Penny Wise & Pound Foolish
Most dentists will sell two things of great value during their lifetime. They will sell their home and they will sell their dental practice. By far the most complicated transaction of the two will be the sale of their dental practice. Hardly any dentists will choose to sell their home without engaging a Realtor, however, many will choose to sell their practice without the assistance of a broker. What they don’t fully understand is that choosing to “self-sell” your dental practice has a high probability of being a very expensive exercise, particularly in today’s marketplace.
To better understand the risks associated with selling a dental practice on your own, the following sets out some of the more significant “selfie” mistakes and how those could be remedied with the appropriate professional advice.
This may be the most crucial place to start, after all, if you are going to sell your practice you need to know how much it’s really worth. This is particularly true in Ontario where the market is very hot and somewhat unpredictable. Firstly, there are lots of Rules of Thumb that suggest value is “some percentage” of gross or “so much” per chart, but these value estimates are just not enough and are inaccurate at best. The second issue is that depending on size and location, a practice will often sell at high premiums over appraised value.
If you get this wrong, it could be a very expense mistake. What you need in order to properly determine value is not only a professionally prepared appraisal, but one prepared by someone who can also suggest whether or not the practice is likely to attract a premium.
Almost everyone with a good practice has had a dentist tell them that they will definitely buy their practice when they are ready to sell (which is in need of a whole other blog to help you understand why believing them is a terrible idea). Anyone with a big practice has already been called by one or two of the corporate groups. You may also have an accountant who is eager to sell your practice. All of this is great but make no mistake, every one of these people will be looking out for their own best interests, not yours. In the current marketplace it is not uncommon for a practice to be sold at a large premium over appraised value, and it is practically guaranteed that you can get more for your practice on the open market than you can get with a “self-sale.” Brokers typically charge 8%, so on a $1M practice that would be $80,000. However, if by knowing the marketplace a broker can get you a 10% premium, you will be ahead of the game even after paying the commission. Helping you get the best price for your practice, and helping you know what that price would be, is a key benefit of using a broker.
Price is only part of the practice sale transaction. In many cases, terms are as important as price, but they are much trickier to figure out. Anyone who has seen a formal Share Purchase Agreement can attest to the fact that they contain a lot of detail, most of it written in legalese. While lawyers are the appropriate professionals to advise you on the legality of such a document, they are not necessarily the best professionals to advise you on the business aspect of a deal. A properly drafted Share Purchase Agreement with terms unfavorable to you, may well get a passing grade from your lawyer from a legal perspective, but may not be so good from a business perspective. An experienced broker should be able to explain the business aspects of a Share Purchase Agreement and alert you to clauses that could negatively affect to your transaction and/or transition.
Questions and Answers
During the buy/sell process, you will likely be presented with a number of questions from the buyer. In many cases, the buyer will actually ask the wrong question and you will give the wrong answer. The possibility of one or both parties misunderstanding the exchange is often significant enough to seriously damage the relationship and thus the deal. There is a tendency, on the part of the vendor, to take innocent questions about the practice personally, or to perceive them as criticisms. In cases of complicated questions there is also a tendency for either party, but particularly vendors, to give the wrong answer – not out of malice but out of a lack of knowledge. The danger being that the purchaser now has incorrect information about the deal that will be perceived as back peddling when later corrected.
The problem created by confused questions and answers is particularly troublesome if the vendor plans to continue working in the practice after the sale. Using an experienced broker who can translate, or properly interrupt difficult or misleading questions and answers, keeps the negotiation and closing process from becoming personal.
If for some reason you make a mistake in the process of consummating your transaction and if that mistake results in damages, you will be on your own. If a broker makes a mistake that results in damages, you would be covered by their “Errors and Omissions” insurance.
Experienced brokers can help the process in the above and many additional areas, at a cost that will likely be entirely covered as a result of the broker being able to get a better price for your practice than you can yourself. If you would not choose to sell your home yourself, which is a relatively easy process, why would you choose to sell your practice yourself, which is a very complex process?!