It is important for practice owners selling their business to avoid the following mistakes, which could cost them thousands of dollars in the final sale value.
Firstly, let me say it’s easy to make mistakes, especially when you attempt something you have never done before. First-time home renovation, building Ikea furniture, fixing the car and basically learning anything new. I’m not a natural, and after considerable numbers of mistakes and money spent on tradesmen I have improved on some of these skills – however, I've far from mastered them.
If you were to apply this thinking to yourself and selling your practice, then there is a reasonable chance you will make a few mistakes. This is particularly relevant if you haven’t bought or sold a business before – an intangible asset and in most cases worth more than the family home. These mistakes can cost time and money when you are making the last and arguably most important sale of your life. In short, it is a lack of experience and often what you don’t know you don’t know, rather than acting incorrectly, that creates the problems.
So, while you may have sold your home as a high-level transaction, it’s important to note that the process of selling your business will be quite different. The sale of a practice is rarely a six-week campaign where the price is paid upfront and the vendor walks away with the cash. In our role as brokers we are fortunate to see both sides of a transaction and we can assure you there is always a portion of the purchase price at risk for the seller, often for a year or two, while the buyer has very little risk over the same period.
It’s therefore important for practice owners who sell to avoid the following common mistakes that could often cost thousands of dollars in the final sale value of the practice.
- Inadequate preparation across three key areas: yourself, your business and the buyers
- A lack of intensive buyer engagement
- Poor transaction management process and tools
What happens if you’re not well prepared? Firstly, your sale will take longer. Buyers will ask for information that you don’t have prepared, which translates to additional time sourcing, preparing and presenting data. Secondly, buyers won’t know enough about your business and it will take longer for them to make a buying decision and an offer. And lastly, the absence of sufficient information can leave buyers with insufficient insight into your business and the perception of greater risk than they otherwise should have. In a nutshell, more risk means a lower price will be offered.
Conversely, if you are well prepared you enhance the buyer’s perception of your asset. The more information buyers have access to and understand, the less risk they perceive. As risk goes down, perception of value and price goes up. The end result is that you are more likely to maximise your sale value, you'll sell in a shorter time frame as the buyers will have all the information they want for making a buying decision (less than six months as opposed to one to two years for many), and you’ll ultimately know what your business is worth.
A lack of intensive buyer engagement
A lot of practice owners who contact us commence their sale process with just one buyer. When we ask about their objectives for the transaction “maximising sale value” is almost always one of the top two. If you plan to try to sell to just one party then it’s unlikely you will have any negotiating leverage and when the offer comes if it’s a long way off what you think the business is worth you have no other buyer to sell to and no leverage.
When we ask practice owners what’s the hardest part about selling their practice, 50 per cent tell us agreeing the price or knowing what their practice is really worth. Unlike selling your house where you can go to realestate.com.au and find out what other houses just like yours, in your location, have sold for, unfortunately there is no equivalent for the FP practice marketplace. You might say it is an inefficient market and there is huge variance in the prices paid for similar practices. If you want to know what your practice is really worth in the marketplace, you need to have it valued or get multiple offers from multiple buyers!
Poor transaction management process and tools
Having poor transaction tools will lead to the same frustrations and often results, that attempting to do home handyman work does with the wrong tools – if you’re anything like me! Any task that you don’t have the right tools for stands a chance of being delivered in a sub-optimal way.
The right process is about managing your risk during the negotiation and optimising your positioning with all the buyers in regards to your objectives for the transaction. This culminates in the transaction document, or sale agreement and most vendors do not have sufficient protection in the sale agreement if something does not go as expected.
While all three mistakes are common, inadequate preparation, in our experience, is the most common mistake and is the number one reason vendors fail to maximise sale value, reduce risk and complete a sale in less than six months. In my next blog I’ll examine further how to overcome inadequate preparation and what are the key areas to focus your efforts.
Do these problems sound familiar? Be sure to leave me a question or comment below.
Chris Wrightson is the chief executive of Centurion Market Makers
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