Following on from my article on the reasons why ‘Keeping Dental Practice Valuations Real’ is ultimately going to yield better results for vendors I want us to now consider, ‘who is really buying your dental practice, is it the lenders’?
To recap. A vendor may selected a broker because they provided the highest valuation. A tempting option on the face of it.
Now they have some interested parties who have been to view.
Remember, there may be several interested parties who never came to view because their accountant or healthcare lender has told them the business case does not stack up.
Of those who view, many will like the vendor, they will like the practice, but they will drop out because they are advised the asking price is not aligned to the business performance and / or potential.
A smaller group (or none at all) will like the vendor and the practice. They think it is pricey but they have fallen in love with it and they really want to move forward.
The vendor like them and they sound like they are going to make an exciting offer.
Their next steps are to report back to their lender (the real buyer) and tell them how much they love this practice. Lenders will pay scant regard to anything they cannot put a number or a value (£) to.
If a ‘vanity’ sale price is agreed between the ‘vendor’ and the ‘buyer’, the only choice is for the buyer to pay cash (not other borrowing) for the ‘vanity’ part of the valuation which the broker applied. That is a very scary place for buyers, their families and friends to go, and often consensus cannot be reached to make that commitment and the buyer withdraws or offers lower than the asking price come forward. By this time, those purchasers who were put off by the high valuation are out of the frame and will have moved onto other opportunities.
This is because lenders (the real buyers) are very diligent with their ‘buyer stress testing’ protocols in order to keep their risk low. A practice with a ‘vanity valuation’ will quickly flag up their end and the deal will be impacted in two ways. Firstly, the lender will advise their client the deal does not make good business sense and they should withdraw, and secondly that they will not lend the full amount and they need to find a cash injection to bridge the gap.
Some may argue that there are buyers in the market who are prepared to spend way beyond the recognised market value to secure a dental practice. You can imagine how much choice those people have and they will only apply their financial muscle to ‘blow away’ other interested parties. They will not come in and pay over the odds for practices which are languishing or do not have certain characteristics which makes that practice a ‘must have’ for them’. We do not believe you should build a marketing strategy around the fact a ‘wealthy buyer’ will see your practice and simply throw money at you. After all, that is not how they created their wealth.
To summarise. We see that the best strategy for vendors is to get a valuation which ‘keeps it real’ in order to create buyer interest and a competitive market place around that practice which will ultimately provide the best yields for the vendor.