What should you do when your practice is too small to sell?

Well established offices that gross less than $200,000 per year often take longer to sell (if at all) for several reasons. Unless the office is a younger startup or has newer equipment and furnishings, buyers are often reluctant or simply cannot afford to purchase a small practice. This is because most buyers rely on 100% financing to purchase a practice while paying large students loans and of course earn an income for their personal expenses. As equipment technology advances the value of smaller grossing offices will continue to push downward or make them unsellable. Recently a doctor called us for advice. We thought it would be helpful to illustrate a case study and make suggestions on how to “create value” for a successful sale for these type of offices.

Example: A doctor located in a medium to large city was unable to sell his office. The doctor had owned the office for over 30 years. It was located in a strip center. The office revenue for the last 4 years averaged about $120,000 per year. Recently, some new equipment was purchased and the current debt and loan obligations were about $30,000. The owner advertised the office for $85,000. After about a year without interest he became concerned. He contacted two of the largest offices in the area – no interest.

At $120,000 the practice barely paid for the expenses and loan obligations. The owner (although working in the office part-time was making no money. He also worked elsewhere part time to earn a decent wage. However, he was just uninspired to put the energy in to re-build the practice revenue. He was faced with closing the office and defaulting on his loans.

This is a common problem for many small business owners. In these circumstances, one has to “think outside the box” to find a strategic buyer or sale situation. Here’s a few suggestions we made to this doctor that might help others in similar situations.

1. Look for another doctor nearby who is near retirement age and who might have a smaller grossing office as well. Suggest a merger of the two offices. This will reduce overhead immediately, help increase the short term profit and create a more sellable practice for a third party buyer. (i.e. two office grossing $200K combine to one office grossing $400K). We highly recommend a written agreement (merger/ partnership agreement) that outlines the relationship including how a sale to a third party is handled.
Benefit: The merged offices will be more attractive to a buyer later on. Plus you’ll both earn more profit in the short term.

2. Give away your phone and records for free. Transfer your phone, patient records and equipment for free. In exchange secure some compensation for any patients you bring over. (i.e. your compensation might be your production or some percentage.) Once your debt is paid off and you’re ready to retire give them the records.
Benefit: Your earn more while you’re working by reducing rent and expenses. The buyer has nothing to lose since they would only gain by the increase revenue and profit. If you profit they will also.

3. Same scenario as #2 but without working. Agree to sell the items for a percentage of the revenue they bring in for a period of time. (Ex: The larger the percentage the shorter the time.
Benefit: The buyer can’t lose. If no patients come then they pay nothing. Of course there must be some trust and verification in reporting the monthly revenue.

4. Hire a new associate and pay them a good daily rate. Let them grow the practice revenue by adding medical services, hours, etc. Give them an option to buy the office at a discount in three years. If they don’t buy it, sell the larger office to someone else.
Benefit: While it may cost you in the short term the medium and long term benefit should be increased gross revenue, higher profits, making some money without working and creating a more sellable practice three years down the road.

5. Why would a nearby office want to merge you into their office? There are two ways of growing revenue for any business—organically or through acquisition. In today’s economic environment it is difficult to simply grow revenue through goodwill and marketing. Acquisition is the best way to grow a business in today’s market. Whether it is a young, doctor just starting a practice or a well-established office –neither office would be able to achieve an increase of $120,000 (i.e. $10,000 per month) immediately… especially today. Even better they only pay a percentage of the actual revenue that is generated.

The key to each of these scenarios is a profitable and fair outcome for both sides. A buyer will not be interested if they have no upside. By structuring a no risk scenario for the buyer combined with profit for both sides – creates a successful strategy for selling the unsellable.