Some people will read this title and immediately decide that this column doesn’t apply to them. They’ll think, “I’m just getting started, I’m not in a place where I can consider selling.” If this is you, and you’ve made it this far—hang on. This is for you. In fact, this column (and next month’s) might even be more helpful for you than for someone who’s been in practice for decades and is finally beginning to think about a possible exit. Truly, the best time to think about selling your business is at the beginning of your journey, not at the end! Small decisions you make today can have big ramifications on your ability to sell, and the value of your counseling practice, when—someday—you decide that it’s time to turn the page.

As counselors consider retirement (or relocation, or a career change), some are finding that the practices they’ve built over much of their careers have little market value. Hence, instead of selling their practices and financing their retirement (or next adventure), counselors are simply winding down their caseloads as the ride out their leases. At the end they’ll switch off the lights, refer out any remaining clients, and trash any unused business cards. This sounds harsh. Even harsher, I can’t tell you how many times I’ve had retiring counselors ask me, “After decades of work, do I have nothing to show for it?” My answer, “Your practice has provided you a good living, and you’ve helped many people over many years. However, what you’ve created doesn’t have a lot of financial value that can be transferred to another party.”

Common Mistakes in Valuing a Counseling Practice

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 will purchase your practice based on the financial opportunity your company presents. Here are three common mistakes owners make when valuing their practices.

Endowment Effect. The endowment effect, also known as “divestiture aversion” is a hypothesis that posits that just the act of possessing something makes one value it more highly. It’s one reason why Realtors work so hard to communicate to home sellers that while they too think the seller’s house is special, the price they’re asking isn’t in line with the actual housing market.

Valuing Growth Potential. Sometimes a business owner will value his or her company not 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 listed for sale: the seller 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.”(2) 

What an opportunity! Indeed, new owner can work hard and grow the practice. That’s a given. However, 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 earn more prior to the sale, he or she could then (and only then) command a higher price.

Valuing Reputation. A seller might say, “We’re very respected in the community. This makes us more valuable.” Not exactly. While having a poor reputation could lower your practice’s value, having a positive reputation is the expectation. Presumably, your reputation has helped you to grow your practice, which will command your purchase price!

How Much is My Practice Worth?

Let’s be reasonable. You counseling practice isn’t worth 2X revenue. I’m contacted all the time by counselors offering me to purchase their practice for 2X revenue. My response is always the same. “If you know someone willing to pay that PLEASE give me their number because I want to sell my practice too!”

There are many formulas for valuing businesses. For healthcare service businesses, one popular method is to calculate a multiple of EBITDA, an acronym that stands for Earnings Before the deduction of Interest, Tax, Depreciation, and Amortization (to keep it simple, let’s just say “profit”). A practice may be worth around three times EBITDA/profit. While these numbers provide a starting point, they fail to determine a practice’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.”(1)

Your company could be worth a lot more than 3X profit. For instance, say you have contracts (e.g., a court contract to counsel DUI offenders) that guaranteed your company increasing revenue and profit for the next 10 years. Or, say your business includes material assets—a slew of 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 3X profit. For example, say your company’s revenue has been declining for several years. This trend would be a red flag to acquirers. Or, say that one of the company’s key employees is likely to leave after the sale. This happens often in the counseling field. Sometimes it’s the owner, who is also a key revenue producer. Other times, it’s one of the counselors that works at the practice who might not hang around (i.e., “Counselor Smith has worked here for 15 years. But when I sell, he’s likely to consider that a good time for him too to move on too”). In either of these scenarios, a practice for sale will show revenues that are nearly guaranteed to drop after the sale of the practice.

A thought to consider as you evaluate your 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 new client leads every day is valuable. Email lists, websites, relationships with insurance companies—all these things could be valuable to an acquirer. This brings us to the next section…

Think Like a Buyer, Not Like a Seller

A seller thinks “I want to get $X. I feel my practice is worth $X. Someone told me not to accept less than $X.” This is a poor way to go about selling a practice, or a business of any kind. Instead, the key for selling a business, any business, is showing a potential buyer that he/she is likely to benefit financially. There are two types of buyers, a “financial” buyer, and a “strategic” buyer. Know what type of buyer you’re talking to.

Financial Buyer. A financial buyer purchases profit generating assets that are likely to provide a return on their investment. For example, if your business generates $100,000 in profit a year, a financial buyer might see that if he/she pays $300,000 for your practice, it will take him/her three years to earn his purchase price back, but then he’s likely to receive a $100,000 benefit per year for many years to come. Not bad! 

Strategic Buyer. A strategic buyer receives the benefit of the financial buyer, but also an additional strategic benefit if they buy your practice. For example, I recently sold a credentialing services business to a strategic buyer—a medical billing company. They were a strategic buyer because, in addition to receiving the future profits of the credentialing business, they would also be able to sell some credentialing customers their medical billing services. This synergy increased the benefit to the buyer, and in turn increased the value of my business.

As a counseling center, becoming a strategic acquisition might be tricky, but it’s worth thinking about. Here are some hypotheticals: Your practice offers psychological testing, or med management, or neurofeedback, or group therapy. A buyer has a practice that offers just counseling. He/she sees that if they acquire your practice, they’ll receive both the profits of your practice, and they’ll be able to offer a wider variety of services to clients of their own practice.  

Be Ready to Let Go

I once had several weeks of friendly communication with a woman who had advertised her therapy practice for sale. Eventually, I made her an offer, and she flatly responded, “No thank you.”  I asked her,

“Have I offended you?”
“No! You’ve been very polite.”

“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 said, “I’ve been a solo practice for a long time. I don’t like the idea of a larger practice taking over.” And that was it. To her, the thought of her practice changing was sacrilegious. She left our negotiation to search for a solo practitioner that would presumably run her practice for the next 30 years, as she’d ran it for 30 years prior.

A buyer can respect and honor a seller’s legacy. A seller can demand a buyer demonstrate that he/she will properly care for their clients and community. However, after the sale, a practice might (and most likely will) change in many ways. At some point, a seller needs to be ready to let go.

At the time I spoke with her, she had been winding down. Her practice was open only 3-4 days a week. Also, being in her 70s, she hoped to pursue activities with her husband while she was still healthy enough to do so. As far as I can tell, she ran her practice for another year or two, but never did sell. In the end, it just closed down. Emotionally, I think it was easier for her to close down than to sell.

Part Two: Coming Soon

The topic of selling a counseling practice is a big one. Hence, next month we’ll continue on the topic with “8 Ways to Increase the Value of Your Counseling Practice.” See you then!

  • Steingold, F.S. (2011). The complete guide to buying a business, 3rd P.84
  • A direct quote from a counseling practice listed for sale.

 

counseling private practice

8 Ways to Increase the Value of Your Counseling Practice (Part 2)

In last month’s column, we discussed the importance of starting with the end in mind. That is, even if you’re just beginning in private practice, to consider that one day you might want to sell that business and move on to do something else…or you might want to relocate…or wish to retire (do you plan to see clients until you’re 87, like the great Irvin Yalom?).

It’s unfortunate that most practices don’t sell. Instead, when the owner is finished, he or she simply refers out any active clients, takes his/her degree off the wall, and shuts off the lights. Truly, this is a disservice to clients, to the one who built the practice, and to the next generation of therapists who will need to start from scratch instead of standing on the shoulders of the experienced professionals before them. However, it doesn’t need to be this way. Your practice can be a valuable, sellable, asset. In this column, we’ll review 10 ways to help you get there.

1.Group practice:

There are two reasons that solo practices are often worth less than group practices. First, solo-practices are smaller and do less business than group practices. Second, with a solo-practice, when the owner leaves, the business stops operating. This means that a new owner isn’t buying a business as much as they’re buying a job. In contrast, a group practice will continue operating, and generating revenue, even when the original owner departs.

2. Brand:

Many practices are named after the owner, as in “Ken Smith Counseling Services” or “Smith and Associates.” This makes passing on a practice a bit wonky. For example, once upon a time, psychologist Dr. Wagner purchased a Boston-based psychological testing practice called “Powell Associates” from the psychologist Dr. Powell. Dr. Powell retired. Eventually, Dr. Wagner added his name to the marque, creating “Powell and Wagner Associates.” That was decades ago. Today, if the practice is resold, what happens? Will it become “Powell, Wagner, and Jones Associates” even though Dr. Powell hasn’t been with the practice for over 25 years?

A personal brand runs the risk of communicating to clients that the value of a company resides with the founder—not the business’ mission, service or team. However, to be fair, this seems to diminish as businesses get older. 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 prepared by Chris, or Ruth (by the way, the restaurant got its monstrosity of a name when Ruth Fertel bought Chris Steak House). As for Dr. Wagner, after generations of practice, 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 when the founder’s name is not tied to a practice.

3. Committed Staff:

Having staff in place, and having the right staff, are two different things. And a smart buyer will know the difference. For example, A psychiatry practice was in process of being purchased. A few weeks before the close of the sale, the new owner began working in the office and started applying basic rules for the administrative staff. They revolted! The staff destroyed documents, canceled appointments, and refused to answer the phone (they were also, as it was later discovered, stealing from the company). The new owner had no choice but to hire a new admin team. This, of course, lowered the purchase price of the practice.

4. Finance the Buyer:

Many businesses are purchased in installments. In an installment sale, sellers receive a portion of their purchase price up front, and then the remainder is paid over time.

While a seller doesn’t get the excitement of a big lump payment, there are some perks to an installment sale. First, a seller can charge interest on the outstanding balance. Also, with and installment sale, the seller can include a provision wherein if the buyer defaults on payments, the seller can repossess the practice (and perhaps sell it again).

5. Earn Out:

An ‘earn out’ is when a seller accepts an offer for his/her practice that is contingent on future performance. For example, you might receive a purchase offer of $200,000. However, only a portion of the sales price is paid up front, and the remaining portion is contingent on the practice reaching anticipated performance benchmarks over the following months or years. If you are confident that your practice is stable or growing, and if you’re willing to stay involved in the operation for a while, accepting an earn out could help you to receive top dollar for your practice.

6. Lease:

If your practice rents space, the lease your business holds can affect a sale. Buyers want below market rent, as well as the flexibility to terminate the lease anytime. This, of course, is unlikely! As a seller, you are in good shape with a fair lease. Avoid troublesome lease situations like:

  • The practice has a 5-year lease in a bad location. The buyer would prefer to relocate but breaking the lease will be too expensive.
  • The lease is non-transferable, and the landlord wants a 20% rent increase from any new owner.
  • The lease terminates within a year, and the landlord refuses to discuss renewal, creating a mystery of what future costs will be.

7. Know Your Business:

I once met with an owner who claimed that her practice was scheduling 10 new clients per week. However, when we looked at the data, it was actually scheduling 12 new clients…per month! Misrepresenting one’s practice to a potential buyer, even accidentally, will erode trust, slow down the sales process, and (in extreme cases) could result in legal action.

8. Finish Strong:

Many practices are for sale by clinicians nearing retirement. This is a good reason to sell! However, a common mistake retiring owners make is that they begin winding down their practices while (or before) their companies are for sale. A counselor who once saw 35 clients a week, might decrease her caseload to 20. This increases the risk for potential buyers, who will need to try to rejuvenate the practice.

My father once told me, “When painting, stop while you still have 20% of your energy left.” His reasoning, “You’ll need energy to rinse your brushes, and clean up the room.” It’s good advice. Similarly, counselors should sell their practices while they still have energy to finish strong. If you want to maximize the value of your practice, make sure your numbers are strongest in your final year.

Hot Off the Press! Read this book and definitive guide to opening a counseling practice in just seven days. 

Interested in writing for us?


Read our guidelines
Share This