Why Some Practices are Hard to Sell

Why do some practices sell quickly, and others never sell?  Here are the some of the most common barriers to practice sales.  

1. Profitability.   The typical practice nets a certain range of gross income. And a sizable number of practices are netting above average.  Practices with low profitability simply don’t have the extra margin to support a new buyer after debt service.  Buyers expect a certain amount of return for the risk of buying a practice.   Many buyers will pay $350K to make a competitive salary after buying a practice with 100% financing.  No buyer will pay $1M to make only $80K/year, even if they otherwise qualify to buy the practice no money down.

2. Overpriced.   Optimistic sellers love to parrot the adage, “There’s a buyer for every practice.”  But they often leave off the qualifier “at a buyer’s price.”  Despite recent trade journal articles and editorials to the contrary, it is buyers—not sellers or brokers—who determine the market value of practices. It’s simply that medical practice brokers tend to be in tune with what buyers are willing to pay in today’s market.  The outdated rule of thumb that practices sell for about “one year’s gross” is one of the surest ways to overprice a practice. An overpriced practice will scare away many buyers from ever taking the first step of doing a serious investigation of the practice.  Even if you manage to find a buyer at the inflated asking price, lenders will finance only a small portion of the purchase price.  At best making the buyer question, “why doesn’t the bank think the practice is worth this much?”  At worst, disqualifying the buyer for lack of down payment.

3. Location.   Buyers generally prefer suburban locations in medium to large cities. They like being close to a wide variety of shopping, educational, and cultural activities.  They like being able to refer to a wide variety of board certified specialists and to 24 hour emergency clinics.  They like having a large pool of relief doctors and potential associate doctors from which to draw. Practices in rural areas are harder to sell.  An otherwise highly desirable practice located in a remote location may take 1-3 years longer to sell.  Similarly, a practice located in a ‘rough part of town’ will take longer to sell.

4. Poor Facility.   Buyers want to feel good about where they will be working.  Your practice is competing against other practices on the market. Face it: if the last time you remodeled was 1972, it’s probably time to replace that burnt orange shag carpet in the doctor’s office.  The good news is that a quick makeover can be done inexpensively.  Some common changes that make a big impact include: a new coat of paint on those walls and cabinets (white and bright is better than old and dark), hire a professional cleaning crew to scrub every inch of the practice, replace outdated light fixtures and wall hangings, paint new lines on the parking lot, replace that desk chair with the duct tape on the seat pan, etc.

5. Poor Equipment.   Typically 10% - 30% of practice value is for equipment. If you have less than the average amount of equipment then the sales price will need to reflect accordingly.  If the average age of your equipment is more than 5-7 years old then buyers will look upon your practice negatively.  Not computerized?  No lab equipment? Have a 30 year old 50 mA x-ray and dip tanks? Is your computer still running MS-DOS?  All of these things will make buyers hesitate about buying your practice.

6. Advisors Who Needlessly Complicate the Transaction.   Nothing can kill a deal faster than an advisor (i.e., accountant, attorney, practice consultant) who either purposefully or unwittingly throws a monkey wrench into a deal.  Every seller and buyer should have an attorney and an accountant represent them throughout the transaction.  The key to success is hiring an attorney experienced in business sale transactions. Don’t use Aunt Flo, the divorce attorney, who will do it in her spare time for free.  Get an attorney that knows customary terms/warranties/representations in practice sales, who doesn’t unnecessarily reopen negotiations after you’ve made commitments to the other party, or are too busy/unavailable to respond quickly.  Get advisors who understand their own professional limitations and cooperate with other members of your transaction team. Some advisors kill deals by trying to be the arch “hired gun” and try to get every aspect of the deal to go their client’s way. You want advisors who understand that a Win-Win approach is crucial to successful practice sales.  After all, that is your goal: a successful practice sale.  If either side takes a ‘We Win—You Lose’ approach then the deal is likely to fall apart.  This approach inevitably alienates and angers the other party to the point of killing the deal.  Your broker can advise you how to select professionals to complete your transaction team.

7. Bookkeeping & Documentation.   You have a great practice.  Making money hand over fist.  Pay cash on the barrel for everything.  You have double digit growth.  That’s great.  But if you can’t document your practice financials then you have nothing to sell.  Buyer’s aren’t just going to take your word as to how the practice is doing.  Buyers and banks require documentation on key practice metrics, income, and expenses.  Another problem area is unreported income.  Lenders use verified tax returns directly from the IRS for making lending decisions.  If the income isn’t shown on the tax return, you won’t get paid for it in your sales price.  Bottom line: you can’t sell what you can’t document.

8. Low Gross.   Low grossing practices just don’t have the income to provide a competitive living to a new buyer after debt service.  It really doesn’t matter whether your net is average or above average.  An above average net of ‘not very much’ is still ‘not very much.’ And don’t rely on the old fallback that the practice has ‘lots of potential’ if ‘someone would just come in and work it hard.’  Few buyers will buy on potential. None will pay for it. On the low end, practices grossing under $300K have fewer buyers.  Practices grossing under $200K are very hard to sell and usually have to be heavily discounted just to attract a buyer.  Practices grossing under $100K usually have little value other than equipment value.

9. No non-compete. Generally speaking, non-compete agreements are required in order to secure financing.  A lender will not knowingly finance a purchase if the seller, or associate doctor, has the ability to undermine the buyer's ability to generate revenue.  It doesn’t matter if the sellers' and buyers' attorneys claim that non-competes are unenforceable.  That may be true, but the lenders don't care!  And your practice will be just one of thousands in their portfolio.  If you plan to sell—get non-competes for all doctors—or be prepared not to sell.

David Greene is President and founder of Medical Practice Brokers, Inc., the Rocky Mountain region’s largest business brokerage firm specializing in sales of medical related professional practices.  Mr. Greene and the associates at Medical Practice Brokers, Inc. have assisted Sellers and Buyers in the successful transactions and valuations of numerous medical practices including: Medical primary care, Medical primary care and surgical subspecialty, Dental, Chiropractic, Veterinary, and others Mr. Greene is a seminar instructor on Buying and Selling Practices, and has been an invited speaker at universities and professional groups on the subject of practice sales and values.  He is a member of the International Business Brokers Association and holds their prestigious Certified Business Intermediary (CBI) certification.

Medical Practice Brokers, Inc., 15847 Woodmeadow Ct., Colorado Springs, CO 80921
Direct Line: (719) 487-9973    FAX: (719) 487-9974    Email: dave@practicebrokers.com