LAS VEGAS — Planning and organization are key to successfully selling one’s O&P business, according to speakers at the American Orthotic & Prosthetic Association National Assembly. Frank Bostock, CO, Thomas DiBello, CO, FAAOP, James Liston, CP, Barry Smith, Esq. and Jeremy Smith, Esq. shared a number of options available to O&P business owners interested in selling part or all of their business.
Ask the right questions
There are pros and cons to consider when selling an O&P business, and Liston knows this better than most. Today he works at as an area clinic manager for Specialized Prosthetic & Orthotic Technologies (SPOT), in Provo, Utah. Liston owned SPOT until it was acquired by Hanger Clinic in October 2007.
Liston wanted to continue working at the clinic, but selling the business would eliminate his wife’s job, an opportunity the couple wanted to take so that she could spend more time with their children. Liston said he and his wife worked through a number of questions when deciding whether to sell: “What will the future look like? What will it look like when it is not our company? How this this affect our employees? How will this affect our family and us? What is the worst scenario if it does not go well?”
After negotiating an agreement with the help of legal counsel provided by Barry Smith, Liston and Hanger closed on the sale 2 months after the process had begun. But once the sale was complete, Liston’s work was far from over. He and his staff began adjusting to a new computer system, as well as changes in everything from payroll to benefits.
“The next 2 to 3 months were spent learning new ways of doing things … There was a lot to learn, all while trying to take great care of our patients and referral sources and putting their minds at ease that they would be receiving the same great care from the same great people,” he said.
Business selling tips
While the O&P industry is unique in a number of ways, there are still several themes that apply across any type of business sale situation, Frank Bostock said. A business owner’s reasons to sell tend to stay the same no matter the field: usually owners are selling as an exit strategy so they can leave the business or retire; to diversify their risk; as a way to reduce stress and responsibility while maintaining their involvement in the business; to access the resources of a larger or more experienced company or organization through partnership.
In any industry, buyers look for a return on investment and sellers need to consider this when setting a price and deciding when to sell. Many business owners worry about selling “too soon,” he said, but Bostock always recommends selling too soon rather than not soon enough.
“The best time to sell is when you are doing well,” he said. He added that many investors “hold out” for too long on their investments, whether it be in stocks, real estate or their own business.
“We always hold out because we think it is going to get a little bit better. There are always a few more dollars at the top that we are going to be able to get if we just wait another week, another month, another year … [We think] things are going to be better. And then unfortunately we find that investments do not always work that way,” he said. “I think the same thing holds true with O&P businesses.”
Another point of emphasis for Bostock was finding the right strategic partner.
“When you look for somebody who you want to align yourself with as a strategic partner, make sure you find someone who has the assets and the resources to help to get you to where it is that you want to go,” he said.
Create a road map
Before a business owner puts the business on the market, he or she needs to make sure all the paperwork is prepared and organized. In short — “Get your act together,” Barry Smith said, starting with tax returns. Many business owners have things “buried on the books” that are less evident in the paperwork, such as new computers, work performed by interns or travel expenses from business trips.
“You are going to give the buyer a tax return. When that buyer looks at a tax return, it is not going to be evident to that buyer how profitable your business is … So you need to go through that tax return and sanitize it. Because a buyer could never figure it out unless you give them a road map.”
Some important questions to consider while compiling the road map include what the buyer finds important, what the business owner’s role will be after the sale, what the role of current employees will be after the sale, what the business owner is looking for in addition to the purchase price and what risks the business owner will assume upon sale of the business.
Once the business owner is ready to sell, he or she should decide whether a lawyer’s assistance would be beneficial. If so, the business owner needs to find a lawyer with experience in acquisitions.
“This perhaps is one of the biggest pitfalls you can make, is to pick the wrong lawyer,” he said. You can rest assured that the buyer will have the right person representing them.”
The business owner and lawyer should set clear expectations for their partnership and have a timeline in place for the sale. Barry Smith encouraged business owners to “get copied on everything” and make sure to direct the lawyer rather than following the lawyer’s lead.
Prepare for buyer’s concerns
Preparing for a buyer’s concerns also can help the sale to go more smoothly.
“You can get the most out of a deal if you try and empathize, and put your buyer’s hat on and ask yourself, where is the buyer coming from? What concerns do they have, and how can I best address them?” he said. “You need to let the buyer know you understand that they are taking on significant risk in buying your business.”
One common part of the selling process that O&P business owners should avoid is setting a purchase price on the business. Barry Smith said this always creates limitations.
“Give the buyer or buyers the data so they can analyze it,” he said. The first step toward settling on a fair price though is getting a valuation, which Barry Smith said is “the easiest part of the process.”
Of course, a number of factors — called terms — will affect the price. Price and terms are “inextricably linked,” according to Barry Smith. For this reason, the owner needs to analyze the business and figure out what stands out. The business owner also should make sure that expenses are at a healthy level. Barry Smith recommends the cost of goods account for 25% of sales and the cost of labor match 25% to 30% of sales.
All in the details
Jeremy Smith offered logistical recommendations for a smooth sale, which he said can take 3 months to 6 months depending on the seller’s level of preparedness in advance of sale talks. He added that selling a business can be stressful and time-consuming; it is a major life event that business owners are adding to what typically is an already full calendar.
“You have just added on to what, for most of you, is an incredibly busy schedule,” he said. “So just be mentally prepared for the devotion of time and energy it takes to actually get yourself into the transaction to make it a go.”
In the terms of sale, Jeremy Smith said indemnification is “unavoidable”; however, he advises trying to “set some limits on it.”
He added that for payment terms, “cash is definitely king,” but business owners can expect most deals to include at least a partially deferred payment.
Jeremy Smith also noted earnouts can be useful in specific circumstances. If sales are doing well and the buyer isn’t ready to pay the amount the seller wants, an earnout can allow the seller to set sales goals and reap the rewards.
A discussion of all these possibilities as well as plans for the seller’s continued involvement in the business after the sale – whether the current owner will stay on as a full-time worker, a part-time worker, a consultant or something else… or will retire completely – should be considered and discussed openly.
“Expectations and perception in the transaction are everything,” he said. — by Amanda Alexander
Bostock F. The pitfalls you need to be aware of when selling your business. Presented at: American Orthotic & Prosthetic Association National Assembly; Sept. 4-7, 2014; Las Vegas.
Disclosures: Bostock, DiBello, Liston, B. Smith and J. Smith have no relevant financial disclosures.