How to avoid the value of your practice getting slaughtered during the Covid Crisis
Question: When it comes to the sale of your practice, what is the difference between a GOOD DEAL and an OPTIMAL DEAL?
Answer: In this case, a cool £90K
If you are thinking about selling, or even tentatively discussing the value of your business, our message is 'Beware of getting farmed'. There may be safety in numbers but make sure your practice value does not get slaughtered by either a lack of current market knowledge or deal making experience.
For the owners of profitable practices, finding prospective buyers is not the main problem in the current market. The true challenge is understanding and achieving full value.Despite the disruption and challenges of Covid-19, Q3 and Q4 of 2020 saw unprecedented levels of merger and acquisitions (M&A) activity in the UK optical sector. If you are a practice owner, then you are likely to have been approached by at least one prospective buyer during the Covid crisis, as well as knowing a peer who has recently successfully sold their practice and may be encouraging you to do the same in the, quite possibly mistaken, belief that they got a good deal, or because they may well be in line to receive a finders commission for making a successful introduction.
You should never look a gift horse in the mouth right? And we all know the saying about the wisdom of crowds – so if others are jumping ship and selling all or part of their practices now – there must be something in it surely?
Be Careful Who You Speak To
Acquisitive groups are making approaches via every possible route: LinkedIn, direct phone calls, hand written letters, invitations to seminars, even random strangers coming into practices and booking a sight test. Some acquiring parties offer free online practice valuation tools based on so-called “industry rules of thumb”. Incredibly some parties will even offer to help you to plan your exit – and will keenly seek to introduce you to “happy case studies” whose practices they have previously acquired.
The Perils of Direct Approaches and a Lack of Competition for Your Practice
A ready buyer and no broker’s fees; sounds great doesn’t it? An easy win for you.
For those not in the know, the problem is that in recent years the market has changed and the prices that practices change hands for has also altered. In the 2 year period between Q1 2018 and the end of Q1 2020 the market experienced a significant uplift in demand for quality practices. Like any other market when demand begins to outstrip supply, the prices achieved where practices were marketed competitively began to rise by as much as 30%.
Ignorance Is BlissThe issues for owners considering a sale via a direct approach are twofold:
Firstly the advocates and case studies you are likely to be encouraged to talk to, sold their practices (or a share of their practices) based on the “historic norms” alluded to before. They are “happy” case studies, because the ultimate outcome proved “satisfactory” and they feel like they achieve a good deal.
The question is, would they be quite so happy if they knew they could have achieved a significantly higher price and better overall deal terms with the same buyer? I think we both know the answer to this. The problem is that far too many parties – from accountants to (historically) credible valuation companies are still applying old valuation methodologies to what is a quickly evolving market – to the detriment of practice owners – and the acquisitive groups know this all too well and use it to their advantage. Factor in a level of distortion in the market from lens suppliers keen to retain market share by pushing exiting owners towards larger buyers within their stable and it becomes a true minefield in terms of who to trust and what the true facts are around deal values.
Secondly, most owners are at an immediate disadvantage. Unless an owner is extremely careful – once you enter exclusively into dialogue with a party that has approached you – no matter how tentatively you engaged with them, you are now in their sales funnel. Go down this route and you are likely to be “farmed.” The conversation and the process becomes led by the prospective buyer, likely to be well versed in charm and persuasive “thought leadership”.
The absence of competition never favours the negotiating position of the seller. In a one horse race for your practice - there is likely to be only one winner – and it’s not you! So why would you put yourself in that situation when it comes to potentially the biggest decision and the biggest deal of your life? Why would you let a party with a vested interest in obtaining your practice at the lowest price and deal terms they can achieve become your “advisor” about what is normal when it comes to exit planning and practice values? Are you prepared to sacrifice as much as 30% of the realisable value of your practice to save on paying a commission? The only party this equation makes sense for is the buyer.
But what about Covid, surely that changes things?
Well yes and no. In the depths of lockdown, demand did slump, but as quickly as 3 months in, as things began to reopen – and owners found the world did not end – indeed many came back to achieve record figures – demand quickly took off again. Subsequent lockdowns have not lowered that demand.
We currently have a number of transactions going through at between 15 and 30% higher than ‘traditional market’ valuation norms. For clarity – these are full cash on completion deals. They vary in size, location and profit levels – but the common denominator was that they were valued by Myers La Roche on current deal data and were marketed competitively, but confidentially, to a range of prospective buyers aligned with different lens suppliers. In other words, we introduced genuine competitive tensions to broker the best possible deal for the owner.
The proof is in the pudding
How can you avoid being farmed by an acquirer?
Here are our 3 Top Tips to avoid your sale walkaway price being slaughtered in a buyers sales funnel process:
1. Get informed. Find out from an independent, reliable source in the know what the true realisable value of your practice is in today’s marketplace.
2. Control the conversation, the timing and the negotiations and use competition to ensure you are achieving optimal terms
3. Don’t shirk the detail. The devil is very much in the detail and a failure to tie down all key contractual terms prior to instructing solicitors is likely to cost you dearly.
When should you bring in independent help?The earlier the better, ideally long before you decide to engage in dialogue with a prospective buyer.
It’s never too late to ask for help; indeed, what a difference it can make.
I recently assisted a practice owner who had been approached by one such acquiring group. The acquirer had “big plans” for his enterprise and the owner was quite taken by their offer, culture and model, but asked me to check the deal terms on offer, as an insurance policy to make sure he was not missing anything.
As is often the case – there were a number of elements missing and ambiguities which required clarifying. With our assistance we obtained the necessary clarity and re-set our clients expectation. He was nervous, because he like the overall proposition, but with a little coaching we helped him to renegotiate the deal terms.
On face value, it looked like a reasonable offer – at least if you used the old fashioned deal metrics from pre 2018.
But it was not an optimal deal.
Within a matter of weeks he walked away with a deal worth some £90k more than the original offer that he had been close to accepting.
How can you capitalise on this knowledge?
You now have the facts about the current UK optical practice sales market and its relevance to you. Yet knowledge is only power if it is harnessed. If you would like someone in your corner to make sure you achieve the optimal deal that you and your family deserve then please give us a call.
To find out more about how we can help, please get in touch to arrange a free and 100% confidential initial consultation via:
How to contact us
Telephone: 0161 929 8389
For more information about current market conditions, check out our article: Why the 3xEBITDA Calculation is flawed. Or to read about the benefits of advanced exit planning, check out Rory's story.