Buying A Practice
By Felicia Brown
Originally published in Massage Bodywork magazine, February/March 2000.
Copyright 2003. Associated Bodywork and Massage Professionals. All rights reserved.
Having a tough time getting your practice started? Not sure how to go about building clientele? While the majority of therapists start from scratch and build their own practices little by little, some individuals would rather invest in an existing, successful massage therapy practice or related business. If you are looking to get started in this or any field without doing all the research and set-up that goes into the start-up of a business, you may want to buy an existing practice. Have no illusions; owning any kind of business takes a lot of hard work and dedication to keep things running smoothly. Buying an existing practice is simply an alternative way of getting started.
The central potential advantage of buying an existing practice is obvious. The current owner has already done the hard part of building the business from the ground up and establishing its position in the marketplace. Over the course of developing that business, the owner has also acquired quite a bit of useful information that directly relates to the industry and market, especially in the practice's local trade area. It is very important for the buyer to know how to correctly interpret and use the information provided by the business owner.
Buying a Business -- General
The place to start is with an inward look. For example, if you desire to have a bodywork practice, where do you wish to practice? In what town or area? In what physical setting? Are you comfortable working solo in an office? Visiting clients in their homes? What kind of bodywork do you wish to do? How many clients do you wish to see each week?
Don't become too inflexible and only consider purchasing a practice if it is a perfect fit, but you can save a lot of time and headaches if you do this sorting first and have a clear idea up-front about what you are seeking. Then, when you do come across a candidate business to acquire, you will have a sense of whether it feels right.
Once determining your interest in a particular business, your primary concern should be determining its value. Depend-ing upon the industry or field involved, value may be based on many factors -- equipment, location, inventory, reputation and goodwill, processes, business experienced staff, and a customer list to name a few. Another important aspect of the value is the state of the current marketplace -- what the current dynamics of supply and demand are. Value is also based on the amount of money the business earns.
Value is subjective depending on your position in the transaction. Sellers naturally think a business is worth more because they remember all the hard work they invested. Buyers see the risks and uncertainties they would be taking on, so lower their value perceptions. Sometimes it can be useful to engage the service of an independent business appraiser. If you pick the right person, he or she can ensure an accurate and credible valuation is given, which benefits both the buyer and the seller.
To help determine value, you or a business appraiser will likely want to focus attention on a Cash Flow Analysis (CFA) of the business. The goal is to determine potential future revenue and expenses. What is left over -- earnings -- shapes a business's value.
The basic technique is to start by examining the current owner's income statement, then make adjustments to it to reflect your circumstances. First, look for expense items (e.g. utilities, linen cleaning, insurance, accounting help being provided by the owner's sister) the current owner may have left out. Add appropriate amounts of projected expense to cover these needs. Then see if any expenses are listed which really are personal in nature (e.g. a car lease, two vacation trips), but were included in the business's finances. You wouldn't need to spend this money, so you can delete these out of your financial projections for the business. The net result of these efforts is a revised income statement which shows the income the business could earn if it were yours. That's the figure you will then keep in mind as you seek to negotiate a purchase price for the business.
Both a willing buyer and seller will find themselves faced with the task of bargaining for what points they each feel are important to the sale. Each party will want to feel they have gotten a fair deal. But before even getting to this point, each party will need to raise a few more questions.
Much information can be gained by talking with the current owner. Be sure to ask as many questions as you need to. Tell the owner you want the information so that you can give the fairest and highest offer possible on the business. As a potential buyer, be sure to raise such issues as: Why does the owner want to sell? (It could be a sound personal reason such as, "My spouse has been transferred," or a more ominous reason such as knowledge of a new competitor entering the market.) Other issues will likely come up as you learn more about the business. The process of raising such issues, investigating them and forming conclusions is called due diligence.
CPA Sandra Shelton of Craven Shelton and Gann offers a few tips for potential business buyers. "Know your own strengths and weaknesses and predetermine your financial abilities before you jump into a business purchase," she said. How much of a down payment on the purchase price can you afford to pay? Where will you get the rest of the money? Shelton also suggests getting and verifying good accounting data. Like-wise, she feels it is important to structure any purchase of a personal service business to include a non-compete agreement for the seller so that he or she doesn't sell their practice to you, then immediately create a similar new business across the street. Finally, Shelton recommends having enough cash flow available to support both you (personally) and the business.
It is important to involve experienced professionals like your accountant and lawyer in your plans. However, all decisions ultimately rest with you.
Buying a Massage Practice -- Specifics
Massage is an intensely personal service. Clients typically try several therapists before settling upon one. They also can be fickle and irregular in their use of massage. Most practices only include a handful of regular, once-a-week clients. These observations highlight why purchasing a massage practice built by someone else can be tricky. That therapist's clients have no contractual requirement to come visit you in the future just because you purchased that therapist's practice. She may have netted $40,000 in income last year from that business, but if your techniques, personality or business practices are sharply divergent, her clients may give you one try and then embark on a search for a new bodyworker. You potentially could get left holding an empty bag, having paid handsomely to buy a good practice, but a few months later having nothing to show for it.
What this means is that in purchasing a massage practice, it matters both that it feels right and that you have an opportunity to handle an ownership transition in a smooth manner. If a seller insists upon a rapid sale closing and exit from the scene, then understand that you are basically purchasing just a list of prospects -- qualified, yes, by their previous purchase of massage, but in no way beholden to you. Such a list might be worth paying a few hundred dollars, but not much more.
Contrast that scenario with a business transition in which the seller gives you an option to buy the business in three months for a pre-determined price, then takes you under her wing for that three-month period -- essentially taking you on as a partner, introducing you to her clients and letting you join her in working on them. An announcement by her after three months that you are taking over the practice with her support and encouragement puts you in a much stronger position to retain those clients. An opportunity for such a transition might well raise the value of the practice into thousands of dollars, exactly how many depending upon the practice's scope.
Indeed it is difficult to offer rules of thumb for how much a massage practice might be worth because the client variables are so complex and difficult to calibrate. In the general business world today, it seems that Internet firms sell for an infinite multiple of earnings (or, often, non-earnings), more conventional corporations with significant employees and sustained earnings for four to seven times their earnings, and local retail or personal service businesses for more like 11/2 to three times their earnings. It is important to remember in the latter instance that personal service business earnings are calculated after assigning a reasonable assumed "salary" equivalent for the work hours put in by the owner.
Selling Your Business
If the shoe is on the other foot, again start with self-examination, making sure you really want to sell. If the answer is yes, then you want to maximize what you can realize from your efforts to build your practice. To obtain the best possible price, you need to present your practice in the most favorable light and then find and market it effectively to qualified buyers.
Assuming you lack experience at such a process, you well could benefit from hiring a business broker (your accountant or lawyer may be able to help you find a reputable one) both to help in developing a business description and in finding prospective buyers. That doesn't mean you have no role; a good broker will, by asking you the right questions, draw out relevant information on your practice's history, current condition and prospects, as well as relevant information on your competition. Similarly, you may well be able to help the broker identify some prospective purchasers, as well as sources like local massage training schools that may soon be graduating individuals who wish to get started in practice.
Business brokers work with business owners of all kinds to help them locate potential buyers. This is done by listing opportunities like yours much the same way real estate agents list houses for sale. Good brokers know where to advertise and how to describe a business to pique interest. And, as they tend to work on commission, business, brokers are motivated to get you as high a price as possible.
If you are not comfortable with such an aggressive approach, you may want to look to some of your local competitors for their interest. It is best to have the initial surveying done by an outside third party, such as your lawyer, to maintain your anonymity until their interest has been determined. You may also want to look within your own practice, if you have employees or partners, for an interested buyer. One major benefit to this angle, for both the buyer and the seller, is that such a sale represents by far the least traumatic type of sales transaction for clients. Also, your current staff members are already familiar with the way your business works inside and out. This can make for a much smoother transition for everyone involved.
Financial Issues to Consider
You are much more likely to get your total asking price if you are willing to provide some of the financing yourself. While it may sound much better to receive a big lump sum all at once, one study I found shows that sellers who sell for cash only usually receive about 65 percent of the asking price. "All cash" transactions also can create a negative impact by creating a variety of questions and doubts that may be hard to overcome (i.e. "The seller must not have confidence in her business if she insists upon 100 percent cash up front, rather than let me make part of the payment out of my future earnings." An "all cash" transaction will likely create some undesirable tax consequences as well. Spreading the purchase price over a number of years, on the other hand, can create some tax savings.
A few other suggestions before you try to sell your practice: Clean up your earnings before taxes by giving up some of your perks or working to increase income for a substantial period of time. Also, be sure to tie up any loose ends or pending problems before beginning the sales process. No one wants to be left holding the bag, especially if the entity on the other end is someone like the Internal Revenue Service.
In short, before you consider buying or selling a business, you need to do your homework. Get all the facts. Clarify both parties' intentions and expectations. Be fair to both sides, but most especially to yourself. Either side in this deal has potential downfall and windfall within the grasp. Be sure you know which one you are getting.
Felicia Brown, LMT, owns a group massage therapy practice and day spa in Greensboro, N.C. Brown offers expert advice in business and marketing for massage therapists and other working professionals, and is available for lectures, workshops and private consultations. She may be reached at Balance, 823 N. Elm Street, Greensboro, NC 27401.