A while back we put out some statistics comparing our practice sales results to some For Sale by Owner (FSBO) statistics we received from the AICPA. The comparison raised a lot of questions from practice owners on both the buy side and sell side of future transactions. Today, I want to address the questions I most often receive from those thinking of selling a practice.
The main question I receive from potential sellers revolves around how shocking the FSBO numbers are:
Why, when people sell on their own, do they settle for such high risk transactions — Like no money down, percentage of collection deals?
The answer primarily lies in the emotion tied to selling a practice to an unknown person. One of the biggest questions looming for any practice owner is “who can run my practice?” or perhaps more accurately “who can I trust to turn my practice over to?” In our experience, this question can have incredible importance to a degree that the answer carries higher priority than price or terms.
Often, this is where the FSBO seller starts. Who do they know? Who do they trust? Who is just like them and will get along with the clients? It might be the practitioner down the hall, the one they have spoken with for years at the chapter meetings or a friend of a colleague they have heard great things about.
Starting with this base of known practitioners immediately limits the market the FSBO will explore. Then the FSBO, having identified their buyer, has the job of convincing the buyer to buy. Fair Market Value of a business is defined as the value of a transaction in which “neither party is operating under compulsion”. In transactions we develop, we see value being defined by a seller and a buyer both operating under compulsion. In the FSBO transaction we have just outlined, the seller is typically under more compulsion than the buyer. In many cases, the buyer may have no compulsion and in fact may believe they are doing the seller a favor.
The disparity in the statistical comparison is due to the fact that we, like most business intermediaries and unlike FSBO sellers, do not pursue a single buyer. We work to create a market of buyers around the sale of a specific firm and let the market determine the price and terms.