Written by Maryam Beyramian, DDS Thursday, 23 May 2013 09:48
Maryam Beyramian, DDS
In the first part of this 4 part series, we discussed the basics of all practice transitions, the numbers and our emotional need. In this article, we will look at an outside-of-the-norm type of sale, the distressed sale.
Distressed sales of dental practices can occur for a variety of reasons. The owner dentist may have a disability, or even death; or they might be going through a personal transition, such as a divorce, and may need to sell the practice quickly. It also may be possible that the owner dentist may be in financial difficulties due to the lack of control of overhead. Whatever the reasons for a distressed sale, the sale needs to happen quickly.
The acquisition of a distressed practice can be an enormous financial gain for the purchaser. Most distressed practices are priced under fair market value and the owners are eager to sell and move on. With the urgency of the sale comes the pressure to close the deal quickly. The purchaser who already has secured funds and is able to evaluate the numbers quickly will be the chosen one.
Three Tips for Closing a Distressed Sale Quickly
- Have the funds already secured
If you are to take a loan out, not only have yourself prequalified, but also submit all of your paperwork as if you are going to close on the loan. If you are only prequalified, the banks may go back and forth with paperwork that may delay funding for 30 to 45 days; this may result in losing the purchase to another buyer.
- Know your numbers
Most purchasers of distressed sales are very versed with practice evaluations and numbers. If you are going to be even in the ball game, you have to be able to quickly evaluate all the practice numbers and present a letter of intent to the seller within a few days.
- Be flexible
Distressed sales are usually very frustrating and stressful for the sellers and their families. You should be sympathetic to their situation by being flexible with your schedule, and understand that the seller, more than likely, has a strong emotional attachment to the practice and, in many cases, would rather not sell the practice, especially at a reduced price.
Understanding the reasons behind a distressed practice will determine your success after acquisition.
Why is the Sale Distressed?
- Overhead is too high
Is the overhead able to be reduced? The purchaser has to look at the variable versus the fixed overhead and make a nonemotional, purely numbers-based decision. If the fixed overhead is too high, then the success after acquisition will be compromised unless significant revenue increase can be achieved.
- Location is not visible or marketable
Is the practice located out of the way of the normal flow of traffic for that region? Even if a practice is physically located close to potential patients’ home or work, it does not necessarily ensure capturing new patients in your practice; people tend to gravitate to familiar places. Again, the physical location of the practice is not a variable. If the location has hindered success of the practice in the past, it will continue to hinder success in the future.
- Seller did not understand the marketing necessary to match the demographics
This is one variable that the purchaser will be able to influence. Marketing is a fluid category with infinite potential. The purchaser will need to fully understand their demographics and purchase this practice with a concrete external marketing plan in place that will eventually lead to solid internal marketing. Due to the nature of distressed sales, internal marketing is virtually nonexistent in the current practice.
- The practice is profitable, but the seller had to take a large income for personal reasons and the practice could not support his personal financial needs
If the practice is profitable, then this type of distressed sale is the most successful for the purchaser. The purchaser needs to understand the numbers of the practice and find opportunities to lean out the overhead. As I discussed in part 1 of my series, understanding the numbers is the key to success. If you want to take home $250,000 per year, it is much easier to maintain a practice with $500,000 revenue running a 50% overhead than a practice with $1,000,000 in revenue running a 75% overhead.
Sometimes it may be difficult to truly understand the nature of the distress. The staff, the seller, and the broker will give you clues, but in almost all the cases, it is up to the buyer to get to the bottom of the problem. Just think, if the seller and the staff accurately knew where the difficulties lay, then the practice would most likely not go into a distressed situation.
To find a distressed practice it is not only important to have a close-knit relationship with the brokers in your area, but also it is important to develop good relationships with attorneys and banks. By directly communicating with the attorneys, you are able to understand the needs of the seller and close the deal quickly, efficiently, and profitably.
Warren Buffet said it well, “In the business world, the rearview mirror is always clearer than the windshield.” The challenges associated with a purchase of a distressed sale lies within you, capitalizing on your abilities but understanding your limits. You can look at your past successes to determine if a challenge such as this is the right practice acquisition for you.