Is Everyone Suited to Buying a Practice?

The short answer is no! A question I often ponder is ‘is everyone suited to being a business owner or are there some individuals that will always be better suited to being employees?’ Importantly, there is no criticism of either. However, I have just always thought that running a business is not for everyone, particularly in the last couple of years!

So, the same applies when considering the acquisition of a practice. It’s not for everyone. The main differentiator is risk. The person’s tolerance for risk. As I’m sure you can imagine, my firm endlessly works sellers and buyers of firms, as well as those being offered equity within firms. Probably the one thing I can absolutely guarantee is there are no deals that are completely risk free. Likewise, there are no deals that are exactly the same. So therein lies the first differentiation point. If you are looking to buy a practice, buy a fee base, or buy equity within a firm, where there is absolutely no risk, there are no completely risk free deals. Thus, if risk does not sit well with you, then perhaps buying a practice or becoming a business owner is not for you, and that is completely okay.

However, moving past this point and presuming a purchaser has an appetite for some risk, the next question is ‘how much’? What is your risk profile? How much risk are you willing to bear? Again, this will vary enormously and is something quite personal. It’s probably not overly different from the risk analysis that financial advisers perform on their clients to help structure their investment portfolios.

This may in part be influenced by the level of debt that you would have to go into to make the acquisition. If the purchase required borrowing $300K, this may be a completely different scenario to borrowing $1 Mill or $1.5 Mill depending on the size and structure of your current firm. If your current firm has a turnover of $5 Mill, then borrowing $1.5 Mill to buy a practice of this approximate size may be fine, keeping in mind integration and the ongoing management of the combined entity. However, I recall the very wise words of my father who also reminded me that you shouldn’t make an investment unless you can afford to lose the lot. That may seem a little extreme, but if it all went pear shaped and you lost the lot, what would be the consequences. Certainly, it is possible to argue that the likelihood of losing the lot is limited, so then it all comes down to at what proportion the deal really becomes problematic for the purchaser. I have seen a few deals, not many, where the purchaser has lost a third, or a half, or even three quarters of the fee base that was acquired, for various reasons. For me, the thought of borrowing $1.5 Mill and losing half or even a third of the client base, would start to make me feel quite unwell.

I feel another factor for consideration in this process is age. Not only the age of the clients that are being acquired, but also the age of the purchaser(s). In essence, what is their recovery time should this proposed deal really not work out? Obviously the further a purchaser is into their career, perhaps the less likely they to want to extend the degree of risk that they may experience through a transaction, albeit these individuals are potentially more likely to have the knowledge, and perhaps experience, to make the acquisition work. However, a younger practitioner, perhaps whilst a little more naïve, has a greater recovery time from making a poor decision.

Furthermore, once risk within the proposal starts to elevate, the natural approach of a purchaser is to try and mitigate the risk via the terms and conditions of the deal. Whilst this may seem reasonable, where such terms extend beyond current industry norms, it then begins to become unfair for the vendor, because the deal is less than market competitive, really highlighting the fact that the proposed transaction between these two particular parties is inappropriate. If an offer put forward by a purchaser is going to insult the vendor with its less than competitive terms and conditions due to the specific risk factors felt by the purchaser, it is best to walk away. That deal is simply not for you.

When advising our clients, I always take the view as if it were me making the acquisition or investment. How comfortable and confident am I that this will work? Once the level of comfort starts to draw back, the purchaser has to evaluate, with each and every new factor, the likelihood of what is being proposed actually succeeding. Buying, or selling, a practice is not an exact science, so it certainly helps to have someone in your corner to help guide and formulate your decisions.

If you are considering making an acquisition, and feel you would benefit from having us on your side as a sounding board to help talk through and identify the risks, call (02) 9233 4333 or e-mail broking@robknightsbroking.com.au.