One of the first things we learned in business is that people will only pay you what and when they have to.
Consider this in the context of selling your dental practice to your associate. A key consideration is ‘how to qualify your associate’?
There are numerous advantages of you may think of selling to your associate.
These might be:
- You have a good working relationship.
- You are clinically aligned.
- Your Associate knows the patients.
- Some of your patients know your associate.
- An associate will be easy to negotiate with as you have something they want.
- The associate knows the practice so less due diligence to carry out.
- Lending can be easier to get because lenders think this is less of a risk.
- No need to get to know other buyers.
- Avoid agency fees.
- Your relationship with your associate may not change once they become your boss.
I have met some dental Principals who believe their associate has earned a discount on the purchase price of their practice through years of service. But we recommend you qualify your associate beyond this.
I have met even more associates who think they have earned a discount. Simply because of their previous loyal service.
What it is worth remembering is that during those years of service the associate was paid to do a job. It is unlikely they worked at a discounted rate of pay.
Whatever the depth of the relationship, I would always advise the Principal to sell for what the dental practice is worth. No one should object to paying the market price for anything. Even though they may not want to.
When it comes to your retirement (or exit for whatever reason), every £1 you get for the sale of your dental practice, will be worth that and more when it comes to funding your financial freedom post sale.
Don’t get me wrong. Selling to your associate could be the perfect solution for you. Our advice is not to negotiate with them on your own because they are transitioning from Associate, to buyer to your boss. Your relationship with them will inevitably change during that time. But before you embark on all this activity you must qualify your associate to make sure they will pay a full market value and that they can complete a deal in a timely manner.
Buyers are motivated to pay you as little as they have to.
The benefits to them are:
- They only have to service a relatively small amount of borrowing.
- It is easier for them to get borrowing.
- They retain more of the profits.
- They realise a paper profit on the first day of owning your dental practice. This reflects the discount they got compared to the full market value.
Other features of this kind of deal are:
- No firm commitment from the buyer, or payment of a deposit.
- Protracted sales process dictated by the associate.
- No proper visibility of the buyers’ financial position.
- Submarket valuations.
- Buyer has no competition so is not motivated to pay market value or complete in a satisfactory timeframe.
- Negotiation and mediation can be difficult with an employee.
- Breakdown of working relationship as you both transition roles.
- Associate may use their in depth knowledge of your circumstances (health, marital, financial) to re-negotiate the price.
- Your associate may hire professionals (an accountant maybe) who will do a valuation with the sole objective of negotiating down the purchase price.
The best way to ‘Qualify your Associate’ is to make your practice available to a range of buyers. Then you can compare their offer and any terms they have to other interested buyers. If that is not something you wish to do then we can help you qualify them and also keep your deal on track and for it to complete at the price that was first agree.
What we also wanted to do is give you some examples of the value (£) we bring to Principals who appoint Lily Head Dental Practice Sales to represent them in the sale of their practice to an associate.
These are real examples of Principals who on reflection would do things differently next time.
- Client in South East England. The Principal has agreed a price with his associate £405,000. The Dentists wealth manager advised they contact us because he felt the Principal was selling himself short. We conducted a valuation and agreed a sale price of £725,000 with the associate. We could have got more on the open market. The Principal wanted to sell to that associate to the exclusion of anyone else.
- Client in the East of England. We conducted a valuation for the Principal. We valued the practice and the freehold at £1,100,000. The Principal decided not to engage us but pursue a private sale to the associate. Over a period of 2 years the associate negotiated down the purchase price to £560,000. The associate had adopted a strategy whereby the longer he delayed the lower the amount he would have to pay. The Principal felt trapped in the deal which was in fact a race to the bottom. Two years later we were invited back in to help conclude the deal for the Principal. The Principal did not want the associate to pay more, but he did want the sale to conclude. We took over the negotiations from the Principal and got the deal to completion in 14 weeks.
- Client in Somerset. Client came to us after 2 failed sales to associates. Both associates strung the deal out and never completed. The Principal had wasted 3 years of her life on unqualified / unmotivated buyers.
Finally. Beware the associate who says they want to buy simply to put the brakes on you selling to anyone else. It is a simple tactic which costs them nothing but which has consequences for the Principal. But please contact us to discuss ways of mitigating this strategy too.
If you would like to talk about anything to do with buying, selling, or financing a dental practice please Contact Us today.