A buyer I’m currently working with found a good practice for sale and asked for my help with the analysis and LOI. The target practice is solid, collecting $680k last year with overhead around 62% and a decent amount of hygiene in a rural area of the country.
One problem. The price.
Wait…scratch that. That’s two problems.
The seller wants $707k for the practice, which is 104% of collections. Which is crazy and way outside the norms for a rural-based practice in the US (see average prices here). So the price is the first problem, which makes a second problem automatic: the broker.
If the price is that crazy, it’s because a broker has been hired who is either too afraid or too dishonest to dissuade the seller from the crazy notion that a sane, rational, ethical, capable and professional buyer (the kind every seller wants to take over their practice) will actually PAY that amount.
Bad brokers are annoying, but you may think the underlying practice is worth dealing with them. If you’re looking at a practice that has that kind of broker involved, I want to give you a tool in your arsenal that you can use to negotiate with.
First, you need to understand the logic the broker will inevitably use to try and convince you that an above-reasonable asking price is no big deal. They’ll use what I call “equipment rep logic” (you can afford this 6-figure piece of equipment with only 2 more crowns per month…). That is, they break down the extra $50,000 or $100,000 they want you to pay for the practice into monthly payments.
It will sound something like this:
“This practice is so good, that paying $50,000 is really nothing to your monthly cash flow. $50,000 on a 10-year loan at 4% is only $506 per month. Are you really going to let $506 get in the way of your perfect practice?”
I have a perfect response for you. But, let’s acknowledge something first. That math is right! And there’s some logic to that statement.
I often do tell buyers I work with that if you’re looking at your dream practice and the gap between what you want to pay and what a seller wants is a small-ish number it’s worth a small monthly payment to have that practice.
But you could play that card all day long if you’re a broker. If $50,000 is no big deal, why not pay an extra $75,000? Why not pay an extra $100,000??
Here’s what I recommend you do.
Flip the broker’s logic on its head.
If they’re going to split the extra money they want from you into monthly payments, do the same right back.
Here’s what I’ve said before, usually to some stunned silence from brokers:
“Well, that extra $50,000 you want for your client is likely going into a retirement fund. So if it’s going to sit in a 50/50 stock/bond portfolio and fund their retirement, it’s going to earn about 5% over the next 30 years. That’s only $268 a month in retirement spending before taxes. You’ve got an ideal buyer here with full bank approval and a team ready to close on this practice as soon as possible. Are you really going to let $268 a month get in the way of the perfect buyer buying this practice?”
There are two sides to the logic of breaking things up into monthly payments. Use the side that benefits you to your advantage.
The price that’s “right” is always going to be what a willing buyer and willing seller will agree to. There may be some minor differences in opinions as to the value of a business. That’s normal.
But don’t feel like you’re helpless as the buyer. You can push back on unreasonable prices.
But always remember to be kind and respectful. Have a little levity in your voice when you counter their logic. The surest way to kill a deal is to be THAT buyer. You know the one. Don’t be THAT buyer.