Deal Killer #1 – Greed
Greed is probably the most effective deal killer of them all. It doesn’t matter whether you are the buyer or the seller; if you get greedy, you can pretty much count on killing any deal that you are trying to negotiate.
Both buyers and sellers want to feel good about the transaction. Such a transaction usually entails an amount of money which is material to at least one of the parties. Unless there is some overriding factor forcing one or both of the parties to consummate a “greedy” transaction, the non-greedy party will simply exit the scene on the basis of trust, or the lack thereof.
A greedy seller is one who ultimately wants materially more for his/her practice than it’s worth. Conversely, a greedy buyer is one who ultimately wants to pay materially less than the target practice is worth. This all sounds pretty simple. But sometimes, it takes a while for the greed factor to reveal itself. By the time the latent greed factor shows up, chances are at least one party has already incurred professional costs of $5,000 to $15,000. Here is how it happens, and ultimately what to look out for.
Signs of a Greedy Transaction
Initially, there is some sense on the part of the parties that a deal is in the offing and the process is often started with a fairly simple Letter of Intent (LOI). The problem with LOI’s is that they often leave out some of the important details which later become the basis for changes to the deal, or sticking points which lead to an impasse which is often only resolved by a change in price. Examples of this could be misunderstandings related to staffing issues or transition periods.
Issues can also arise from the due diligence process. Recently, there was a case where a practice was appraised for $3.95M, taken to market where the vendor received an offer for $4.125M. During the due diligence, an accounting error made by the vendor’s accountant was discovered, which reduced the appraised value by $470,000. The challenge was that the vendor refused to lower his price below $4M. Even though the purchasers agreed to an earn out that would have provided the vendor with a sale price of over $4M, the seeds of doubt about the ability to work with the vendor were sown and ultimately lead to the collapse of the deal. In the final analysis, it was not the numbers that killed the deal, but the purchaser’s concern about being able to deal with the vendor’s “me first” attitude as a long-term associate.
Protecting Your Deal From Greed
Fortunately, there are a number of preventative measures that either a purchaser or a vendor can take to avoid getting caught in a greed driven transaction. The following are a few:
- Avoid deals where the other party is “stuck” on an issue. Watch out for comments such as, “I have my number,” or, “I won’t take less then xyz% as an associate,” or, “You have to stay on as an associate for at least three years not a day less.” Any situation where either of the parties is the unwilling to compromise, or at least consider a compromise, should be a red flag.
- Avoid deals that are not supported by a properly-prepared appraisal, or where the price being negotiated is materially different than the appraised value. If the value being proposed by one of the parties is significantly different than the appraised value, then it is a good idea for the non-proposing party to get a second opinion on the appraised value, or at the very least advice from a good accountant who deals exclusively with dentists.
- Avoid deals that are based on appraisals that contain unsubstantiated future revenue projections. Make sure that the offering appraisal does not contain material financial adjustments made only for the purpose of increasing revenue, or decreasing expenses, to a “provincial norm.” When you buy a practice you are buying is the future profitability or cash flow. The appraisal should give you an indication of what that future cash flow will be, BUT it should be based on what the practice has done, not on subjective provincial averages and norms. Arbitrary adjustments to industry norms are different than anomalies in that anomalies should be factored into the value equation. Assume a practice has consistently generated $900,000 of gross fees with stable profits until the year of the appraisal when the dentist took 2 months off for personal reasons. In that year the gross dropped from $900,000 to $775,000. After the hiatus the dentist returns to a normal schedule with no apparent impact on gross or cash flow. The year with the reduced gross and cash flow is an anomaly – it is not normal and there is no indication that it will be ongoing. This is the one situation where what has happened in the immediate past is not a good indicator of what is likely to happen in the future. In this case the appraiser does need to make an adjustment to eliminate the anomaly.
- Make sure that you have the right advisors. Your accountant should specialize in dealing with healthcare professionals, hopefully mostly dentists. No less than 60% of your accountant’s clients should be dentists. When it comes to buying or selling a practice, make sure that you are using a lawyer who specializes in doing dental deals. The very best “dental” lawyers do virtually nothing but dental transactions. The right advisors can alert you to transactions which are becoming too lopsided.
- If you find that a deal is becoming too one-sided, be prepared to walk away. This is very important, particularly for buyers who have been unsuccessfully trying to buy a practice and often overlook a greed motivated transaction just for the sake of being able to finally buy a practice – any practice.
Transactions where one of the parties is overly motivated by greed will almost always create disappointment, and in most cases end up as a very expensive exercise in futility. As a vendor, you could end up with less than what your practice is really worth or end up making concessions that you will later regret. As a purchaser, you could end up paying more for your target practice than it’s worth, and in some cases end up giving the practice back to the bank. The one question that most of the successful parties on either side of a transaction often ask us is whether or not the other party is reasonable and if they are an honest person. Proceed accordingly.