The dangers of direct approaches and DIY practice sales in the current buoyant marketIn the first of a new series, Myers La Roche Director, Dominic Watson explores the dangers of direct approaches and DIY Practice Sales in the current buoyant market.
In spite of the uncertainty of Brexit looming on the horizon, in areas with ample optometric cover, the practice sales market for profitable enterprises continues to be very buoyant. However we have also seen the emergence of a much less welcome trend. In the last month alone, we have had 3 practice owners call us in various states of distress after having had their fingers, bank balances and faith in human nature badly burnt by aborted privately agreed sales.
Having helped Eye Care Professionals to value, buy, build, prepare for exit and to sell practices for nearly 20 years, our team has seen most things. Highly commercial or ruthless buyers trying it on, leading to costly aborted private sales are nothing new. We previously documented one such case study in “John’s Story” back in 2017. However, it is the increasing volume and also the slickness of some of the operators that is of major concern for owners. 3 in a single month is a new and highly undesirable record; unfortunately we know from experience that this only represents the tip of the iceberg in terms of the overall number of victims out there.
For each practice owner who comes forward to remarket their practice, there are many more who also had a really bad experience. However, when they have already committed to significant legal costs and expended significant emotional energy they have reluctantly rolled over and completed on deals which looked nothing like the deal they originally agreed to. They know they have been had, but elect to be pragmatic and cut their losses.
There will also have been an even larger number of owners who recently completed on a sub-optimal deal, but who have been quite literally charmed into falsely believing that they have achieved fair market value and a good deal. These people often unknowingly sacrificing tens or even hundreds of thousands of pounds of value in their sale deal. It would never happen to you - would it?
As a practice owner, the sale of your business is one of the most significant events of your life, so why do so many owners fail to invest in adequate advice and end up taking the wrong route to market?
After tens of thousands of hours working in your practice, you deserve to exit with maximum value. The only way to ensure you do this effectively is by being fully informed. Being forearmed with this knowledge will allow you to set the right course for success and should ensure that you avoid becoming a victim.
Knowledge is power
5 Classic Mistakes Practice Sellers Make From the Outset
Classic Mistake 1: Attempting to deduce value, practice appeal and sale options from incomplete 'anecotal evidence' or hearsay and getting it very badly wrong.
A surprising number of owners make spurious and misleading conclusions from practice sales adverts. The most common misconception is that there is a simple, immutable relationship between a practices turnover and its market value.
The problem with using “For Sale” adverts as a “window” on the market is that it provides a highly distorted view. Drawing conclusions from advertised practice prices can be highly misleading because:
- The largest and most profitable practices tend not to be advertised publically [including by Myers La Roche.] This means that anyone drawing conclusions from publically advertised practices is only seeing a sub-set of the market.
- Many of the practices that can be seen advertised within the “visible subset” are likely to mislead expectation because:
- A practice owner can “ask” whatever they want for a practice
- There are a number of unscrupulous non-specialist business transfer agents out there whose business model is to seduce owners into using them by suggesting they can achieve highly inflated prices. They hook the owner in, then charge them a very high “sign on” fee, and a very high “exit” fee – making them lots of money irrespective of whether the practice sells or not. We know this because we frequently are asked by people to act for them when they have realised their mistake of appointing this type of operator originally.
Over the years we have heard a huge range of “rule of thumb” valuation methodologies pedalled by the misinformed. 100% of turnover, 50% of turnover, 49% of turnover. All are completely wrong, but the 50% myth is the most persistent.
To be absolutely clear, there is no recognisable link between turnover and achievable price for an independent optical business.
In the last 12 months we have sold practices within the following range:
• 114% of turnover
• 11% of turnover
Making assumptions and failing to take the right advice can be extremely costly and this is best illustrated via an example:
We recently completed on the sale of a practice with a turnover just shy of £1.1 million. Had the owner applied the 50% myth, then they would have valued their business at c£550,000. The price we achieved was actually £1.3 million. Had they listened to chatter or tried to guestimate a rule of thumb valuation then they would have short-changed themselves to the tune of a cool £750,000. Getting the right advice and assistance does come at a cost, but as this example illustrates it is frequently worth its weight in gold. Unfortunately far too many people don’t get themselves into a fully informed viewpoint and fall into the trap of either overvaluing or under valuing their practice. Both can have a major adverse impact on a sale - don’t let this be you.
On face value being approached by a buyer may seem like an attractive proposition. It offers a potentially easy, elegant and low transactional cost sale after all. However, unless you already have a clear and correct understanding of the true realisable value and appeal of your practice, this is almost always a bad move and there is a serious danger that what started out amicably, turns into an arm wrestle that you can’t win.
Classic Mistake 2: Taking the 'easy' route by reacting to an approach from a buyer.
Even if the motives of the buyer or introducer are good, by engaging, it sets the clock ticking and in doing so, cedes a large amount of control to the prospective purchaser by removing one of the key negotiation tools – the leverage of competition.
Much more about the dangers of this and how to keep control will be provided by another article in the coming weeks. Also look out for our “buyer classification” – a valuable tool to help you safely navigate the ever evolving practice sales ecosystem.
Classic Mistake 3: Getting advice from, and trusting, the wrong person.
When it comes to selling a practice, everyone has an opinion. But who can you genuinely trust? Taking advice from the wrong person is one of THE classic traps. We are still amazed how many people are influenced in their decision making by their “friendly” local rep. More about this later.
Likewise, before you agree to let your accountant sell your practice for you, check just how well they really know the market and how many optical practices they have valued and sold in the last 12 months. We are having to pick up the pieces from an increasing number of failed attempts from non-specialist accountants to market their clients practices wasting significant time and emotional energy for their clients along the way. Optics is a niche market and one that non-specialists seldom understand. Does your accountant know their OCT from their CCG?
Beware too of hidden agendas. Make sure that your accountant, rep or any other party does not deliver you as a “present” to a buyer to curry favour, to receive an introductory commission, or to keep your business “in house.”
A much more detailed examination of who you can trust and the types of buyers can be found in our article: Who can I trust when selling my healthcare business?
Classic Mistake 4: Failure to present to the market correctly and failure to create a market place.
Banksy would never contemplate using his accountant, or the person he buys his painting materials from to sell his work – especially his most prized life-time’s work. He would also never talk exclusively to just one potential buyer.
Instead [when he is not being benevolent] he uses a market specialist to spectacular effect; an expert who knows his niche market intimately and can present his work in the best possible light, someone who knows the different types of buyers and the segmentation of the market. A firm that can highlight intangibles and create desire and a competitive market to achieve the best possible deal, whilst at the same time retaining anonymity and confidentiality.
Some would argue that a Banksy painting is worth very little in the greater scheme of things. After all:
• It is an inanimate object comprised of paint and readily available materials that could be purchased by anybody at minimal cost
• It does not create a yield or have a useful function.
The point is that some people value things differently. From modern art to modern optical practices, some parties are prepared to pay a premium price for the right type of practice – if they have to.
To achieve a premium price for a profitable practice, it takes optimal presentation in a truly competitive situation orchestrated and controlled by the seller and their advisors. NOT the buyer. In most cases, it is undesirable to have a “public auction” for a practice sale. Having staff, competitors or patients find out that you are planning to sell can be very damaging. So the ideal scenario is to create a suitably competitive environment, within confidential bounds, a delicate juggling act – involving both art and science
The closest reference point that most practice owners have to the sale of their business is a historic sale or purchase of their home, or perhaps the sale or purchase of a commercial property. Because of this, without the right guidance, it is all too easy to assume that selling an optical business is a similar relatively simple transaction: Find a buyer, negotiate a price and instruct lawyers.
Classic Mistake 5: Failure to negotiate key terms clearly before accepting an offer.
The reality is that business transfer and conveyancing are very different animals. The sale of a property tends to involve a headline price and perhaps a separate negotiation for carpets and curtains.
The sale of a business involves a headline price and then a raft of other key commercial points that need to be agreed, each of which can make a significant difference to the attractiveness of the deal to both parties. When key commercial terms are not understood and agreed at an early stage the following are likely to happen:
- A protracted time-frame for the transaction
- Escalating legal costs, meaning all parties get a worse deal. [The job of the solicitors is to formalise the deal that has been agreed, not to retrospectively negotiate key commercial terms ]
- Deterioration of the relationship between buyer and seller
- Significantly higher chance of the deal falling through
Some more experienced, repeat buyers will happily go to lawyers with a part-formed deal, knowing that with key other commercial terms retrospectively negotiated in their favour they can pay significantly less money for the practice and on more favourable terms for them than the headline price originally agreed. It pays to get informed and to negotiate clear terms from the outset.
Getting it right
Over the coming months, we will take a detailed look at the dangers of each of these potential traps to help ensure that you don’t go down any blind allies or sub-optimal routes. We will also provide hints and tips on how to get things right.
In the meantime, remain vigilant and if in doubt, please pick up the phone and talk it through. As the market leader in the optical practice sales field for more than 2 decades, we have built our reputation by providing high value, honest, impartial advice with integrity. We can help you confidentially understand whether a party is truly to be trusted and whether a deal on the table represents full value for your practice. We can be reached during usual office hours on 0161 929 8389.
©Myers La Roche 2019