The role of competitive tension in dental practice sales

Simon Palmer, August 2013 

There is a reason why world records are set in a race environment instead of a man by himself on a track. People strive to do better when there is a competitor nipping at their heels.

Competition, whether in sport or in business, makes us strive for excellence... and conversely a lack of competition will often lead to the opposite effect – complacency. 

...And yet, when dentists are selling their practices they seem to ignore the logic of this and often deal with a single prospective purchaser. A large percentage of dental practices for sale won’t deal with many buyers and as a result, don’t get competitive offers. They sell to their associate or the person/company who cold-called the practice with an offer. They (at best) may get a valuation or market appraisal to decide the fair price.

Why do they do this? Dentist practice owners are (in general) time poor. We recently had 30-40 buyers very interested in a practice for sale in a desirable location, all asking questions, all expecting timely responses, all wanting to see the practice at different times, there are of course the negotiations and lawyers and accountants to wrangle and get answers from as well. For a dentist to try to handle all of this on his own at the end of a full day of patients (not to mention the burdens of ownership) is not easy to say the least. You could forgive a dentist practice owner who seeing this in front of him opts to save himself the hard work and deal exclusively with the single buyer who presented himself.

What is wrong with this approach?

What is wrong with a seller dealing with one buyer at a time?

The buyer without competition
If a dental practice for sale is only talking to one potential buyer, that buyer can afford to get complacent and demanding when negotiating the terms of the contract, etc. They usually haggle more on price, they take their time to arrange meetings and get feedback from their accountant, lawyer, and financiers and they take time getting back to you themselves. Why would they hurry? Why would they put forward a great offer for the practice when they know that the seller has no other prospects that they are considering?

Competitive tension in a practice sale creates a sense of urgency in buyers and forces them to put their best foot forward in negotiations. They hustle to get back to you and to get responses from their advisors because they know that there are other buyers who will get further ahead with the transaction if they don’t. When a savvy buyer bids in isolation they start lower than they would if there were other prospective buyers. The worst result for the buyer without competition is that the seller says no to the bid. When a smart buyer bids in competition they can’t afford to bid too low as the worst result is that the seller says yes to someone else!

The buyer with delayed competition
Many sellers recognising the important role competition plays in a sale will have every intention to take the practice to the marketplace to get competitive bids but decide for simplicity’s sake to talk to one or two buyers at a time. Often their employee or the first few who expressed interest are the ones who get “first dibs” at trying to make the deal happen.

The only problems with this approach are:

1. The buyers still don’t have the incentive to hustle or put their best offer forward;
2. Seller Deal Fatigue sets in. Let me explain this phenomenon. Often the preparation and due diligence involved with a practice sale is arduous and invasive for a seller. It involves getting your lawyer and accountant and their accountant, lawyer and financer all on the same page regarding how you have run your accounts and your proposed transaction. It can also take some time depending upon how clear or complicated your accounts and transaction is and how fast the potential buyer gets back to you (which may not be fast if there is no competition as mentioned before). By the time all of this is done and there is a deal on the table that the seller thinks is ‘fair’ he is often unlikely to want to go through it all again.

Won’t simply getting a valuation solve this?
Many sellers claim to solve this problem by simply agreeing to get a market appraisal or valuation done to determine the price that should be paid. This is – no doubt - better than negotiating the transaction without one... However, what a valuation cannot account for (to the detriment of the seller) is the role that competitive tension can have in driving up a sale price. Competitive tension can drive a price up above a valuation price due to:

1. Fluctuations in supply and demand in the local market. The laws of supply and demand say that at a time of undersupply in a market the price for something should go up and yet most valuations of a dental practice don’t take into account the fluctuations of seller supply and buyer demand in the local and national marketplace.
2. The social proof of demand. Sometimes a buyers demand for something increases simply because the buyer can see that other people want it.
3. Extra personal value of the practice to particular buyers. A buyer might be willing to pay more than someone else for a practice they like if it was near their home, family or ethnic community. This added convenience of the practice adds value to a particular buyer.
4. Other intangible benefits to a practice that are unlikely to be able to be adequately factored into a valuation like a new residential or commercial block being built nearby.

Many times we have seen competitive tension raise the price of a practice well above a valuation price (worked out by a respected and independent 3rd party valuer) for these reasons.

We have also seen a buyer in isolation with a valuation still haggle on the price pointing out insignificant or irrelevant things that the valuation didn’t take into account, feeling very safe in the knowledge that their narrative of the value is the only one you are hearing.
 

Conclusion
If you are selling your practice you have some choices. These include getting a valuation and dealing with one interested party until they make an offer close to what you are looking for or frustrate you enough to start talking to a second buyer. Alternatively, if you want the best possible deal for the asset that you have, engage with a company with access to as many buyers as you can in your area, and see the results competitive tension can produce in the sale of your practice!