As a practice owner, choosing to sell marks an important milestone in your life.
You’ve probably invested decades into your business, making its sale a hugely emotional decision, as well as a financial one.
The sales process throws up all kinds of value judgements, fears and frustrations. But having put so much into your practice over such a long period of time, you don’t want to fall at the finish line. By getting out of your own head and into that of your buyer (whether they’re a corporate or an individual), you can make the transaction easier on yourself, and far more successful.
Let’s begin by considering the mindset of a corporate purchaser (we’ll come back to the independent buyer later). In this type of sale, you’re dealing with a body that’s logical: they’re all about numbers.
Value is a complex and ethereal thing, and it’s not easy to judge what something is worth. When buying or selling a house, things are more straightforward. In this situation, there’s a tangible quantity of bricks and mortar to assess (along with decking, landscaping and school catchment areas). A practice is harder to put a price on, as the value is subjective and is inherently aiming to predict the future.
When you, as an owner, think about what your practice is worth, you’ll probably see all the years of hard work, the chaos, and the late nights. But here’s the rub – your buyer doesn’t see those things. They’re not buying what you put into your pride and joy. Simplistically, they’re buying what you’ve achieved (or more specifically what it will continue to achieve), not what it cost you.
It’s human nature that we over-value what’s ours, and this is known as the ‘endowment effect’. It’s the reason that we might see our own house as perfect (for us), and why we might feel aggrieved if a prospective buyer suggests that the third bedroom is a little on the small side.
A corporate is in this to make money, so they’ll look at your practice and see how they can fit it into their parameters. Forget about your feelings: it boils down to cold, hard numbers. A corporate purchaser will essentially buy profit – justifiable profit – and they’ll be quite happy to do so because it will please their shareholders. For them, it’s a case of ‘the bigger the better’. Too small, though (below £750k for most, although it varies), and it’s simply not worth their while. It’s important to note here that they’re also not buying your practice’s potential. If the business could do it, then you should get on and do it.
Just as we might feel offended over the small third bedroom, it’s easy to take umbrage if a corporate purchaser wants to chip away at your price, and this is where it’s very helpful to see things from the other side. Fundamentally, they’re not doing this to be malicious; they just have a different perspective to yours. You’re also not doing them a favour by selling to them. The Austrian School theory of value rather succinctly sets out that each party in an exchange satisfies their needs to better their position. It is intrinsic that it’s never neutral for either party: you have got to feel happier having cash in your pocket, at the date of sale, than you would keeping the business, and the buyer has got to feel better off having the business instead of the funds.
To help yourself at this point, try to bring your mind to practical considerations that might affect your final price. This could be things such as staffing, the quality of trade-in, or how long a tie-in you want or expect (more on that shortly). Lease complications are a common pitfall, so do ensure that you tick all the boxes and can provide the answers that potential buyers want to hear.
The other main thing that a corporate purchaser wants is to de-risk the process. For the large cheque they’ll give you, your business becomes their business. Their business. However, to de-risk the acquisition, they’ll want you to help them transition the business safely. If you account for a reasonable chunk of the turnover (for instance, if you’re responsible for around half of it), that means four or five years of earn-out.
While this kind of tie-in might not be what you want, it’s a reasonable expectation. Back in the depths of time, this wasn’t the case, but nowadays the prices and stakes are higher, and so the terms are different. As an owner, you’ll probably have spent years accumulating evidence and data to prove your trading history, and it’s easy to think that this means the buyer cares about what you’ve done before. They do – but only because it’s the best evidence of what your business will do in the future. A purchaser is buying today’s revenue, which includes your contribution to turnover, and they don’t want that to be lost in transition.
So there we have it: in the simplest terms, a corporate buyer wants justifiable profit, and to de-risk a transition to their ownership. A micro-corporate may have a subtly different strategy, but they’ll nevertheless be a discerning buyer.
The independent buyer is a separate matter. Because this is (obviously) an individual, they’re probably not held to account by anyone other than the bank. For this reason, many independent acquisitions can be a twisted mixture of monetary motivations, emotional drivers, and sometimes an egotistical desire to get that next “promotion” to practice owner.
It’s common to think of your practice as an asset, but what your buyer is often paying for is actually a highly paid job (though perhaps one with a lower salary than that of a non-owner) and longer working hours. To them, your practice is a dream or vision, into which their own (often overvalued) ideas can be channelled. And that’s a far more complex proposition than the logical corporate.
As individuals therefore vary so greatly in terms of mindset, you may want to profile your desired category of buyer in order to optimise different factors. From this, you can decide on the best approach by gaining access to their particular perspective, and ultimately maximise your exit.
If you’re thinking of selling, do get in touch. There are things that we can do to help, whether that’s providing an independent appraisal or helping you to optimise your business to get what you want out of it.