As experienced dental practice brokers in Australia, my team and I are always amazed at the misconceptions that some dentists have about the process of selling a practice. In this article, we thought we would address some of the more common seller misconceptions that we hear:
Seller Myth #1 – Once we have agreed on the price…everything else will fall into place.
While price is no doubt the most important item that you and the seller will need to negotiate, it is not everything. There are dozens of other terms that you will need to negotiate to close a deal, and many of them might change how you or the seller think about price. Examples of these terms include the timing of the transaction, whether 100% is paid upfront or some is withheld and paid over time, post-sale work commitment, if the purchaser wants the staff to stay, and many more.
Seller Myth #2: Buyers that look at my practice but don’t buy are “tyre kickers” and/or timewasters.
When a person is looking to buy a house for their family to live in, it is not uncommon for them to look at up to 10 houses before they make their purchase. Does that mean that they were insincere or intentionally wasting people’s time when they looked at the 9 that they didn’t purchase?
Of course not. They either hadn’t seen what they were looking for yet, or they hadn’t seen enough comparatives to know what “good” looked like yet.
Buying a dental practice is similar.
Buying a practice represents a significant commitment of a buyer’s resources into the future, both in terms of finances and time. It stands to reason that authentic, sincere buyers will want to research comparatives before they commit.
While it may be frustrating to have people look at your practice and not jump at the chance to own it, rest assured the buyer that does end up buying your practice is likely to have looked at several before they decided to buy yours.
Seller Myth #3: My friend got $X for their practice, and my practice is better. I should get at least 1.5x that.
When I hear statements Iike this, I have so many questions:
- How do you know what your friend received? The dental industry is full of “the fish was this big” stories, where sellers exaggerate what they received or don’t mention the onerous terms under which they received it. I have also seen buyers exaggerate how little they paid.
- How do you know what your friend had? Very few dentists have seen the financials of their friend’s practice…are you relying on your friend’s account of this? (“the fish was this big” financials).
- How similar is your practice to theirs? There is a different market for practices in different areas, with different clinical ranges, different key-person dependence, different security of tenure, etc.I once had a client say something like this misconception to me, and they were comparing their rural practice to their friend’s suburban one.
- How long ago did your friend sell? Markets change over time, with interest rates, cost of living pressures, the local and national economy, as corporate interest peaks and wanes….and so do the buying appetites of buyers.
- What makes you think that your practice is better? Is it:
A. because you did better than them at university, know you are a better clinician and seem more successful ? OR
B. because you KNOW their figures and KNOW that you have:
- Higher revenue
- Higher profit
- Less key person dependence
- A more easily recruitable location
- Less need for reinvestment
Far too often I find that peoples guestimates of their practices value compared to others are based more on A than B.
Don’t get me wrong, you may be worth 1.5x your friend…you might be worth 3x, but if you’d like to know what price might be achievable for your practice, there is no substitute for talking to an industry expert who has seen hundreds of practices, their financials and the prices that these practices are able to achieve.
Seller Myth 4: If I know a buyer, brokers add no value.
Firstly, if you have a buyer that you are dealing with in isolation…how will you know that they are offering a good price and terms? How do you know another buyer of equal or better quality wouldn’t offer more. If your answer to this is “I’ll get a valuation to dictate the price”, my response is:
- A valuation isn’t the end of the negotiations with a buyer, it’s the beginning; and
- Auctions beat valuation prices a lot of the time
We achieve confidence in pricing when the market dictates a price. Not when one is suggested by a single buyer or an accountant in isolation.
Secondly, a broker’s function isn’t to introduce a buyer… a broker’s function is to get the best price and terms for their client. This is usually achieved by many steps, including (but not limited to):
- preparing the business for sale in such a way to highlight its features and potential
- introducing more than one buyer such that each has a fear of missing out
- negotiating and using competitive tension to achieve the best outcome
- chasing down lawyers, landlords and financiers to keep momentum going, because time kills deals.
In short, if you feel you don’t need a broker because you have a buyer… you are misunderstanding the function and benefits that a good broker will bring to your transaction.
Seller Myth 5: A buyer will pay for the potential as if it is proven.
We regularly have vendors coming to us saying that their practice is worth more because they chose to be:
- closed for X excess weeks per year
- only open 4 days per week
- referring out any complicated work
- overpaying staff
- not doing any marketing
Really, they want buyers to pay for results that they haven’t been able to generate (or in their minds have chosen not to generate) themselves…
I am not saying that buyers won’t pay extra for opportunity or potential…they will sometimes.
But buyers and their banks cannot tell with any certainty what profit a practice would have generated under different trading conditions. As a result, as a general rule… buyers will pay far more for proven than potential every time.
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