So, you’re thinking of selling your practice? Let’s look at maximising the value of your business.
Tired of demanding staff, price-cutting competitors, over-regulation or just feel like a change? While the overall health market is growing at nearly 6% per annum, as a result of our ageing population, general economic conditions and, unfortunately, the rise in obesity, you might just think that now, in a growing market, is the best time to exit.
At this point, you think you may have reached ‘peak value’. Perhaps you are concerned about larger ‘chain’ practices opening up in your locality? You may believe that the additional value you can create by staying on may not be worth it, and that it’s time to do something else.
How to sell your practice
Here are some pointers that you’ll need to consider if you want to be truly rewarded for all the work and stress you’ve put into the practice.
The key issue is that you need to see your practice the way the buyer sees it. If more than one buyer sees the extra value in your business, the higher you’ll be able to drive its value up. A bit like a property auction except, obviously, more complex.
The value of a house is clearly visible to all who walk through it; however, the value of practice includes the buyer’s estimate of its future returns from their unique perspective.
So, looking through the buyer’s eyes, you can ask yourself some key questions:
How profitable is the business now?
Most businesses that I see don’t appear to be very pro table. This is for two reasons and you’ll need to attend to both. Firstly, business managers are very sloppy in terms of not separating their personal and business expenses, and the fact is their accountants are not particularly vigilant in examining it. This leads to a situation where the profits are underreported. Obviously, this could also be for ATO purposes – the lower the pro t the lower the tax. To get a real understanding of where you are, you’ll need to normalise the accounts: namely separate business and personal expenses, as well as take out all of the revenues and costs that wouldn’t normally appear as part of normal operations. So, if you’ve had a costly lawsuit or derived revenue from assets that you no longer own, these needn’t be included in normalised accounts.
How profitable could this business be?
There are several layers to this question. Financial skills are not the foremost skills that most practice owners have, and as a result, they don’t tend to look for small improvements in revenue and small decreases in cost that make larger improvements to pro t. When presenting at the recent Cosmedicon conference in Sydney, I demonstrated an example where a 15% increase in revenue and a 20% decrease in administrative and marketing costs led to a 257% increase in profit.
If you remember that buyers usually price businesses for a multiple of profit, a practice with an EBIT of $418k can increase in value from $944k to $2.4m.
All that was required here were: establishing a loyalty programme; a more assertive approach by the practitioner and the receptionist to book follow-up appointments; establishment of a good CRM (Customer Relationship Marketing) system for personalised follow-ups; and some staff efficiencies and outsources.
What are the motivations of the buyer?
This is the key issue, but one frequently not considered by the seller. The best buyers are strategic buyers, specifically ones who already operate within the space, but whose acquisition of your practice will help them make their existing practices more pro table as well as yours.
Here are eight motives that a strategic buyer may have in acquiring your practice:
a) To expand geographically. They may want a new location, specifically one where the demographics look good for expansion.
b) To consolidate and enjoy economies of scale. Running multiple practices often enables owners to strip costs by removing cost double-ups between surgeries or by specialising in specific process in different surgeries, leading to cost savings and revenue gains.
c) Gain additional market share. Particularly for branded chains that are expanding as part of or in lieu of a stock exchange listing, the greater the prevalence of brand, the more attractive they are to investors.
d) More economic access to new clients, suppliers or distributors.
e) Access to additional skills. As the range of niche specialisations increases in this market, certain practitioners with those skills can be used more widely by a larger business.
f) Product expansion or diversification. Particular practices may have specific skills and access to your practice’s set can be made more broadly by a large chain of multiple clinics.
g) Defensive. Simply the buyer wants to access your practice and its clients before their competitor does.
h) Intellectual Capital. This includes not just legally protected methods of achieving new anti-ageing and cosmetic outcomes, but also the potential know-how that your practice has under its belt. What could the monetised value of your client list and all of their previous treatments be worth to a buyer?
What are the expected future returns for the practice(s)?
If the buyer takes into consideration one or more of the above reasons for wanting to acquire your practice, they will then project a high level of expected future cash returns than you would simply by carrying on the practice in its current format.
When more than one potential buyer calculates the future expected returns, you then move into a pleasant situation where a desirable business facilitates a bidding war. An ideal situation for the seller is one in which two or more bidders are competing and raising the price.
What are the expected future risks? Once the buyer assesses what the practice is likely to yield in terms of future returns, they then need to factor in the risks – usually the possibility that adverse events may occur. Your preparation involves ensuring that many of these risks do not occur.
One of the greatest risks is that skilled practitioners (like yourself) will leave the practice. If you are just one of a number of practitioners, you will need to continue to create positive work conditions as well as appropriately based financial incentives to ensure that this does not occur.
While your own departure may also be inevitable (assuming you are not locked in by the new owner in an ‘earn-out’ arrangement) you will also need to ensure that your skills are transferrable. This can be partially resolved by understanding what kind of skills the new owner is likely to bring to the practice, as well as by transferring your skills to others wherever possible.
Aside from the exit of skilled personnel, there are a number of other risks that could affect the value of the business. It is important to see the practice’s future through the eyes of the potential owner and then being an action plan to mitigate those risks.
Preparation for a business sale should begin now for an exit that will occur over the next ve years. Here’s a simple action plan starting today that will help you multiply the value of that eventual exit.
- Assess the current value of your business – free of charge, you can confidentially answer a series of simple questions on your practice at strategictransactions.com.au/quick-value/
- Write a long list of all the potential strategic buyers that could be interested in buying your practice under the 8 headings listed above. Track their movements online.
- Look at where you have an ‘asset deficiency’ in each of the following 8 areas of your business (financial, product, customer, competitive, brand, intellectual property, systems and people). Remember to try to work ‘on the business’ rather than ‘in the business’.
- Understand future trends. If you are not planning to exit for 3 or even 5 years think about how the market will look at that point and orientate your practice around what you believe will be marketable at that point.
- Consider your personal and financial goals. Your business is one of several considerations with regards to your future lifestyle. While you will need to make
- sure that your exit returns are tax-efficient, you also need to consider whether those expected returns are sufficient to fund your future lifestyle. Furthermore, ask yourself some important questions about your health and your future lifestyle. Many ex-business owners (and their partners) live to regret the sale of their business.
Finally, you need to understand it is a long and often complex road to a successful exit. It’s essential that the planning begins now and that you engage the appropriate expertise to steer you on that path.