This may seem like an abstract question at first, however it is abundantly evident that the exit options available to a business differ significantly from those of a practice. This is a particularly vital distinction in the business & professional services sector, as it with these enterprises that goodwill represents the major proportion of value.
So how do you know if you have a business or a practice? The easiest way to make the distinction rests in the concept of “principal-dependence”, or the extent to which the enterprise is reliant on its owner/s for frontline revenue generation. If you’re still not sure, imagine taking a 6 month overseas holiday during which time you were uncontactable. How are your stress levels?
A “business” would survive (and perhaps thrive) very well during an extended break, however it is highly likely that the absence of the owner would be sorely missed – and potentially catastrophic – in a “practice”.
Let’s consider some other determining factors:
1. If your name is on the door (i.e. the company’s brand features the owner’s name), it is almost certain that you run a practice, not a business.
2. If relationships between the enterprise and its prospects and customers are predominantly centred around the owner/s, you run a practice. If the relationships are primarily at a corporate level, it’s more likely that you run a business.
3. If the enterprise has scale – necessitating a corporate management structure – it’s more likely than not that it would be considered a business. If it is on the small side, it’s probably a practice.
4. If multiple streams of revenue are in place, with many being recurring or annuity in character, you more often than not have a business and not a practice.
Obviously these are broad guidelines only and not prescriptive, however it should be fairly easy to categorise your firm accordingly when considering each characteristic. And you should get a handle on this, because it is a major influence over the most suitable and effective exit options available to you as the owner.
Exiting a Business
With the intention of keeping this as simple as possible firmly in mind, I unfortunately run the risk of over-generalising, so it is important that you take professional advice to evaluate your individual situation. However, it is fair and accurate to state that a business has far greater appeal to an external, unrelated buyer than a practice. A business is generally more sustainable, less dependent on the departing owner, more diverse in its income generation, has greater market penetration and presents a lower risk profile than a practice.
As such, the exit options available to a business are far broader and encompass the external buyer/investor market, to include:
- Sale to a strategic or trade buyer
- Sale to a financial buyer
- Management buyout (backed by external financing)
- Perhaps even a public listing.
These options provide the opportunity to obtain maximum realisation of value.
Exiting a Practice
If you own a practice, however, your most likely buyer – or buyers – could be right under your nose. Rather than focusing on achieving a sale to an external buyer in an economic environment expecting a surplus of business investment opportunities over the next decade, consider instead a longer-term succession approach encompassing a management and/or employee buyout.
Who better to take on your business than those who already know it so well, for whom the transition risk would be considerably lower? Some businesses simply are not scalable, whilst many others revel in and compete on their boutique nature. Internal successors can be gradually groomed to take on the reins, with the existing owner/s exiting completely after a specified period of time or simply remaining in a consultative or non-executive capacity and retaining some level of ownership.
So take a step back and figure out what you have to work with. If you truly have a business, work hard to maximise its appeal and value to external buyers. Build an advisory team, structure the business for maximum return and focus on long-term growth. Basically, focus on building a product that you can sell for the highest price when the time comes.
If it’s a practice that you have nurtured over the years, turn your attention instead towards a succession strategy. Far better to work towards an outcome that will most likely be realised than taking your chances and suffering the likely disappointment in the open market. Lead, groom, develop, transition, delegate – these are your critical success factors.