Is my practice actually saleable, or am I assuming there will be a buyer when I retire?

Twenty years of good income makes a practice feel obviously valuable. Buyers don't price it that way.

Two things decide what a buyer will pay: what carries on without you, and how many years you have left to build more of it.

Who this affects | Who it affects

This affects:

• specialists and GPs who expect the practice to fund part of their retirement
• practice owners within ten years of an intended exit
• partners in a group practice with no agreed exit or valuation terms
• owners whose referrals come mainly through personal relationships
• anyone who has never had the practice independently valued

Is my practice saleable? | The answer

Only to the degree that its value sits in the practice and not in you.

Strong earnings prove the practice can earn while you're in it, and very little about what happens afterwards. A buyer pays for the share of those earnings that continues without you, and in an owner-dependent practice that share is much smaller than the income statement suggests.

A valuation starts with the equipment, the fittings and the money patients and schemes still owe the practice. For most practices, that is a small part of the price. Almost everything else is goodwill, and goodwill comes in two kinds: practice goodwill and personal goodwill. These affect how practice saleability actually works.

How practice saleability actually works | How it works

Practice goodwill and personal goodwill:

Practice goodwill belongs to the business: the location, the name, the systems, contracted referrals, the staff and the patients who keep coming back. A buyer can buy it, because it stays put. Personal goodwill belongs to you: your reputation, the colleagues who refer to you by name, the patients who chose you and not the practice. It can't be sold, because it leaves when you do. The more of that goodwill belongs to the practice rather than to you, the more it's worth to a buyer.

What a buyer does about it:

Personal goodwill makes a practice riskier, not worthless, so a buyer rarely refuses outright. They rewrite the terms instead. They can't know whether the earnings survive your departure until long after they have paid, so the deal is built to answer that question later, at your expense. An earn-out holds back part of the price and releases it over several years, but only if the practice holds its turnover once you've gone. A handover period keeps you in the rooms at a reduced role and rate while your successor is introduced, which moves your retirement date.

Why the restraint matters:

A restraint of trade stops you practising nearby for an agreed period. It's meant to stop you competing, but the wording seldom separates competing from simply carrying on working. If you are genuinely stopping, it costs you nothing. If you meant to keep doing sessional or locum work, medico-legal or consulting work, or to wind down over a few years, it can cost a great deal. Settle it before you sign. South African courts treat restraints as enforceable unless the person resisting one shows the terms are unreasonable, so the onus is on you. Have an attorney check the area, the period and what you may still do.

What actually transfers:

A buyer asks one question of every part of the practice: does it stay when you go? Referrals are usually the biggest item and the likeliest to leave, because a practice fed by a few personal relationships keeps its most valuable asset where a buyer can't reach it. Patients transfer more easily when recall systems, proper records, and a recognisable practice name let a buyer verify retention independently. Staff and systems decide whether the practice runs while you're away. The administration gets checked too: whether the practice number transfers or your successor must apply for their own and re-contract with every scheme, and whether the lease has enough term left and can be handed over.

Common practice sale mistakes | Common mistakes

• The most common is measuring the practice by what it earns. A buyer measures what survives your departure, and those two numbers can be very far apart.
• The second is waiting to value the practice until the final two years. A valuation five to ten years out gives you time to act on what it shows. Two years out, all it gives you is the number.
• The third is treating the practice as the retirement plan. If most of your wealth sits inside the practice, a disappointing price falls straight on your retirement.

A practical example | An example

An owner in his early fifties had the practice valued with no intention of selling. Most new work came through referring practitioners who knew him personally, and no other clinician had a referral base. Over the next few years he brought in an associate, introduced her into those relationships and added a hospital group as a second channel. By the time he sold, the buyer asked about the handover timetable, not about whether the patients would stay.

Official references

• HPCSA: Ethics and professional practice
• Board of Healthcare Funders: Practice Code Numbering System
• SARS: Disposal of small business assets