When selling your practice why does paying for a broker feel like losing?
Selling your practice is a milestone moment. You have likely spent a career building up a healthy and successful practice and are looking for a buyer who will affirm the value of your work.
However, finding the right buyer is a specific skill, distinct from the skills developed by healthcare practitioners. This is where a healthcare broker comes in. An experienced and trusted healthcare broker can lead you through this detailed process with efficiency and expertise.
Oftentimes, agreeing to pay a broker fee feels like losing, like you’re giving up some of the value you worked so hard to build up. This article offers
- concrete answers about cost,
- mindsets about the partnership, and
- an evaluation framework
to help you think through whether or not you want to hire (pay) a broker when selling your practice.
Selling Your Practice – What Factors into Broker Costs
- Base Fees
The cost of a broker is generally 6 to 10% of the net proceeds. Some brokers charge less and some charge more, but you can expect a broker to tell you that they charge around 10% of the net proceeds of the sale.
- Extra Fees
In addition, some brokerages charge a fee for preparing a practice for sale. This is similar to a consulting arrangement and is often conducted like a full-day workshop. Some brokerages also charge a fee for a quick look or detailed valuation.
- Minimum Fees
Finally, some brokerages charge a minimum fee. When the 10% fee would cause a brokerage to lose money, they must charge a minimum fee for the transaction, often $35,000-$50,000, depending on the staff needed to execute the deal.
Mindset – Healthcare broker as a business partner
If you aren’t thinking of your broker as your business partner, don’t hire one. You are paying him or her a small slice of the value of your practice to help you exit, close, or transition. If you are thinking of the broker as on the other side of the table, you may become resentful of the fee and focused on what you think you could have had.
An experienced, healthcare-focused broker will bring undoubtable value to the table. This short list highlights just a few of the qualities you can expect in a healthcare broker:
- Deep knowledge of healthcare practices, including maximizing and negotiating any real estate attached to the deal.
- Expertise in practice analysis, underwriting, and ultimately performing a valuation buyers will trust.
- An understanding of how buyers will categorize your practice.
- Experience structuring the sale.
- Practicalities of being your front-line for the numerous phone calls, the gathering of copious information for the sale, and administration of the APA
- Streamlined industry marketing prowess and relationships
Costs No One Tells You About
If you decide not to engage a broker, you will likely incur costs you have never heard about. The costs include
- Botched Lease Assignment
The lease assignment is one of the top three negotiation items that you have likely never heard of that, if not handled properly, will kill your transition deal. A lease assignment should simply be a signature whereby the buyer takes over the lease of your practice space. However, landlords often see this as their chance to open up the lease and negotiate higher rents. When this happens, the practice valuation decreases because expenses increase. This dynamic can easily shave $100,000 off a previously agreed-upon purchase price. One of a broker’s (many) roles is negotiating the maintenance of the purchase price, even when unforeseen hurdles appear, like a landlord wanting to increase rent at the 11th hour.
- Walked back value
If a buyer mailed a valuation directly to you, you have seen where the buyer intends to begin negotiations. However, once you sign an exclusive agreement, a buyer will dig into your historical practice financials (as any smart buyer would) and calculate a more precise EBITDA. This will oftentimes result in a walkback or decreased valuation. Without a broker at the table, articulating exactly why that value can and should not be walked back, how will you maintain the price you thought they promised?
- Wishing you would have shopped around
I was standing behind our sponsorship table at a community event and a man in his mid-sixties walked up and said, “I wish I’d never worked with [a prominent buyer that makes offers directly to doctors]. They took advantage of me.” An offer in hand or air-tight financials makes you feel confident – and you should be. Both of those are signs of a successful practice but they will not save you from a walked-back offer or botched APA.
Summary
There is one main cost to using a broker – a success-based fee, though other brokerages do charge one-time fees for other parts of the process.
Further, there are costs to not using a broker that industry experts do not discuss but can cost you the transaction.
At Practice Transitions Group, we have built a team of experienced professionals with organized and efficient ways of approaching any sale. We have gained proficiency within the industry. Working with a broker who can direct the process will only bring welcomed confidence to this significant transition in your career.
