stage in your practice career of growth, consolidation and sale – each stage producing differing levels of financial return. Your last consultation fee before retiring may produce £50, but your first business sales deal after selling could produce £500,000.
10. Failure to have a plan B – if the practice fails to sell it is important to consider alternative methods of divesting yourself of your business.
Simply trying again is not the best way forward. Should you sell at a reduced price, change broker, take on a manager and invest in the practice or lease the practice? You will need to look at the practice, its strengths and weaknesses and accommodate them in any changes you make to the way the practice functions.
TIP: If you have a practice in an unattractive location, unless you are making very good profits, you may have to reduce the price to attract someone. Investing large amounts of money may not give you a return, but minor decor and appearance changes could make a difference.
Your broker should be honest enough to let you know the position regarding saleability at the onset. Suggesting an unrealistic sales price simply to get the work can result in failure to sell at all. If the practice runs from your residence, consider moving it to a commercial site – that way the practice value may well be increased and you will have a house to sell on the open market.
