Questions and Answers
1. What is a fair price for a practice?
Like any other product, a business is worth whatever a willing buyer will pay a willing seller in a free market. However, the value of most practices is determined by what someone can afford to pay for it. If the practice can earn the income you want and make the note payments, then it’s worth the price.
2. What is Goodwill?
Goodwill is the difference between the total value of a business and the value of inventory, equipment, and other “hard” assets. Every practice has goodwill unless it is closed down or is failing badly. The amount to pay for goodwill depends on the cash flow of the practice and its general attractiveness. If buyers didn’t pay for goodwill, sellers might as well sell off their equipment and assets and close the practice rather than sell it as an on-going practice.
3. Are there tax benefits in buying a practice?
Usually you can take a tax deduction for depreciation on the fair market value of all furniture, fixtures, and equipment at a much faster rate than real estate. In addition, the covenant not to compete, goodwill and the value of training are tax deductible’. Finally, most practices have deductible expenses that add to the owner’s cash flow.
4. Why do Practice Brokers not show practice financial statements before I make an offer?
Just as you would not want your personal financial documents made available to the public, practice owners want only serious buyers to have access to such private information. Your Practice Broker will provide you with summary information including gross sales, lease information, and cash flow. He/she will assist you in drafting an offer based on that information and protect you by making the offer contingent on your satisfaction with that data upon your full investigation. A business offer to purchase simply says, “If everything I assume about this practice proves true, this is what I am willing to do.” You, the purchaser, then have the right to proceed, withdraw your offer, or make a new offer based on your investigation. The seller, once he/she has accepted your offer, must stand by those terms unless you and you alone choose to alter them.
5. How much do practice brokers charge a purchaser?
Under normal circumstances, a practice broker does not charge a purchaser any fee. Some special situations may require a fee. If you desire the broker to perform a buyer search for you, represent you in negotiations and closing, or assist you in the purchase of a specific firm, there may be a small fee. Otherwise, the seller pays a broker in full.
6. How do I determine how much to “put down” on a business when the seller is offering seller financing?
Most buyers in today’s market are making that determination in one of two ways. Commonly a prospective buyer will offer a down payment between one third and one half of the purchase price. For many practices, this means approximately one year’s adjusted cash flow. Please keep in mind, however, that there are cases where these levels of down payment will not clear the existing debt in the practice. Obviously, it is in your interest that the practice be transferred free and clean of debt. Take this into consideration whenever calculating the down payment amount.
7. I want to be in practice for myself but have no training in practice operation. Do you know of any school I can attend or course I can take to prepare me to buy my first practice?
In most cases, the former owner agrees to train you in the successful operation of that particular practice. If the seller has not already offered training, you can make it part of your offer to purchase. You do not have to be concerned that you will receive out dated or ineffectual information but rather will learn straight from “the horse’s mouth.” It is important to remember that any owner who offers seller financing has a vested interest in your success. No better classroom exists.