Major Mistakes to Avoid When Selling a Practice
Previously, my colleague, Mike McAninch, outlined three major mistakes buyers make in purchasing a dental practice: going it alone, seeking a win/lose, and agreeing to the wrong sale price. Not surprisingly, these are also three major mistakes to avoid when selling a practice. Today I will explore these mistakes, which our firm’s Practice Integration team has distilled from assisting dentists with hundreds of practice transitions over the last 20-plus years, from the seller’s perspective.
Going it alone
To be sure, selling a practice will be one of your largest ever financial transactions. Throughout the process, it may well feel that everyone involved is looking to wrest their piece of the pie. It is not surprising, then, that one might be tempted to go it alone and avoid expenses related to the transition. However, assembling the right trusted advisors to assist you in your practice sale can save you a great deal of money in the long run.
I recommend the following folks for your acquisition team.
Your accountant – He/she can help you avoid costly income tax mistakes. Every practice transaction will be broken out across various elements, which are taxed either as capital gains or as income. Trying to avoid the cost of an accountant’s assistance in a transaction can lead to paying income taxes on proceeds that otherwise could have been taxed at a lower capital gains rate.
Your attorney – You need your attorney to review the practice sale documents to ensure you are selling the practice legally and in compliance with all state and federal laws. Your attorney will protect your long-term interests by helping you limit future liability from a practice already sold.
Your financial advisor – Selling a practice likely is going to be one of the larger financial transactions you undertake. In many cases, it coincides with the end of your income from practicing dentistry. How does this transaction fit into your larger financial goals? Does it provide you financial freedom? Selling a practice prematurely, without understanding how it fits into supporting your ideal retirement, can be a costly mistake with ramifications for the remainder of your life. A practice sale is part of your financial plan, not separate from it.
Your broker/transition specialist – Selling a practice means finding a buyer and obtaining a third-party valuation. If you do not have a self-sourced buyer, a broker’s 8-10 percent commission can mean the difference between a sale and walking away. If you do not need a broker to find a buyer, it’s still prudent to hire a transition specialist to assist in valuation and model agreements. These are two levels of service often provided by the same company. Make sure you know the scope of the services required for your specific situation and that your fee arrangement reflects that.
Two final items to consider when selecting your team. First, it is vital each advisor have experience and a proven track record in dental practice acquisitions. Second, each advisor should provide you with a clear statement of their fees.
Seeking a win/lose – the power of emotion
A popular myth today is that success in business requires you to win at all costs. Buying and selling a practice is not a zero-sum game. Buyers and sellers tend to negotiate the best deals when they try to see the transaction from the other’s point of view. Financial and non-financial accommodations encourage the buyer and seller to work toward a successful transition. For example, a seller agreeing to stay on for a time period, or to provide coverage for a buyer on vacation, can give a sense of continuity to patients and facilitate a buyer’s success.
Selling too cheap, asking for too much, and not understanding net sales proceeds
You have created a valuable asset in your dental practice. A good transition specialist and dental-specific financial advisor can help you understand how that asset is valued, marketed and sold. If you start the process of selling a practice too close to your desired transition out of dentistry, you may inadvertently create a fire sale situation in which you allow your business to be sold far below market values.
Your practice is special; it is your baby, you have operated it for years, you have dedicated patients, and you have poured your heart into it. Unfortunately, your emotional attachment to your practice does not translate into a premium on its price. Practice valuations are based on market standards related to cash flow. Relying too heavily on your practice sale in your overall financial plan may lead to negative results. Asking too much for your practice in an open market may create circumstances where a sale never occurs.
All of these can lead to a need to work back, work too long, or make painful adjustments to post-clinical lifestyle spending. In a transaction, the number to keep an eye on is your net sale proceeds. What will you retain after fees and taxes? This depends on your sales price, your team of service providers, and your individual tax situation. If you don’t know this number and how it fits into your financial plan, I would argue you are not ready to sell your practice.
Are you thinking about selling a practice? Please consider a Buckingham Practice Integration Advisor to be a member of your team!
This commentary originally appeared April 24 on DentalTown.com
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