Valuing Your Practice

Interested in selling your practice? We pay top dollar for practices with revenues of at least $350,000 per year. Contact us here!

If you’re just getting started in private practice, selling your counseling business is possibly the last thing on your mind. However, it’s never too early to start laying the groundwork for building a counseling practice that will someday be attractive to an acquirer. In fact, realizing at the beginning that there will one day be an ending is good forethought.

There are lots of reasons someone might decide to sell their practice. Consider:

  • Might you decide to relocate at some point during your career?
  • Might you ever want to change careers?
  • When do you hope to retire? Do you plan to work in private practice until you’re as old as Irvin Yalom (80)?

Think that you’re too young to contemplate an exit strategy? Try this: A recent Stanford University study suggests that looking at an age-enhanced picture of yourself will motivate you to save more for retirement.[i] That being said, counselors today, as a rule, are already in the second half of their careers. Of the AAMFT’s 25,000+ members, the mean age is 55.[ii] Also, this year, more than one forth of attendees at the ACA national conference were 56 or older.

As counselors consider retirement, some are finding that the practices they’ve built for much of their careers have little market value, or few interested acquirers. Hence, instead of selling their companies for a tidy sum, counselors are simply rolling them up—locking the doors, shuttering the windows, switching off the lights, and disconnecting the phones. This sounds harsh. A counselor might say, “After decades of work, do I have nothing to show for it?” The answer, “Of course not. Your practice has provided you a good living, rewarding work, and you’ve helped a lot of clients. It’s just that what you’ve created doesn’t have value that can be transferred to another business owner.”

How to Value your Company:
There are many formulas for valuing companies. For service businesses, one popular method is to calculate a multiple of revenue. Depending on the industry, a services firm can be worth between one and two times revenue.  Businesses can also be valued based on their EBITDA, an acronym that stands for Earnings Before the deduction of Interest, Tax, Depreciation, and Amortization (to keep it simple, let’s just say “yearly profit”). A firm may be worth as much as two to three times EBITDA. While these numbers provide a starting point, they are also flawed for determining a business’s exact worth. According to one expert “The problem is that these formulas are almost always too simplistic to serve as anything more than a very rough guide for the sale of real businesses.”[iii]

Your company could be worth a lot more, or a lot less, than the formula above might suggest. For instance, say you have contracts guaranteed to earn your company revenue for the next 5 years (a court contract to counsel DUI offenders, for instance). Or, say that the sale of your business includes material assets—a slew of new high-end equipment, or even a building. Either of these scenarios could raise the value of your business.

However, your company could be worth less than the formulaic value. For example, say that your company’s revenue or profit has been declining for the last several years. This downward trend would be a red flag to potential acquirers.

Second, say that the owner is also the company’s manager, but she doesn’t take a salary. In this case, the company could show a profit of $85,000. However, when one adjusts for a manager’s salary, the business is only breaking even. In this instance, acquirer isn’t buying a business; he or she is buying a job.

Third, the value of a company could be less if the company’s key revenue producer will be leaving after the sale. This happens often in the counseling field. A company for sale will show gross revenues of $250,000. However, $150,000 of that revenue is a product of the owner’s counseling fees. Once the owner sells and departs, the company will stop producing most of its revenue.

A thought to consider as you evaluate you company’s price: “If I leave the practice, what remains that an acquirer would consider valuable?”  The answer to this question is not always obvious. A dedicated staff is valuable. A telephone number that generates several appointments a day is valuable. The billing system, email lists, website, relationships with insurance companies—all these things could represent an opportunity for an acquirer.

Common Mistakes in Valuing a Business:
You love your practice. You’ve put your heart and soul into it, and to you its value is significant—any acquirer would be lucky to have it! Trust me, I understand. But a prospective buyer is looking at your business without emotion. Their offer will be based on the financial opportunity your company presents. Here are two common mistakes a business owner can make when valuing his or her company:

Valuing for Growth Potential
Too often a business owner will value his or her company not based on revenues and profits, but on what he or she believes the company is capable of earning in the future. Below is a real example of a counseling practice making this mistake. The owner is trying to sell the business on the “great opportunity” available for a buyer to grow the practice.

“Potential co-operative marketing with other health related professionals in same location. [A new owner can also] Expand professional referral network. [A new owner also has the] Potential to expand hours/days of operation or add complementary services. [New owner could also] Leverage social media marketing for targeted local advertising.”[iv]

What an opportunity! Sure, an acquirer can work harder than the last owner, and grow the company. That’s a given. But a seller can’t value their company on potential growth. As a note, if the seller is convinced such opportunities are low hanging fruit, it’s wise for the seller to capitalize on those growth opportunities before selling the business! Not only will the seller make more money prior to the sale, he or she could command a higher purchase price.

Buyers are looking for businesses with predictable revenues, not a lottery ticket. They will value an acquisition based on what they are actually getting.

The Value of Reputation:
A seller might say, “We’re very respected in the community. This makes us more valuable than one times revenue.” Not exactly. While having a poor reputation could lower your practice’s value, being “respected in the community” is the expectation, not the exception. Hence, while a great reputation may not translate into a larger than usual purchase price, a great reputation does make your company more sellable. Presumably, your reputation has also helped you to grow revenues, which will command your purchase price!

Letting Go:
When selling your practice, be ready to let go. After the sale, your practice might change in many ways: The logo. The name. The location. The specialization. And the list goes on…

I recently had several weeks of correspondence with a woman who had advertised the sale of her sex therapy practice. After talking with her at length, and making several proposals for the sale of her practice, she flatly turned me down. No counter offer. Just, “No thank you.” I asked her,

Have I offended you?
No! You have been very polite.

Have I been pushy?
No! You have been extremely patient.

Is it an issue of money?
No! Your price seems fair to me.

Has another buyer expressed interest?
No! There are no other interested parties.

“Then what!?” I asked. She told me that she decided that she only wanted to sell her practice to another sex therapist. I tried to explain, “I plan to hire a sex therapist to be a key member of the team.”

“That’s the other thing,” she said. “I’ve been a solo practice for 20 years. I don’t like the idea of a larger practice taking over.”

And that was it. She left our negotiation to find a solo sex therapist practitioner she could train to run her practice for the next 20 years, as she’s run it for the last 20 years. To her, the thought of her practice changing was sacrilege.

I hope she finds the buyer she is looking for, as she had been winding down her operations, and is now only open 4 days a week. Also, being in her 70s, she hopes to pursue new activities with her husband while she still has the enough health to do so. Frankly, if she doesn’t find the perfect buyer soon, like so many others, she will find herself turning off her lights, and disconnecting her phone.

A buyer can respect and honor the seller’s legacy. A buyer can show the seller how much he/she will care for their clients and community. However, few buyers are willing to do things exactly like the seller! At some point, sellers need to let go.

Prelude to Part Two:
The topic of creating a sellable practice is a big one—an entire book on the topic would still be just a cursory overview. Hence, you’ve just read part one of a two-part column. Stay tuned until next month, when I will be presenting “11 Ways to Increase the Value of Your Counseling Practice.”

counseling private practice

11 Ways to Increase the Value of Your Counseling Practice

Are you thinking about selling your counseling business? Thriveworks will pay top dollar for counseling / therapy practices with great reputations. Call Dr. Anthony Centore directly at 617-513-5433.

In the previous column, we discussed the importance of building a sellable private practice, and we looked at formulas for valuing a service business. In this column, we’ll review 11 ways that you can make your business worth top dollar to an acquirer.

1. Brand
In the counseling industry, many practices are named after the owner, as in “Amy Smith Counseling” or “Smith and Associates.” This type of name could make transferring the business to an acquirer tricky.

Once upon a time, psychologist Dr. Wagner purchased a psychological testing practice called “Powell Associates” from a Dr. Powell. Dr. Wagner added his name, changing the business to “Powell and Wagner Associates.” Today, if the practice is resold, what happens? Will it become “Powell, Wagner, and Smith Associates” even though Dr. Powell hasn’t been with the company for over 20 years?

A personal brand runs the risk of communicating to customers that the value of a company resides in the founder—not the business’ mission, product, service, or team. However, this seems to become less the case the larger and older a business is. For instance, no one walks into a Walgreen’s and demands to speak with Mr. Walgreen. No one goes to Ruth’s Chris and expects their steak to be grilled by Chris, or Ruth (by the way, the restaurant got it’s name when Ruth Fertel bought Chris Steak House). As for Dr. Wagner, he explains, “Someone might call and say ‘My Grandfather used to see Dr. Powell.’ They don’t expect him to be here, but they still trust the brand.”

While not insurmountable, life is a little easier for an acquirer when the founder’s name is not inextricably tied to a practice. If you want to build a practice to sell, consider a brand name other than your own.

2. Beyond a Solo Practice
Solo-practices are often worth less than group practices. For this, there are two reasons. First, simply based on their size, solo-practices often produce lower revenues than group practices. Second, with a solo-practice, the business owner is the lead clinician. Hence, when the owner sells (and leaves the practice), the business stops generating revenue. A new owner has the daunting task of finding a new clinician, and building his/her caseload. In contrast, a group practice with several clinicians will continue generating revenue even when the original owner departs.

3. Consider an Earn Out
An “earn out” is when a seller accepts an offer for his/her company that is contingent on the company achieving specific financial goals over a period of time. For example, a company might receive a purchase offer of $200,000. However, a percentage of the purchase price is contingent on the company earning their anticipated revenues the next three years.

If you are confident that your company is stable or growing, and if you’re willing to stay involved in the management of your business for a while, accepting an earn out could help you to receive top dollar for your business.

4. Finance the Buyer
Many businesses are purchased in installments (this is also called “financing the buyer”). In an installment sale, sellers receive a portion of their purchase price up front, and then the remainder is paid in installments (perhaps over 3 years).

There are some perks to an installment sale, for sellers. First, a seller can charge interest (often 5-10%) on the outstanding balance. Also, with and installment sale, the seller can include a “claw back” provision in the sale agreement, which means that if the buyer defaults on payments, the seller can repossess their business and resell it to a new buyer.

5. Focus on New Clients, not Existing Caseloads
Current caseloads are worth less than new client inquiries. For example, one practice for sale has four clinicians, each with full caseloads of long-term clients. The practice receives 20 new client inquiries per month. In contrast, another practice for sale has only two full-time clinicians, and 100 new client inquiries per month.

While the former practice is generating higher revenues, it also places a buyer at higher risk. At only 20 inquiries per month, the business won’t recover in the event of clinician turnover, as the practice is not generating enough leads to build a new counselor’s caseload. Hence, even though the second practice serves fewer clients, it could be more valuable than its counterpart.

Tip: Having a rigorous system in place to document the volume of incoming inquiries from various sources (email, website, yellow pages ads, etc.), and what portion of them become new patients, will increase the value of your practice to certain buyers.

6. Credentialing
In many markets today, accepting clients’ health insurance is important to a counseling business’ success and stability. Hence, it is increasingly important to buyers to find a practice that is credentialed with insurance companies.

A business seller should make sure that their insurance credentialing is such that it will transfer to an acquirer. When possible, a practice should have group contracts with insurance companies, as well as individual provider contracts.

7. A Committed, Compatible Staff
Sometimes, when a practice is sold, staff doesn’t survive the transition. Here are two real-life instances wherein existing staffs were incompatible with new management.

  • a) A psychiatry practice is being purchased from an absentee owner/manager. A few weeks before the close of the sale, the new owner begins working in the practice and begins to implement some basic rules of operation for the administrative staff. They revolt! The staff destroys documents, cancels appointments, refuses to answer the phone, and creates a hostile work environment (they were also, as it was later discovered, stealing from the company). The new owner has no choice but to fire the staff, and hire a new administrative team.
  • b) A buyer of a counseling practice discovers that the previous owner has overpaid his clinicians by compensating them heavily for completing basic administrative tasks the previous owner did not want to do. The new owner realizes that the practice cannot survive without the clinicians forgoing their administrative duties (along with the extra income). The counselors do not respond well to receiving what they perceive as “a cut in pay”, and several leave the practice. Revenues drop by over 40%, and the practice doesn’t recover for over a year.

In both these instances, the owners had little choice but to start over with new staff. However, a buyer will almost always want an existing team to stay. Hence, anything that commits employees to the business, such as a “long term incentive plan” (a bonus accrued and paid on a rolling basis over years of service) could be valuable to a buyer, as it helps to improve staff retention.

8. Quality Hard Assets
To the extent that a buyer can utilize them, hard assets have value. Recently, I visited a counseling practice for sale in New England. The owner valued her furnishings (chairs, desks, computer equipment, etc.) at $12,000. However, almost everything in her offices was tired, old, and generally below our standard of quality. Hence, to us her ”furnishings” would have to be replaced entirely and therefore had zero value. In contrast, if we visited a practice with therapy offices that were “move in ready,” such assets would be worth top dollar, as we wouldn’t need to put out the cost (and effort) of furnishing the space.

9. Lease
If your practice rents space, the lease your business holds can affect the sale. Buyers always want low rent guaranteed for multiple years, as well as the flexibility to cut and run anytime. This, of course, is unlikely! As a seller, you are in good shape with a fair lease, with some amount of security for the buyer. Avoid these three bad lease situations:

  • The practice has a 5-year lease in a bad location. The buyer would prefer to move the office, but breaking the lease will be too expensive.
  • The lease is non-transferable, and the landlord wants a 20% rent increase from any new tenant/owner.
  • The lease terminates within a year, and the landlord plans to raise the rent more than 4%.

10. Be Honest and Open
As part of our growth strategy, my company has started looking for counseling practices to purchase. We talk with many providers who have listed their businesses for sale. At times, even after we sign a confidentiality agreement, some are reluctant to talk openly about their practices’ weaknesses (owners never have a problem talking about their strengths). This evasiveness often ruins the potential for a sale.

Sometimes owners will overestimate the size of their practice. I recently met with an owner who claimed that her practice was scheduling 5-10 new clients per week. However, when we looked at her practice’s record of first sessions, it was actually scheduling 6-12 new clients…per month! That’s a forth of what the seller reported! Either this seller had did not understand her business, or she was trying to mislead.

Misrepresenting one’s company to a potential buyer will slow down the acquisition process, and could result in future legal action from a buyer. So be honest! No business is perfect, and a serious buyer isn’t looking for perfection.

11. Finish Strong
Many practices are for sale by clinicians who are nearing retirement. This is a great reason to sell! However, clinicians commonly make the same mistake. That is, they begin winding down their practices while (or before) their companies are put up for sale. For example, a counselor who once saw 30 clients a week, while trying to sell her practice, might decrease her caseload to 20. This ill-timed decrease lowers revenues, and increases the risk for potential buyers, who will need to try and rejuvenate a shrinking practice.

My father once told me, “When painting, stop while you still have about 20% of your energy left.” His reasoning, “You’ll need energy to rinse out your brushes, and clean up the room.” It’s good advice. Similarly, counselors are much better off selling their practices while they still have energy to finish strong. To attract good buyers and to earn top dollar, make sure your numbers are stable, even trending upward!

Selling a Counseling Private Practice

The following presentation was presented at the ACA National Convention in 2013. The topic is on Building a counseling private practice that will be sellable and attractive to a prospective acquirer.

Hot Off the Press! How to Thrive In Counseling Private Practice: The Insider’s Guide to Starting and Building a Counseling Therapy Business

Counseling Private Practice

As counselors, when we venture into private practice for the first time, we make the difficult transition from technician to entrepreneur. The immensity of this transition cannot be overstated.

Learn More! Counseling Private Practice Book
(Includes a Bonus MP3 audio file from the author titled “How to Build Your Counseling Practice to Sell”)

 

[i] http://online.wsj.com/article/SB10001424052748703410604576216663758990104.html
[ii] AAMFT Media Kit, as of 11/14/2011
[iii] Steingold, F. S., (2011). The complete guide to buying a business, 3rd edit. P.84
[iv] A direct quote for a counseling practice for sale in 2012.

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