Selling a professional practice – to get the best price

You need to make it easy to TRANSFER your GOODWILL

The greatest fear that purchasers of professional practices have is that they will pay big goodwill to the outgoing owners, – and then the clients will all leave. To minimise this risk, any purchaser needs to seriously look at the reasons why a client frequents the practice, the new owner needs to give the clients no reason to want to change their behaviour – to keep things rolling along as if nothing has really changed.

The truth is that most clients don’t care about who owns the practice. Think about it… do you (as a customer) really care who owns the business where you buy your coffee? .. or your groceries?

Clients usually come to a practice for three reasons:

1. The Location. Many clients go to their chosen practice because it is convenient to do so. The practice is either near their home, work, school, etc. A practice that moves location is likely to lose clients, regardless of whether the practice has new ownership or not. This is why it is critical that a practice has strong security of tenure, when a new owner takes over.
2. The Fees and Charges. Some clients go to their practice because they are price-sensitive and the fees of the practice are affordable. The purchaser of a practice would be unwise to raise the fees significantly in the first year of owning a practice. New owners should give their clients a chance to get to know them first, build up relationships, and help the clients to realise the value that they represent before contemplating any fee increases.
3. The Personality. Many clients go to a practice because they have built a trust, rapport and familiarity with the owner and the team. Often clients have been going to the same place for many years, where the team knows them and their family, so loyalty exists between the clients and the team. If you are buying a practice that you feel has a lot of client loyalty, due to the personality of the owner and the team, a series of implied and explicit endorsements from the previous owner can help maximise a transference of trust, and preservation of goodwill.

Implied Endorsement

Implied endorsement can be achieved by having the vendor work in the practice post-sale. If the clients can walk into the same premises, see the same person working there and see their long time owner still working there, even in a reduced capacity, it reduces client attrition dramatically. Seeing the owner that they trust work side-by-side with the new owner is an implied endorsement.

Most post-sale commitments by owners start off being for a short period of time (6 -12 months), and thereafter by compatibility and negotiation.

Explicit Endorsement

Explicit endorsements can be done verbally by the retiring owner, by introducing the new owner to clients, or by way of a letter, newsletter or flyer in reception.  This endorsement can incorporate the following points:

• It can mention that, after many decades of working hard, you (the vendor) have decided that you will be scaling back your days/hours at the practice and may take a sabbatical in the near future.
• It can say that you will be introducing a new owner to the practice, and highlight their education, background and any clinical specialty or other skills (e.g., speaking another language) that they will be adding to the practice’s services.
• It should say that you (the vendor) take their trust and loyalty seriously, and wouldn’t introduce them to a owner who you didn’t feel was up to the job. It would ask the clients to join you in welcoming the new owner to the practice, and encourage them to see the new owner when your availability is limited.
• It really doesn’t have to outline the sale/transaction that has occurred.

Explicit Endorsement

When a new owner joins a practice, clients will often ask reception staff for information on the new owner. Don’t leave their response to chance; coach them and help them out by preparing a sheet of bullet points about the new owner’s experience, background, history, strengths, etc.

If the incoming owner capitalises on the existing trust that a patient base has developed over the past years with the practice and the staff, most clients will (at least) give the new owner a try. It is then the responsibility of the new owner to make a good first impression and win over the clients.

Retention Conditions

When a professional practice is being sold it is often recommended that the outgoing owner should agree to allow the purchaser to put a “Retention” provision in place. Obviously this needs to be a fair and equitable arrangement. Usually a retention clause will dictate that the purchaser can set aside a portion of the funds being paid to the outgoing owners (a Retention Fund) with a lawyer (or business broker) on the basis that after a period of time (say 6 months) the retention fund will be paid to the seller if all clients have been retained, but if any clients have not been retained a proportional amount will be deducted from the retention amount and will be retained by the purchaser.

An experienced business broker can help with a specific transition plan for your practice – one which will make it easy to transfer your goodwill to the new owners.

Benchmark Business Sales and Valuations