If you sell your practice for more than the total value of the identifiable assets (Accounts Receivable (A/R), Furniture Fixtures & Equipment (FFE), Leasehold Improvements (L/H), Non-Compete Agreement, etc.), you are getting paid for the practice’s GOODWILL. You will have very little influence on the value of your tangible assets. You can directly influence your practice’s goodwill. Below are Six (6) actionable ways to increase your practice’s goodwill and maximize your proceeds.
Cash-Flow is King – Investors make investments hoping to receive future inflows of cash that exceed their required rate of return, their “hurdle rate.” A Buyer weighs the alternatives between starting up a new practice (“green-fielding”) and acquiring an existing practice based upon what is available in the locale and timeframe they choose. If a practice is available and if that practice’s future anticipated cash flows exceed that of the green-field alternative, the acquirer will recognize goodwill value in excess of the practices identifiable assets. The amount of that goodwill is a function of the practices “excess earnings.”
Deals transact when ready, willing and able Buyers seek to buy at the same time a Seller decides to sell, if there is an overlap between what the Buyers can and will pay, and what the Seller will accept. Our objective is to minimize the overlap so that we have a point of coincidence. We maximize your proceeds by pricing it on the higher end of that range without going over the high point.
Staff/Patient Interaction – You, as the exiting practitioner, must demonstrate your practice’s success is not dependent upon you. The better trained and more versatile your staff, the more confidence a Buyer will have. Create an environment of positive, helpful staff members who are ready to bend over backwards for your patients. Happier employees are more productive in the workplace, according to a study in Britain by the Social Market Foundation. (Sgroi, 2015) You must understand what your employees need to stay loyal and satisfied; and then give it to them. No other factor can instill goodwill in your patient census than a customer oriented staff; for they are your goodwill ambassadors.
When was the last time you looked at your practice reviews on Google or Yelp? Every staff/patient interaction may be commemorated for your potential practice acquirer to read. The more customer service oriented your staff, the more goodwill a Buyer will perceive. At some late stage in the process, the Buyer will want to interview your key employee(s). If a rift exists, the Buyer will quit the deal or seek to renegotiate the price.
Document Business Processes – Documentation is not just used to create manuals or memorials of how we think our processes are being handled. When combined with a dashboard of Key Performance Indicators (KPIs) you will have an evolving process improvement tool that will “call-out” inefficiencies and help you to eliminate wasted time and resources. Being able to demonstrate trends, such as patient wait time improvements or receivable collection times getting shorter, offers much more insight into the practice than its financials alone. Business processes that are integral to understanding why the practice cash flows will give a Buyer more confidence than historic financials without the “why” explained. We measure what matters to us. If accurate insurance data collection improves receivable collection cycles, we should measure this evolution. Start tracking the accuracy and time for collection of this information as a KPI and then focus on process improvement. If we see the cycles protracting, find out why and correct the trend. If the trend is improving, find out why to determine what has changed and try to make that factor a part of the revised business process.
Curb Appeal – Successfully selling your practice involves minimizing the probability that a potential acquirer will find a problem within your practice or a reason to seek alternatives. Just as when selling a home, the first impression a perspective Buyer has will set the stage for all later interactions between you and the Buyer. Start by putting yourself in the Buyer’s shoes. When walking into your practice, pretend you are walking in for the very first time. Look at the outside parking area. Is the contractor keeping up with the yardwork? As you walk in the front door, look at your signage. Could it use a touch up of paint? How dated are the furnishings in your waiting area? Every Buyer will enter your practice with a critical eye, looking for issues. You owe it to yourself to ensure your Buyer’s first impression is a good one.
Remove or dispose of any nonproductive assets. Non-working equipment will become a confounding factor during the equipment appraisal process. If you get rid of it before the Buyer’s first walk through, you will have removed a variable in the selling process. Every variable has an exponential impact on the probability that something will go wrong. Why risk it?
Professionally Managing the Sale – Exiting your practice is an intricate process with many potential pitfalls. Success depends upon making the practice transparent so that a Buyer may act with confidence but without full access to the information which we will intentionally withhold until after they have made an acceptable offer and entered into a purchase and sale agreement. If our representations are found incomplete or substantially untrue, the deal will “crater.” We cannot go back to market without this becoming a “black mark” in the minds of other potential buyers.
Another concern you will have is that you do not want your patients or non-key employees to find out about your intentions until you have eliminated all (or most) of the variables. We are all risk averse. Not knowing who the new owner may be will create perceived job security risk among your staff. Until we are ready to actually close the transaction, confidentiality will remain paramount and non-key employees usually remain out of the loop.
Do not engage with a potential Buyer until you have compiled what the Buyer’s CPA will require to complete due diligence. Your intermediary will review the due diligence information to put together the offering materials. This information is then stored in a deal vault for use in the due diligence process, only when the time is right.
Once the potential acquirer has entered into a non-disclosure agreement and demonstrated their financial ability to complete the contemplated transaction, we will give them the offering memorandum. This is a summary of your practice showing all the high points and disclosing all the potential issues a prudent buyer will discover during due diligence. Next, we will enter the initial meeting stage. During this period, the object is to present your practice in its best light. Do not answer questions that are not asked and do not try to sell yourself. Let your intermediary expound on your practice’s virtues. You should be reserved and likeable but not easily accessible. This will empower your intermediary to require a progression of steps a Buyer must undertake before they are permitted to see all they desire. Your intermediary is going to then trade information for action from the Buyer. If they want to get into the nitty gritty details of your practice, they will need to get into due diligence. This cannot happen without an acceptable offer. Oh, and by the way, we will need a good faith deposit of say 10% of the sale price to be placed in a closing attorney’s trust account before we will accept the Buyer’s offer. Now comes due diligence. During this stage, you will have ceded control of your selling process to the Buyer. Should the Buyer find information that would preclude them from proceeding, that has not already been disclosed in the offering materials, they are entitled to quit the deal. This is part of the compromise for withholding the nitty and gritty details until after we have a contract. Assuming we have reviewed our diligence information completely, prior to going to market, and that we have chosen to go under contract with a Buyer we fully expect to complete the transaction, we will get a due diligence waiver and then conclude the transaction. When managed expertly, expect the process to take around six months.
Pricing it Right –If we go to market with too high an asking price, we will limit the number of potential acquirers who will engage in the process. Too low an asking price and we will not minimize the overlap between what a perspective buyer would have paid and our final negotiated transaction value. Imagine the range in price that our Buyer is willing to pay as a stretched rubber band. To help that person recognize the value of your practice, we will need to help them justify our asking price.
Figure 1: Stretching the Pricing without Missing the Market
If we go to market too high on that range, our Buyer will not even consider the opportunity or initiate the process. Cashing in on Your Goodwill is a process. Pre-planning and expert execution will enable you to maximize your proceeds, while ensuring your staff and patient census will be well cared for after your departure.
Sgroi, D. (2015). Happiness and productivity: Understanding the happy-productive worker. Social Market Foundation Briefing CAGE 4.