Matt Arthur, CEO of Mayfield Practice Sales, covers seven key points every dental practice owner should consider before looking to sell their practice.
Why is accurate data so important?
First things first, data is king when selling your practice.
To show the importance of maintaining accurate financial data, it is handy to remind yourself of the six steps to selling a typical practice:
- Marketing to potential buyers
- Offer letter (heads of terms)
- Due diligence (this is for the buyer)
- Drafting of contract
- Completion of sale.
The chain starts with a valuation. Accurate financial records are key to reducing the risk of valuation errors. Each clinician should make sure they invoice all work carried out through their clinical software and maintain records of revenue that individually they have generated.
Management accounts are vital in providing key insights into a business’ performance. They can enable a more favourable valuation as you can remove all personal costs with a greater level of accuracy. A slick set of management accounts can satisfy a buyer that they are buying a well-run business.
If interested, the buyer will make an offer based on the original valuation. If the seller accepts the offer, the buyer will proceed with both legal and financial due diligence. This is essentially them doing their homework, ensuring everything is in order.
Inaccurate data and practice records can greatly affect the confidence the buyer may have in a purchase, certainly making it less appealing. Upon investigation, they may not be able to justify their initial offer. Ultimately, if they are unable to get comfort in the financial data they’ve received, this may lead to lengthy renegotiations, reduced price or the sale may fall through completely.
To make the sales process as efficient as possible, ensure you maintain accurate data before selling.
If I receive an offer letter can I still run the practice as I see fit?
Even though an offer letter is not legally binding, it will stipulate certain criteria that you must meet to proceed a deal. For example, there may be a reference to pre-completion turnover, the levels of staff costs, or rent.
Several months may pass between receiving an offer letter and the commencement of the due diligence process.
If during this period, the seller makes material changes to the stipulated criteria; for example, increasing levels of support staff or altering associate contracts, they should consult the buyer first. Without their consent, the buyer may decide that the proposition is no longer economically viable and withdraw their offer or insist on renegotiating the purchase price.
Which accounting method is best?
In dentistry, there are two accounting methods commonly used:
- Cash accounting recognises revenue and expenses when cash exchanges hands
- Accruals accounting recognises revenue when raising an invoice, and expenses when receiving an invoice.
The difference here is timing. Accruals accounting gives a far more accurate picture of a business. For example, it does not recognise revenue until the work is complete. Likewise, it records sums owed to suppliers, even if the practice is yet to pay them.
If you do not use the accruals accounting method, it is possible to understate your liabilities. Which any competent buyer will find out during the due diligence process.
Opposingly, your practice might operate with reasonable levels of patient debt, allowing patients to pay for expensive courses of treatment once all treatment is complete. The cash accounting method would therefore understate your revenue.
Will I have to keep working once I sell?
This depends on who you sell to. It is typical if you sell to a corporate – they will require you to work for a certain period of time. Known as your ‘tie-in period’ (also called the ‘earn-out’ period). This can typically be between three to five years. This allows them to benefit from the revenue you generate and plan for a successor. If you are considering your retirement, you may have to factor this into your plans.
If selling to an associate or another third party, they may be happy for you to retire with immediate effect or after a short transition period.
Do I get my purchase price upfront?
It is standard that the buyer only pays part of the sales price upon completion (often 60%-70%). This is known as the ‘initial consideration’.
The buyer pays the remainder at a later date and is often linked to financial targets. If terms are met, the withheld monies, known as ‘deferred consideration’, will be paid.
This can often be over a period of several years. This allows buyers to reduce the risks associated with the acquired practice not performing as expected. The entire purchase price is known as the ‘total consideration’.
Should I invest in refurbishing my practice ready for sale?
There is a balance to strike here. On the one hand, a buyer will expect the practice to be in good condition with equipment that is in good working order. On the other hand, practices are valued as multiples of the EBITDA they generate.
So lavishly spending money on expensive equipment in the run-up to the sale will not necessarily translate into a higher sale price for the practice. Prospective buyers are more likely to be put off buying a practice if it is perceived to require extensive investment than they are to pay a premium for a practice that has been recently kitted out with expensive equipment. There is little to no historical data to assure a buyer that the investment will yield a return.
The best course of action for practice owners is to keep their practices in good condition during their ownership and maintain their equipment and practice decoration to a reasonable standard.
Do I get to keep all of the money from my sale?
Considering a share sale disposal? An acquiring party will buy the business cash-free, debt-free.
In essence, this means that they are acquiring the assets free of debt, with the seller able to keep any excess cash the business has built up. The seller must settle debts before, or immediately upon completion. Often out of the proceeds from the sale.
In any transaction, a ‘Sales Purchase Agreement’, which is the legally binding contract, will set out any legal objectives that must be met.
Knowledge is key to preparing a practice owner for the sale of their business. For many people, it is a daunting time, but it doesn’t have to be that way. Using the services of a professional is essential to easing the burden and presenting a business in the best possible light. This can quicken the process and maximise returns.
If you would like any more information on valuing or selling your practice. Please contact us on 0333 444 0837 or email us at [email protected].