We do unconscious bias training
We do unconscious bias training
Is profit truly the smoking gun of exploitation?
August 27, 2020

When preparing your home for sale you might go straight to market, trusting your estate agent to put some lovely photos and copy together for the brochure. Or you might decide to finally create that extra bedroom and give the place a serious and long overdue tarting up. Of course, the latter takes more effort but I don’t think there’s ever a zero-effort way to generate value. So it is with dental practices too, and as more owners look to exit, having been riding high in the previous buoyancy only to face a sudden change in circumstances, the same applies: the more time you spend preparing your practice for sale the better price you will achieve.

People tend to forget this when they’re feeling panicky and desperate because they don’t want to play anymore. That urgency and anxiety encourages black or white thinking: “Can I still sell? Yes? Great, I’ll take a hit so long as I get out alive.” It also makes people vulnerable to availability bias the tendency we all have to believe that examples of things that come readily to mind are more representative than is the case. So what’s right in front of your nose — in this case the urgent question of whether you can exit immediately — seems more important than the nuanced question of what else is possible.

You get a higher sale price when your business has higher profits. The payback on profit growth can be sevenfold when you sell. Why wouldn’t you want that? Well, investment in the future can be difficult because it requires us to fight against loss aversion (another cognitive bias) whereby we have a disproportionate emotional response to losses over gains, hence we prefer to stay small rather than take the risk and reward of growing a dental practice.

When you’re running a practice it’s easy to get side-tracked into running it for this month’s income. But when you first get the notion of selling it it changes your mindset (I can’t count the number of times this has been demonstrated by people I know who lived in the same house for years before suddenly renovating it because they wanted to sell). Wherever your sale price is eight times the profit of the business of course your mindset changes, how could it not?

Despite its widespread portrayal as the smoking gun of exploitation, profit isn’t always an evil thing, in fact it’s a signpost that value is being delivered to customers. If, philosophically, you’re OK about increasing profit to sell your business, why not do it anyway? How come you can’t hack this growth mindset beforehand? It would mean you enjoyed the extra profit all along and still got the high sale price. Answer: your cognitive biases.

Anyway, many of the principals looking to exit quickly may simply be too tired of it all. They want to get out now before they have to deal with all the additional perplexities of what was quite a safe and straightforward game. If that’s you (and you won’t want to hear this), you’re likely going to have to deal with those complexities anyway because the corporations are going to press you to keep a 25% stake for four or five years. You may want to exit immediately and not get that 25%, but you’ll be potentially ruining your pension.

Contrast that with a recent case study of ours: a client was planning for an exit and built the business up over two years. Covid was a mere inconvenience; the team was able to restore 100% of turnover by operating at just 60% capacity because the growth was built on solid foundations. Meanwhile NHS practices are paid for being shut or doing 20% of the activity on their contracts. You can see who the real winner is going to be in the long run…

The information contained in this article is based on the opinion of Hive Business and does not constitute formal tax advice. Any tax outcomes will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future. You should seek specific advice before embarking on any course of action. Hive Business does not provide regulated Financial Advice, including advice on investment, insurance or lending products or their suitability for you. This article is provided for information only and does not constitute, and should not be interpreted as, investment advice or a recommendation to buy, sell or otherwise transact, or not transact, in any investment including Bitcoin and other crypto. Any use you wish to make of any information contained within this article is, therefore, entirely at your own risk.

By Ross Martin Group Chairman
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