Blog

What is Your Greatest Risk in Selling or Buying a Practice?

by Ken Berry, CBI

In almost every conversation we have with a practice owner, whether seller or buyer, the owner feels their greatest risk in pursuing a sale or acquisition will be contained within the terms of the transaction (i.e. how much cash down, is there an earn-out element, etc).  While we agree that the terms of the transaction represent an area of significant potential risk, we think there is a key factor outside the terms that represents a greater risk.  A factor many sellers and buyers do not give enough thought and consideration… FIT!

Fit, or rather a poor fit, is the greatest risk a buyer or seller can experience.  By fit we mean a buyer (if you are selling) or a practice (if you are buying) that encompasses a range of solid alignment:  technical ability, personality or culture, character, business acumen, business process, client interaction, business and personnel management, and general business philosophy (i.e. hours, attire, etc) among others.  A poor fit will almost certainly result, to some degree, in both a business and transactional failure regardless of price and terms.

Here are two quick examples to provide our thoughts on how critical fit is:

#1.  Buyer pays 100% cash down at closing.  Seller loves it because they have all their money and have no risk moving forward.  However, the buyer is a bad fit for the practice and within a year or two is declaring bankruptcy.  How do you think the buyer feels about the seller?  Do you think it is likely the buyer is going to consider legal action against the seller?  Would you?  We think it is pretty likely and the seller is going to be surprised to find they actually have pretty significant risk of losing a chunk of the money they were paid.

#2.  Buyer pays 20% cash down and seller finances the balance of the sale with the amount being adjustable against the buyer’s first five years of ownership (this, by the way, is not a transaction model we would advise any seller to pursue).  This transaction structure represents tremendous risk to the seller because it depends entirely on the buyer’s performance for the next five years.  However, the buyer is a great fit and not only does the practice maintain its level of revenue from point of sale, the revenue grows and the seller is paid more than anticipated.

The point of these two brief and simple examples is that a poor fit can undermine “risk-free” transaction terms and a good fit can overcome “high-risk” transaction terms.

So, the top priority for any seller or buyer should be to find a good fit.  How can you define, find, and recognize a good fit?  Well, it just so happens we work with all of our clients (usually sellers) and customers (usually buyers) to do just that.  Give me a call at 408-598-3009, I would be happy to discuss this with you.

Comments (0) • Posted March 30th, 2017 at 11:38am

Is This Your Last Tax Season?

by Ken Berry, CBI

What Should You Expect from a Broker?

by Ken Berry, CBI

Evaluating Fit Should be Your Priority

by Ken Berry, CBI

Two-Stage Deal Structures: What is Wrong with Them?

by Ken Berry, CBI

How is WIP Handled in an Accounting Practice Sale?

by Ken Berry, CBI

Is it Possible to Buy Part of an Accounting Practice?

by Ken Berry, CBI

Lead Generation, Part 1: Your Foundation

by Ken Berry, CBI

Don’t Let a Lack of Succession Planning Ruin Your Future

by Ken Berry, CBI

Perception Translates into Revenue

by Rick Harrison