IMAGINE THAT YOU OWN A practice with, say, $500,000 in annual revenues. You started it 30 years ago; you persevered through lean times, built a loyal staff and a satisfied customer base. Your hard work and risk taking has paid off and you’re now turning a decent profit.
You’re in the baby boomer cohort and are close to, or over the magic 60- year-old mark (60 is the new 50, right?). You’ve had thoughts that at some point (sooner than later) you should take chips off the table and dial back.
Like many practice owners you sometimes get letters from potential suitors. Most of them don’t seem legitimate but one day you are approached by a big player in your industry saying they are eager to acquire your company and will pay top dollar. You’re intrigued. You take a meeting. You share some financials. They come back with a bid letter with a very attractive “offer”. You feel very smart and very shrewd, because you’ve quickly done all the work that you would have paid a business broker to do for you.
You are on a path to a very positive outcome, right? Wrong!
In our dozens of years of M & A experience, we’ve seen this type of scenario a lot. Instead of a successful closing, here is what is more likely to happen: The suitor has thrown out a very attractive valuation number.
They will ask you for more and more information. They will probably ask for, and get, some kind of exclusivity period from you. You will get tied up providing information and engaging with the suitor. You will get “invested” in this process.
The valuation can only go DOWN from the very tempting initial bid. The more the potential buyer investigates your company, the more dings to the valuation. If a Letter of Intent is drafted, it is likely to have terms and conditions heavily favorable to the buyer. While you may have competent legal help to fend off some of these terms, the process is chewing up time. Costing money. And pushing back on these unfavorable terms only causes the valuation to go down further. But the price is still so GOOD, you don’t want to let it go. You are teased along thinking that you are getting closer and closer to a deal.
But it’s a quixotic journey.
This becomes a vicious cycle, which more often than not does not lead to a successful closing. Rather, it leads to frustration and the investment of time and resources that could have been deployed much more fruitfully elsewhere.
There is a much better way to manage the sale of your company. And given that a company represents a lifetime of work and most of your wealth, the sale of your practice is a process worth doing right. You deserve to maximize the value you get when you sell your company.
Here are some key points to help you do that:
PLAN AHEAD. The exit from a practice should be planned several years ahead. Make sure the practice is in top condition to support a sale process. Consider engaging an exit planning professional, or at least a trusted circle of professional advisors.
HAVE OPTIONS. When it’s time to sell a practice, the owner should develop a wide range of options. Negotiating with only one buyer gives the buyer the leverage and ultimately wastes more of your time. Our firm always starts with casting a wide net (we screen hundreds of potential buyers) looking for their financial resources, their culture, as well as their skill and capacity to service your clients. Practice owners who choose to manage the process themselves should do the same thing. (Note: local competitors are often the WORST group of potential buyers because of the risks of exposing your clients to them)
CREATE URGENCY AND COMPETITION. Once you decide to go down the path of selling your practice, manage it to a tight timeline. Having multiple buyer options in the mix makes this possible. Multiple buyers also set the stage for a competitive valuation process that bids one buyer against another. (How are most unique and valuable things sold? Right, an auction!) Let the market drive the valuation for your practice.
MANAGE THE TERMS. Take the lead in spelling out the specific terms that work for you such as all cash payment, a lucrative consulting agreement or a special lease on the building that you own. The terms can be just as important as the price. By leading, the owner can avoid some of the “term creep” that can make the deal much less desirable or kill the deal outright.
DON’T SCRIMP ON PROFESSIONAL HELP. This is likely to be a “first time, last time” transaction and your largest transaction of your lifetime. Get legal, marketing and M&A advice from the best professionals whose experience you can trust. Experienced advisors can more than make up for their fees, not just in purchase price, but in bringing buyers to the process that will actually do what they say they will do. Good advisors will add value by paying attention to the details beyond purchase price (escrows, indemnities, working capital adjustments, consulting agreements, earn-outs, etc.) that few sellers understand well enough to successfully negotiate with experienced buyers.
Remember, if you do get that “over the transom offer” that seems too good to be true, it probably is. Take a deep breath, slow down, and perhaps use this as a catalyst to develop a real plan and process.
© 2017 Accounting Practice Sold, LLC