Factors that will Adversely Impact the Sale of Your Practice

As you can imagine, I get to speak to many many people looking to sell or buy professional practices, and it often intrigues me as to what some parties may consider favourable attributes or characteristics when in reality they’re actually not. Now, please let me preface this with, the following examples are not intended to be a shaming session for those who may agree with these following points; please take it as information or guidance that will better help with the planning and execution of your transaction. Most practitioners sell their practice but once, thus it’s often not possible to be entirely across the current market occurrences when it comes to transactions. That’s why some elect to engage a broker on their behalf to make sure they are giving themselves the best opportunity possible to achieve the best outcome. For those who don’t wish to engage a broker, that’s okay, hopefully some of the following may help lead you to your desired outcome.

So, some things as a broker or purchaser, we typically don’t wish to hear:

1. Some or all of my key personnel will finish up upon settlement – no, no, no. In virtually every scenario that we have seen, at least some of the firm’s personnel are desired post transaction. Thus, if the purchaser is walking into a firm with no professional personnel, this is problematic. This also remains the case where one or two key personnel, who have a strong working knowledge of the clients, are going to retire upon settlement
2. Conversely to the above, the purchaser must guarantee all of my staff continued employment – as mentioned, often most staff are wanted, however making the ongoing employment of all personnel a condition of the transaction, especially where they haven’t yet met them, can be a major stumbling block for a purchaser
3. A couple of my key staff will leave at settlement and will continue to operate nearby – having key staff with the ability to continue to service clients, whether they be your clients or not, can be a significant risk for a purchaser, particularly where those personnel have had significant contact with your clients and may or may not be signatories to employment agreements containing restraints
4. My fees are reducing each year as my clients retire or die – this is a hard one and is often an indication that the practitioner has left the sale of their practice too long. A purchaser will always be wary of a transaction where the firm’s fees have continued to decline year on year. What are they actually buying? What clients will actually remain?
5. The purchaser must also purchase the premises – an example is where the purchaser can acquire the practice for say $500K, however because the vendor wants them to also buy the premises, and the price now becomes $1.1 Mill, often killing the deal. Such a scenario is certainly more common in regional, as well as perhaps suburban areas, and whilst the purchaser may be willing to purchase the premises in some very limited circumstances, making this a prerequisite adds unnecessary complexity to the deal
6. The purchaser must see out my remaining five year lease – when 7 or 8 out of 10 purchasers wish to relocate the acquisition to their premises, in virtually every circumstance, they will not want to be responsible for your ongoing extended lease. Thus, if you are considering the sale of your practice in the upcoming couple of years, I would recommend that you minimise your ongoing lease liability as much as possible as this is likely to remain the vendor’s responsibility beyond the short term. There is a balance act here though, so don’t leave yourself short either
7. I want 100% of the purchase price at settlement – I have never seen this happen! Probably the only two scenarios in which this may happen is where the purchase price has been discounted (heavily), or there is some clawback clause within the contract that will see the vendor repay part of the purchase price where the purchaser does not receive what they have purchased (highly unlikely)
8. I want a ‘walk in, walk out’ transaction – I have heard of limited situations where this has happened, although certainly not in any of our transactions. Keep in mind, the purchaser will require some form of assistance in terms of introductions etc from the vendor. Such terms may be achieved where price is again discounted
9. My key clients represent the vast majority of annual revenue – there is a fine line between where a firm has a group of reasonable sized clients that are perceived as more profitable to where the revenue generated by such a group becomes highly risky should these clients not remain post sale. The precise proportion is not known and is likely to differ across firms, however, our experience suggests where the top 20 clients represent 80%+ of fees, purchasers become very nervous. The percentage or proportion may in fact be lower than this too. Regardless, there are ways to mitigate this scenario
10. I’m the only practice in town – this can be a double edged sword. If you are the only practice in a thriving town, where your services are in demand, and you are charging competitive fees, then this could be a positive. However, generally this is going to lead me to ask why you are the only practice in town? It is often indicative of need and also drives pricing down, which is not ideal.

Now, this list is by no means exhaustive; it could easily double, triple or quadruple, however it certainly highlights some of the doozies that we have been told and provides the underlying essence of some of our concerns when it comes to practice transactions.

If you are a vendor or purchaser that would like to seek some external assistance, keeping in mind that we have full, as well as abbreviated brokage services, please contact me via michelle@robknightsbroking.com.au or call me directly on 0413 047 077.