Introduction
An audiology practice owner faces many tough decisions when confronted with retirement and exit planning, chief among them, how to do it and who to trust. Unfortunately, most articles on the subject of practice acquisitions emphasize guidelines for buying practices rather than selling them, and conversations with peers may produce more rumors than facts. This article will provide advice on selling a business for those who find themselves moving closer to retirement. Instead of providing a step-by-step overview of the sale process, which can be found on thousands of websites with a Google search, it will dig into the actions an audiology or hearing care practice owner can take in years leading up to a sale in order to get the most out of it.
Discussions about practice sales naturally focus on the key issue of price, also referred to as valuation. What many owners fail to realize is that there can be a significant difference between the fundamental valuation of a practice, based on financial models and core competencies, and an owner's ability to realize that valuation when they sell it. We all know someone who sold a practice at an attractive price, and much like a fish story, each time the story is retold the price goes up. Unfortunately, due to non-disclosure agreements and the size of the transactions, one cannot usually verify the facts about either the price or the terms - and many times, it is the terms that define the value of the sale.
Too often, owners overlook such terms as owner employment agreements, earn-outs, and seller financing, and eventually regret their myopia. Understanding the non-financial elements of value within your practice, as well as the common reason deals fall apart, will help you prepare for the sale and make it a more lucrative and less stressful event.
The following six guidelines are presented to help you in selling your practice, to enable you to succeed in going out on top.
Six Guidelines for a Successful Sale
1. Time it right
There are three types of timing to consider when planning for the sale of a business: personal timing, company timing, and market timing. Most owners tend to focus on personal timing, choosing a date based on their age and their retirement goals. Unfortunately, personal timing has zero impact on your ability to sell a company. Instead, your company's performance and the state of the market are the two most important timing factors to consider.
Ask yourself the following questions:
- Is your business growing?
- Do you have stable employees in place?
- Do you have a diverse and stable customer base?
If you can answer yes to these questions, your company is ready to be sold. But wait, you say, I've been working my whole life just to be able to say yes to all three questions. Why would I sell now? If you view these as ideal conditions, so will the person to whom you sell. A growing business with stable employees and a strong customer base provides very little risk to buyers, making them more willing to pay a premium for the business.
When considering market timing, ask yourself these questions:
- How are interest rates?
- What are capital gains tax rates?
- Are there buyers?
Coincidentally, today's current market conditions are very favorable. Interest rates are at historic lows, meaning buyers have access to cheap money with which to buy a practice. Interest can be a major drain on a company's cash flow, and lower interest rates enable buyers to pay higher prices.
Congress decided to extend the Bush tax cuts, ensuring low capital gains tax rates through December 2012. Another often overlooked factor in a practice sale is the impact on a seller's tax liability. In order to maximize value a seller must understand how much of the sale price he or she gets to keep.
Finally, the market has been flush with buyers for the last few years. Manufacturers and retail chains are seeking acquisition opportunities throughout the U.S. New, private equity-sponsored companies have also recently entered the market. Add that to the ever present opportunity to sell to an individual, and there have never been more opportunities for sellers.
Looking forward, buyers will be in the market for years to come. Interest and tax rates, however, are never guaranteed. An astute practice owner must contemplate all of these factors in determining the right time to sell.
2. Price it properly
If you are planning to retire in the next ten years, you probably have an idea of a selling price for your practice. Perhaps you had a professional valuation conducted, or maybe you just spoke with colleagues and think you have a handle on what buyers pay. Regardless, you are most certainly biased in your own favor. You most likely believe that your practice has strong growth potential and that a buyer should pay you more for the right to tap into this potential.
Think again. Too often, owners fall into the trap of pricing their practice based on their hopes and dreams rather than on reality. Not only can unrealistic pricing expectations derail a deal, they can also turn away potential buyers before the negotiations even begin. Imagine the process of buying a house. Typically, buyers look online or speak with their real estate agents, and one of the main criteria they use to determine which houses to visit and which to avoid is price. Many practice buyers take the same approach. Analyzing an acquisition opportunity is a lot of work and many buyers would rather not expend the time and energy if they interpret the list price as inflated, unrealistic or beyond their means.
Now consider you are a home buyer and have found the perfect house. You fall in love. Not only does it have everything you want today, but you also have the opportunity to put on an addition, giving you an extra bedroom and more living space. In turn, this will increase the home's value. Would you base your offer for the house today on what it will be worth after you put on the addition? Probably not. Selling a practice is no different. While the potential may appear obvious to both parties, it is the buyer who must invest in order to achieve growth, and who must take the risk in the process. At the very least, if you choose to base your price on aggressive growth forecasts, be prepared for an earn-out in which you share the risk.
3. Be open-minded
"I expect to sell my practice for 1.2 x Sales. I'm ready to retire and I don't want to work for the buyer after I sell. Maybe I'll stick around for a month or two, but nothing beyond that. And, I absolutely will not sell to these three buyers, so don't waste your time contacting them."
I have heard this statement from many practice owners over the years. While all three of the expectations expressed in this statement - high selling price, not working for the company after the sale, and excluding many potential buyers - may be possible to meet on their own, meeting all three expectations is virtually impossible. Achieving even two out of the three expectations may require a combination of sacrifice and luck.
Multiples of sales, while widely used in the industry, do not tell the full story. Buyers use their own formulas to determine a price based on revenue, adjusted earnings, and total hearing aid sales. They may pay 1 x Sales or more, but there are usually strings attached, one of which is the owner employment agreement.
Consider the difference between a corporate buyer, who owns hundreds of practices, and an individual audiologist, buying a first practice. The individual can step in right away, allowing the owner to phase out quickly and move toward retirement; however, unless the individual is the beneficiary of a generous trust fund, he or she is probably not able to pay a premium. Corporate buyers, on the other hand, may be well capitalized but they do not have a deep bench of audiologists waiting for another acquisition so they can go to work. It takes time to find a qualified replacement for the owner. Furthermore, most owners are major revenue contributors to their practices, and the majority of the goodwill that justifies the valuation is a direct result of the owner's presence. As the owner leaves, so do some of the patients.
There may be a very good reason for which you would like to avoid specific buyers or types of buyers. Unfortunately, limiting the number of potential buyers increases the degree of difficulty involved in selling the practice, and hurts your chances of achieving the "perfect" sale. It is the equivalent of an NFL team choosing to only draft players from the SEC (South Eastern Conference in college football). The SEC may be the greatest conference of the last decade, winning five national titles in a row and chock full of NFL talent, but Tom Brady, Joe Montana, and Barry Sanders all came from other conferences. Ruling out buyers before exploring the opportunities they present can limit your chances of success.
4. Seek professional advice
Most business owners only sell a company once, and selling their company represents the largest financial transaction of their lives. It is a long and complicated process fraught with traps. Hiring a qualified, independent Merger & Acquisition firm helps mitigate risk and improves the potential for a successful sale. These firms usually charge a percentage of the sale price, known as a success fee because it is only payable upon successfully closing a transaction. The fee may seem steep at first, but it is a small price to pay in order to maximize the value you receive in a sale. Imagine a race car driver choosing to fire his pit crew and change his tires on his own during a race - he may save a few dollars, but will finish dead last in the race.
A good adviser will manage the entire sale process for you and make sure you put yourself in the best position to avoid failure. They will help you determine a proper asking price, prevent negative surprises from arising during the due diligence period, make sure the buyer is capable of securing financing before accepting a letter of intent, and protect your confidentiality throughout the process. They will consolidate and recast your financials to ensure a buyer understands the full cash flow potential of the practice and not just what you show on your tax returns. Hiring an adviser heightens the sophistication level of the transaction - a professional buyer will not think she can take advantage of you and buy your company at a bargain price because you do not have representation. Above all, hiring an adviser allows you to continue running your business, preventing a deterioration of financial performance during the process.
In choosing the right adviser, first verify his or her independence. Many people will offer to advise you in this area, but consider avoiding those who are buying practices themselves or directly connected to buyers, as they may not put your interests first. Second, make sure the adviser has experience selling hearing aid practices. Many firms tout healthcare expertise, but selling a surgery center or healthcare IT company does not qualify them to manage the unique aspects of selling a hearing care practice. If they do not understand the valuations and do not have relationships with the major buyers, they may not be positioned to help you achieve your goals.
5. Prepare clean financials
Financial reporting is a nuisance, if not an afterthought, to small business owners in most industries whose financial reports typically consist of the annual tax return. I hear a predictable groan from small business owners every time I bring up the topic of income statements, balance sheets, and especially partial year financials. Most owners do not take the time to prepare these, nor do they see their benefit.
Getting your financial house in order, however, makes you more attractive to buyers by improving transparency and speeding up the due diligence process. Ask your CPA to prepare an Income Statement and Balance Sheet for the three years leading up to the sale, as well as for the current year-to-date. If for some reason the numbers on your tax return do not match the numbers on your Income Statement, be prepared to answer some tough questions. It is perfectly acceptable for your CPA to account for certain items one way on the Income Statement and another way on the Tax Return, as long as the variance is small. However, as the discrepancies approach five and six figures, expect the buyer to ask you for an explanation (and maybe the IRS, too).
A business owner receives many tax benefits by mingling personal and business expenses, in many cases showing very little profit on their tax return. The final year before you sell, however, is not the year to show a loss just to reduce your tax exposure. Corporate buyers who recast financial statements every day will be able to interpret the real cash flow of a business, but an individual buyer may be frightened by a business that appears unprofitable. Since you are unlikely to have audited financial statements (very rare for small businesses), buyers rely primarily on your tax returns as the true reflection of the company's performance. In times when securing a loan is difficult, a bank may use negative income on a tax return as a reason to deny a loan request.
Finally, the topic of cash always seems to stir debate. All small businesses receive cash payments, but not all treat them equally. If this applies to you, you are advised not to mention this at any point in the negotiations. First, cash receipts that do not appear on the tax returns do not count towards a valuation because they cannot be verified. Second, if you are willing to mislead the IRS about your income, what else are you hiding about your business?
Remember, every question a buyer asks during a negotiation creates a potential reduction in the sale price. Having clean and organized financials reduces the buyer's workload, increases transparency, and improves your prospects for a successful sale.
6. Make it turnkey
The most valuable intangible asset in an audiology practice is almost always the practice owner, whose contributions to sales and management outweigh those of any other employees. Unfortunately, that owner's departure results in a departure of patients and profits, too. A wise owner plans for this by establishing business practices that promote success regardless of his or her involvement.
Hiring and retaining key employees who can make significant contributions to revenue will reduce the practice's reliance upon the owner. When it comes time to sell, this reduces the buyer's risk and ultimately increases the practice's value. A practice with enough patient volume to justify multiple audiologists should strive to limit the owner's contribution to revenue to 30% or less of total revenue. This becomes easier as the practice gets larger, but may be virtually impossible for the sole practitioner. The inability to achieve this threshold will not prevent you from selling, but it may impact the terms of the deal.
If you find yourself in a position in which you generate most or all of the revenue, set your expectations accordingly. If you sell to a corporate buyer, be amenable to an employment agreement of 3 to 5 years beyond the close of the sale, to make their purchase turnkey (3 years is the industry standard). If you plan to sell to an individual so you can avoid this, begin contacting prospects years in advance. The shortage of audiologists who seek practice ownership decreases your likelihood of finding one in 6 to 9 months (the average time it takes to sell a small business in the U.S.), so even if you choose this path you may find yourself working for longer than originally planned.
Think also of your support staff. A good biller, bookkeeper, or office manager can make a practice run smoothly while freeing the audiologist from administrative burdens and allowing him or her to maximize time with patients. Hiring and retaining the best support staff makes ownership easier, and buyers recognize this. Make sure to employ the appropriate number of support personnel, as a practice that has too few or too many will not run at maximum efficiency.
Create desk manuals for each position you employ, defining the position and its roles and responsibilities. Create quantifiable performance metrics, especially for your revenue-generating employees, and track individual performance at all levels. Track the source of your new patients and the performance of your referral sources with the same enthusiasm as you measure your employees, so a buyer can easily understand exactly how you attract new patients.
Conduct a thorough review of your referral sources and the payers with which you work (i.e. third party reimbursements). If you notice any one source or payer contributing to more than 30% of your total revenue, begin taking action to diversify these mixes. If you own a practice in Michigan, you most likely treat a high number of retired auto workers who have some form of UAW-sponsored health insurance that pays for hearing aids. If 70% of your business comes from these patients, what will happen to your business if this benefit is reduced or eliminated altogether? If you are one of the fortunate audiologists to have a close relationship with an ENT physician who refers all of his patients to you for hearing aids, what will happen if he retires, or decides he wants to hire an audiologist in order to keep that revenue for himself?
Mitigating these risks will not only increase the stability of your practice for the long-term, it will make it more attractive to a buyer. No investment is risk-free, and changing ownership challenges even the best practices. Do your part to make your practice turnkey and you will enjoy a more lucrative and less stressful transaction.
Conclusion
Selling a business can be an unnerving experience that causes you to put your life on hold indefinitely, or it can be a fun and exciting way to reward yourself for decades of hard work. Take the proper steps to prepare yourself for the sale by making the business turnkey; choosing the best timing based on your company and the market, not you; seeking the proper guidance; and, aligning your expectations with reality. Until we discover the magic formula that makes every practice perfect, following these guidelines can help you to reduce the turbulence on your way to retirement and ensure a successful sale of your practice.
