Little did I know I’d learn something at a funeral to help me appreciate an important lesson regarding the successful sale of a professional services business.
I had returned to Orlando, where I spent the first half of my business career, to attend the funeral of a dear family member. After the funeral, the church hosted a covered dish dinner for family and friends. While going through the food line, I bumped into an old friend (Bob, not his real name) who told me he had recently sold his veterinary practice.
Bob was enjoying retirement. He told me he fished several times a week on the lakes in southwestern Orlando, even serving as a paid guide every now and then. Bob proudly said, “I have this retirement thing figured out.”
As he was telling me the story I was thinking to myself, “How can Bob afford such an awesome retirement?” I knew his veterinary practice was small, just he and a couple of vet techs. In my years of seeing and doing business transactions, I hadn’t seen many small professional services businesses like his sell for much more than asset value. After all, the greatest value in a professional services business is goodwill, and as the old saying goes, “goodwill walks out the door every night.” Buyers generally don’t pay much for goodwill in a professional services business.
Without me even asking, Bob told me he sold his vet practice to a husband-wife team of veterinarians who were leaving employment at a big-box pet store to become business owners. Bob said he got five times his most recent year’s profit, 60% cash at close and the balance in a five-year seller’s note. I about dropped my plate of fried chicken, I’d never seen a small professional services firm sell for fives times profit.
“You got a great deal, a really great deal, how did you do it?” I asked. He then described his approach, and it made so much sense I asked his permission to share it with my weekly blog audience. His first strategy was to demonstrate the loyalty of his customer base. Bob owned this vet practice for about 25 years, and though no pet lives 25 years, Bob showed how he retained families over the years. People who had a pet when they were kids were now coming to Bob’s vet practice for their children’s pets. Bob demonstrated that about half of his annual revenue came from families he had served for more than 15 years. When the husband-wife team looked at the practice with their banker from SunTrust, they could see an incredible stability of the customer base.
His second angle was to demonstrate how his appointment calendar stayed almost full every day for the past five years. There was obvious demand for vet services in that area. With the practice being bought by a husband-wife team of two vets, it seemed highly likely there’d be increased revenue from this ongoing demand. With two vets in the practice instead of one, there was inherent growth built into the opportunity.
The last factor Bob used to generate his handsome exit was to point out the physical stability of the business. The vet clinic has been located at the same address for over 35 years, many years even before Bob bought it. Though Bob didn’t sell the real estate to the husband-wife team buying the practice, he made them a reasonable market-rate lease deal to ensure their stability at that location. After all, the buyers knew that the community recognized that location as “the” vet clinic in that neighborhood.
Bob’s healthy exit from his business was the by-product of proven stability coupled with inherent growth opportunity. For a guy who’d spent his entire professional life treating dogs, cats and other domestic pets, Bob was one astute businessman. His brief story over lunch after a funeral was a reminder that you can indeed sell the goodwill value of a professional services business, but you have to make it tangible and demonstrate a high likelihood of its sustainability.
JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.
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