How to Prepare Your Business for Sale: Knowing the Three Things Every Buyer Looks For

Author: Craig Castelli & Tom Goyne, Au.D.

No two audiology practices are identical, and therefore each transaction has its own unique aspects with a multitude of factors contributing to the outcome; however, there are certain fundamentals that apply to every deal. In order to properly prepare your practice for sale, it is wise to consider the following three things and make improvements where necessary:

Profit & Loss Statement
Craig: Financials drive valuations. Expect a buyer to request at least three years of P&L statements along with interim statements from the current year. Making them readily available is the first step, but proper preparation involves much more. First, make sure to understand your P&L well enough to answer basic questions; pay attention to fluctuations and understand the key financial ratios. Know how to express Cost of Goods Sold (COGS), advertising, and payroll as a percentage of net sales, how your ratios compare to industry averages, and why you achieve such ratios.

Tom: Audiologists are rarely trained on how to compose and analyze a profit and loss statement, and therefore human nature kicks in and they tend to avoid the work that needs to be done to properly prepare and understand one. But, if used properly, a profit and loss statement can be used to evaluate what has happened in your practice in the past and properly plan for the future, while also demonstrating that your practice is an asset that is desirable to potential buyers. If you aren’t sure how to compose and analyze a profit and loss statement, contact a practice consultant or your accountant.

Patient Concentration
Craig: Patient concentration generally refers to two things: third party payors and referral sources. As an owner, it’s always important to understand where your patients come from, but it’s especially critical when trying to sell your practice. First, calculate your sales by payor type: private pay, various insurances, reverse networks like Hearing Planet and Tru Hearing, and Medicare and Medicaid. Prepare a chart that names each source that pays your practice more than one thousand dollars per year and lists the respective amounts. Don’t track this? No problem. Any that fit this description will send you a 1099 at the end of each year.

Next, examine your referral sources, including physician and patient referrals. Prepare a similar breakdown that shows the total in each category, along with other sales sources (e.g. newspaper, direct mail, previous customer). Then, identify any physicians or other referring entities that refer a significant volume of business each year.

Excessive concentration exists when one payor or referral source contributes a disproportionate share of revenue. Concentration can begin at 5-10%, and becomes a major concern at 20%.

Tom: Having your patient concentration excessively centered on one or two sources is similar to investing all of your retirement funds in one stock. While it may be working now, you are running the risk of losses down the road. Campaigns such as marketing directly to the public and enhancing your patient recall program can help to mitigate excessive patient concentration.

Hearing Aid Economics
Craig: Hearing aid sales drive the value of every practice for two reasons. First, they are the profit center; and, second, manufacturers influence values by providing financing and advising on transactions. To them, hearing aid sales drive value, and therefore hearing aid economics are a key piece of a buyer’s analysis. Understand your unit sales volume, closure ratio, return rate, binaural rate, and average sale price (ASP), as all are key factors that buyers evaluate. If your statistics deviate from industry standards by a material amount (positive or negative), understand why because buyers are sure to ask.

Tom: Similar to the profit and loss statement, audiologists are rarely trained in how to properly counsel patients in a manner that will increase the likelihood that they will accept our recommendations. Whether we are recommending a new set of hearing aids or more frequent changing of wax traps to a patient, all too often our efforts are in vain. The prevalent “test and teach” method has resulted in a 40%-50% closure ratio across the field. Instead of this method, I recommend that audiologists use elements of motivational interviewing, the Client Oriented Scale of Improvement (COSI), the Multiple Environment Listening Utility (MELU) and books such as Daniel Pink’s To Sell is Human. Improvements in the way you counsel and sell patients on your recommendations will have positive effects on all of the rates listed above.    
Craig Castelli is the Founder and CEO of Caber Hill Advisors, an M&A advisory firm with extensive experience in assisting buyers and sellers of audiology practices. Tom Goyne, Au.D. is a practice owner, adjunct professor at Salus University and a practice consultant with Oracle Hearing Group.