Market Your Practice to Potential Buyers
Six steps to help you along the way.
By Steve Stalzer, PT, MBA*
Selling a practice is rarely an easy decision, and marketing your practice to maximize value can be even more difficult. For those who are looking to sell, it is important to consider how to best position and market your practice to attract the right buyer. Much like selling a house, it is easier to sell a turnkey practice and command a good price if everything is in order. For the sake of this article, let’s assume an owner has taken the necessary steps to maximize the value of the practice, and he or she is now focused on attracting the right buyer.
Know Your Practice Value
Therapy clinic values are typically calculated as a multiple of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The “adjusted” qualifier simply means that this number is adjusted to normalize owner’s salaries, rent payments, and appropriate owner add-backs. If, for example, an owner pays above market value rent for a facility that he or she owns, the difference may be added to calculate the adjusted EBITDA. In this example, we are assuming that the new owner will pay market value rent rather than the above market rate currently paid. In addition to adjusted EBIDTA, you may also hear the term TTM, or trailing 12 months. Calculating your “TTM-adjusted EBITDA” is simply done by looking at monthly P&Ls (profit and loss statements) for the most recent 12-month period rather than using the most recent calendar year.
Clinics that have a healthy profit margin, good reimbursement, quality staff, and solid systems in place will command a higher multiple than those with poor profit margins, low reimbursement, and staffing or transition concerns. Value is impacted negatively by risk the buyer assumes in purchasing your practice. Risk comes in many forms including lack of referral and payer diversity, transition risk, and competitive market risk. A contract such as a management agreement with a local hospital or employer can carry additional risk if the contract requires approval to be assigned to a new owner or if the contract has a termination clause that allows the contract to be cancelled on short notice for any reason. Knowing the risks associated with your practice allows you to determine the appropriate multiple range to expect from buyers. It also allows you to speak intelligently with potential buyers about how they can mitigate risks and optimize their investment.
Know Potential Buyers
The next step in marketing your practice is to make a list of your potential buyers. This will depend on many variables including the size, location, health, and value of your practice. National therapy companies often have defined criteria for ideal acquisitions. These criteria may include a minimum in adjusted EBITDA, reimbursement ranges, and even preferred geography. Smaller practices may generate more interest from local buyers where larger companies may attract buyers from across the country.
Start by identifying national buyers that have acquired practices like yours over the last few years. You will likely be able to name several with little effort. Many of these companies will list recent acquisitions on their website, which also provides insight into their acquisition and growth trends. Next, look at companies within your state and surrounding states with whom your practice could add value. These practices will typically need to be larger than yours to have adequate cash flow and financial strength to acquire your practice. Proximity without overlap can be a great scenario, but don’t rule out direct competitors.
Be Cautious Of Getting Locked In To The First Caller
As physical therapy acquisition activity has skyrocketed over the past five years, more buyers are reaching out to owners who are not actively looking to sell their practice. While this is great from a seller’s perspective, it is important to be prepared for these conversations before you engage in them. Unprepared owners may not position their practice as strongly as they should, and it is easy to let your guard down during what seems to be a friendly initial conversation. Keep in mind that each of these calls is like an interview, and it is better to engage in those conversations once you are prepared to have them. Once you start down the path with a potential buyer, it can become difficult to pause the conversation to initiate discussions with additional buyers.
Creating A Deal Book
The next step to consider in marketing your business is assembling a “deal book.” A deal book is the offering document that includes key facts and data for the company. The seller (or seller’s advisor as is often the case) writes the offering document and distributes it to buyers after each potential buyer signs a confidentiality and non-disclosure agreement. The book does not need to be complicated, but it will take some time to create and needs to be complete, accurate, and honest. The deal book should make a strong first impression for potential buyers and should highlight the strengths of your business. As a general guideline, your book will be a 15- to 30-page Word or PowerPoint document with several sections including a practice summary, financials, key operating data, referral data, company personnel, facilities, and growth opportunities. The book should not include an asking price as doing so only sets a maximum for the buyer. As with any negotiation, you ideally want the other side to make the first offer.
For Sale By Owner Versus Broker
The pros and cons of working with an advisor or broker are numerous, and the decision will depend on the owner’s goals, priorities, time constraints, and comfort level with the sales process. Much like selling a home, there is no requirement to hire an advisor, but doing so may help attract additional and better offers for the seller. An advisor is also responsible for keeping the deal on track throughout the process, which is significant as selling a practice can be a full-time job by itself.
If you are considering using an advisor, take time to talk with more than one. Ask about knowledge of the therapy industry and familiarity with potential buyers. How will the advisor list the practice or solicit potential buyers? Quality advisors should have well-established processes for creating deal books, contacting potential buyers, and driving a process that results in the right buyer for you and your practice. Advisors are typically paid an initial retainer as well as a percentage of the sale price, which aligns the seller and advisors in seeking the best price for your practice.
Reaching out to potential buyers is an important and time-consuming step. If you are not working with an advisor, take time to develop a complete list of buyers before reaching out to any of them. Have a plan for organizing calls and taking notes from discussions. Be prepared to send your deal book as well as financials that will be needed in the initial phase and in later phases of due diligence.
When talking with buyers, promote the positive aspects of your practice as well as the future potential. Be prepared to speak to weaknesses and how they can be overcome but don’t dwell on them. Remain positive and remember that marketing your practice isn’t over when you leave the meeting room to go out for dinner or even after you have a signed letter of intent.
Whether you are working with an advisor or you are talking with potential buyers yourself, create a timeline and stick to it. Being organized and prepared can help you avoid deal fatigue, when the sales process becomes drawn out and drives potential buyers away. Make selling a priority on your schedule so you can keep buyers engaged while moving efficiently through the process. Be sure to set clear and reasonable expectations about your timeline for selling.
1 Bainbridge SM. Mergers and Acquisitions. 3rd ed. New York, NY: Foundation Press; 2012.
2 Harrison CS. Make the Deal: Negotiating Mergers and Acquisitions. Hoboken, NJ: Wiley; 2016.
Steve Stalzer, PT, MBA, is a partner at 8150 Advisors, a consulting firm specializing in strategic growth and succession planning for physical therapy practice owners. Steve is also a founding partner in Axis Sports Medicine and prior co-owner of Proaxis Therapy, a 30-clinic practice in the Carolinas and Colorado. Steve received his MSPT from the University of South Dakota and his MBA from the University of Colorado. Steve can be reached at firstname.lastname@example.org.
*This author has a vested interest in this subject.