Tom was once a client of mine, and he was, in many ways, a dream client. At the very least, he was very determined to get into ownership. In the first few months of our time together, Tom must have brought me ten potential practices to purchase. Not one of them was worth buying.
And it only got worse. As Tom’s desperation increased, the quality of the practices he was finding actually decreased. Frankly, I was amazed that Tom had found that many duds, so eventually I sat down with him and talked about several red flags that he should be on the lookout for as he searched for a practice to purchase. Here are five of the biggest of those.
1. The Overpriced Practice
A seller asking too much for their practice is pretty self-explanatory, right? If only it were that simple! So how do you know if a practice is too expensive? Look at what the practice is collecting, especially in the most recent year. (This is where banks look most closely, too, by the way.)
Historically, buyer’s have paid around 70% of collections, and I sometimes see it creep up close to 80%. So if the practice is projected to collect $850,000 but they’re asking $800,000 (that’s 94% of collections), they’re likely:
- Over-valuing their practice
- Not serious about wanting to sell
- Unwilling to negotiate the price
- All of the above
There can be situations where paying 94% (or more!) of collections makes sense, but they’re very rare. Sellers with an inflated sense of how much their practice is worth also tend to have oversized egos through negotiations, through the transition, through introductions to patients, etc.
2. There Is No “i” In Team
Is the seller a team player? Is she easy to work with? Maybe you send an email requesting needed documents and the seller takes days or even weeks to respond, or simply ignores you altogether. Or you get those documents and they’re disorganized, or poorly scanned, or just scribbled notes. (Yep, I’ve seen all those.)
These things are all indicative of something undesirable (probably several somethings) in a business transaction, but one of the biggest is that the seller simply isn’t conscientious — they don’t take your time or your needs into account.
I go into more detail on this — and every other aspect of purchasing a practice — in my online course. I recently dropped the price for the whole course (
$997 now $749) and even split it into four mini courses: Preparation, Analysis, Negotiation, and Closing — each priced at only $199. Take the full course and you’ll be ahead of any competition in the hunt for a great practice to buy.
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3. Tax Fraud
I can’t begin to tell you how many times a buyer has come to me with a practice with insane expenses. One client joked (accurately) “I’m pretty sure he has a sailboat named ‘Uniforms’!”
It’s not uncommon for sellers to funnel personal expenses through the business: personal groceries, residential lawn services, a ski cabin in Aspen, etc. I’m going to call it what it is: tax fraud. If you see this, getting financing from a bank will be dang near impossible. And therefore, so is the sale.
4. The Super Secret Seller
No, unfortunately it’s not a James Bond thing. That might be fun. But I’m talking about a seller who keeps secrets, and in this case, you’re the secret. These sellers refuse to tell their staff or their referral partners about you or the potential sale.
And how forthcoming are they to you? When you introduced yourself, did they invite you into their office for a tour? Did they offer to send pictures? True, some sellers may be worried about confidential information. But it’s just as likely that the seller may be hiding something and is trying to psychologically lock you in with an LOI.
Find a seller with Oprah-like enthusiasm about the sale. The seller should be a resource, not a roadblock.
5. The Irredeemable Bad Boy
Have you ever watched “Are You Smarter Than a 5th Grader”? There was always that person who thought they could go in and do a clean sweep of those kids. Don’t be that person. I’ve had multiple clients that have found a mismanaged practice and convinced themselves that it would be different under their ownership. That’s just not the case.
More likely, that cheap practice you’re looking at is struggling for a reason. Most of the time, it’s not because the seller isn’t as smart as you, but because the underperforming practice has underlying issues that you don’t want to take on.
Make sure you have realistic expectations and a trusted advisor to figure out if it’s possible to eventually make something of an underperforming practice after a lot of blood, sweat, tears and years.
Tom was drowning in a pool of poor practices. Fortunately, after we talked about these red flags, he could swim to the surface, take a breath, and make a new game plan. Eventually, Tom found a great practice that fit his wants and needs, and he was infectiously excited about it when he brought it to me.
And that excitement, that enthusiasm, is what we’re looking for. Next week, we’ll go over how you can know whether you’re excited about a purchase for the right reasons. If today’s newsletter was all about red flags, next week is all about green lights. So if you haven’t yet, make sure you’re subscribed.