The offer was accepted but as soon as the buyer started to perform their “due diligence”, cracks began to appear…
Not every sale of a practice goes the way it should and for Dr. Crane, it could not have gone worse.
Dr. Crane had been trying to sell his practice and retire for a number of years but wasn’t able to find a buyer that would offer him the price he wanted. Not that the price was completely unreasonable – it wasn’t – but it was at the very high end of could be expected.
Eventually, we did find a buyer that made an offer very close to Dr. Crane’s asking price.
But most buyers (especially the sophisticated ones) don’t just accept the information the seller provides. They make the offer subject to a deep dive inside the operations and financials of the practice they are looking at purchasing. In the case of Dr. Crane, the offer would only stay at the full offer price if everything the buyer looked at was at the high end of expectations.
Sadly for Dr. Crane, they weren’t.
It started with the way Dr. Crane was paying himself. A buyer is going to look at the ratios the practice generated for different types and classes of expenses. The first one that came up lacking was the expense ration for personnel. At first glance, the ration looked decent but when the buyer started looking at the details they noticed 2 problems – there was no salary for the dentist (Dr. Crane) nor was there any salary for the Office Manager (Dr. Crane’s wife).
This immediately raised a red flag for the buyer because Dr. Crane and Mrs. Crane were both planning on retiring after the sale and those 2 positions would both need to be filled. Therefore, they needed to take the historical payroll costs for the practice and add in a salary for a dentist AND an office manager.
Obviously, adding in 2 expensive to fill positions dramatically changed the ratios of payroll expense and significantly lowered the reported operating profits of the practice (the Crane’s were using the dividends as their salary).
The buyer realized immediately that they would need to renegotiate the purchase price they were willing to pay and before they did any further due diligence, brought a revised offer to Dr. Crane based on the information they had found thus far.
Unfortunately, this new number was substantially lower than Dr. Crane’s minimum acceptable amount and the deal fell apart.
Setting high expectations is a good thing but the financial numbers must support it. If you’re thinking of selling, call me – Stan Kinder – and find out what your practice is worth.
