Why You Should Use a Broker – Particularly Now
It has been suggested that the majority of dental practices sold in Ontario and likely in Canada are sold privately or by accountants or lawyers. It is arguable that these practices could have been sold for more if they had been sold by a broker. For the last decade, we have been in a very strong sellers’ market which has convinced a lot of sellers that they could avoid a commission and sell their practices themselves. For the most part, this has been pretty easy to do but the question is at what cost.
Does it make sense to save an 8% commission but sell for 10% to 15% lower than a properly brokered sale?
In order to be financed virtually all practices will need an appraisal prepared by a recognized dental practice broker or a Chartered Business Valuator (CBV). The valuation methodologies used by CBVs will all be similar while the methodologies used by brokers can differ significantly from broker to broker. With a few exceptions, the appraised value will reflect a market-related return on investment, assuming knowledgeable, willing, and unpressured buyers and sellers in an open and free market. The reality however is that in the current market, most practices that are offered to a wide market of buyers will sell for a premium over the appraised value. The full value potential of any practice will never be known if it is not offered to a wide array of buyers. This is particularly true in the current post-COVID environment where the market is in a bit of disarray with different buyers offering different strategies to protect themselves from any unrealized practice erosion.
Let’s take a look at what this actually means.
Most brokerage commissions will range from 6% to 8% so let’s assume a broker is able to sell a practice appraised for $1,000,000 for a 10% premium. The selling price would be $1,100,000 and at the maximum commission rate of 8% the commission would be $88,000 and the net to the seller would be $1,012,000. Understand that no broker can guarantee what a practice will sell for however it is not uncommon for good practices to sell for at least a 15% premium. It is also the case that most brokers will reduce their commissions for higher-value practices. Let’s assume the same example we used above but at a 15% increase and a commission of 6%. Using those metrics, the practice would sell for $1,150,000, the commission would be $69,000 and the net to the dentist would be $1,081,000. This equates to $81,000 more than if the dentist had sold it privately for $1,000,000.
Most private sales are transacted for the appraised value with little or no consideration for the market.
Now how does this work in the immediate post-COVID environment?
To begin with, no one is really sure what practices should actually sell for. Is the profession going to be permanently compromised or will it rebound to pre-COVID levels? For the most part, the profession in Canada has rebounded faster and more completely than what most pundits speculated. It is however perhaps a little early to be taking a victory lap. After six months it stands to reason that there would be some degree of pent-up demand which could be partially the reason for the quick recovery. Even though the daily new case numbers are climbing I don’t think we have seen a true second wave yet. The current post-COVID environment is rife with uncertainty when it comes to practice sales. If ever there was a time when the experience of a broker should be of some real value it is now.
Even if you forget about the potential of higher sales prices, reputable brokers should be able to guide you through a myriad of COVID-related sales challenges. For example:
- How has COVID impacted practice value?
- What are some of the strategies that buyers are using to protect themselves from a permanent market downturn and what effect do these strategies have on the seller?
- For sure most buyers are a little nervous but what about the banks – how do both sellers and buyers structure their purchase and sales in a way that works for the bank?
- How do holdbacks work, are they just a cash grab on the part of a purchaser or can they actually work for the seller and if so, how do you set them up?
- Even the simple matter of open houses can be better facilitated by a broker, given COVID gathering restrictions and ensuring COVID tracing and new safety protocols.
The takeaway is that now more than any other time in recent memory it is critical to be talking to a broker.
Brokers more than accountants or lawyers have the necessary wide view of the current market and are in a better position to maximize your practice transition. We have the experience that you need in this unprecedented environment and would be delighted to talk to you about your opportunities.