Negotiate a Fair Price
I'm thinking of buying a practice that grosses $500,000 and nets 32% of gross revenue.
The seller is asking $400,000 (80% of gross revenue). I think that's too much. What
should I do?
In my experience, potential practice buy-outs and partnerships frequently fall through
because buyers or sellers have unrealistic expectations about the value or earning
potential of a practice. According to a 2004 survey,1 the fair market
value of optometry practices ranged between 40% and 70% of their gross revenue,
but 50% of practice owners believed their practices were worth 70% to 100% of their
gross revenue. If you agree to pay the seller more than 70% of his annual gross
revenue, you may have to take an unreasonably low salary to pay off the acquisition
In contrast, many buyers want to pay less than
fair market value because they have a heavy debt load and need higher than market
compensation. Just as the seller shouldn't expect the buyer to pay a higher price
so he can complete his retirement portfolio, the buyer shouldn't expect to pay a
lower price so he can earn a higher than market salary. If you want to close the
deal, you have to negotiate.
When you negotiate a practice buy-out,
hire an independent appraiser who has no financial or personal incentive to over-
or undervalue the practice. He can provide an unbiased opinion about community demographics,
business risk and financial prospects. A good appraisal also will show that a practice's
cash flow supports the purchase price, acquisition debt payment and a reasonable
salary for the buyer. Factors such as practice size, net income, cash flow, age
and condition of equipment and the transferability of goodwill from the seller determine
the value of a practice, not the seller's financial needs.
The best advice I can offer a potential
buyer is to base decisions on facts, not emotion. If the appraisal is lower than
the seller's asking price, you and the seller will have to negotiate. You may not
always reach an agreement, but it's better to turn down an unreasonable acquisition
opportunity than to make a bad business and financial decision that will affect
you for many years to come.
Optometric Management, Issue: November 2005