The 7 ways a transition can go wrong

The short answer

What are the most common ways a transition goes wrong for a physical therapy business owner? Paul Martin, Founder and President of Martin Healthcare Advisors, has seen the same seven mistakes for 27 years. Here they are, and how to avoid each one.

The 7 mistakes:

1. Taking the call from a single acquirer, signing their NDA, and letting them hold the steering wheel
2. Going to market unprepared: no normalized EBITDA, financials not in order, no clean data room
3. A leadership team that is not aligned, or not ready to grow through a transaction
4. Mispricing the business in either direction based on advice from people outside the industry
5. Running due diligence and your clinics at the same time, so performance slips and the acquirer re-trades the price
6. Waiting for a better window until the market's window closes
7. Being out of compliance from pushing volume and forcing the numbers

Full transcript

The transitions that go wrong almost always go wrong for the same seven reasons, and I can name every one of them.

Number one, it's the call from a single acquirer. They are only doing their job, and they convince you to sign an NDA and send information on the promise of an offer. By starting a sale process this way, just know this: they hold the steering wheel, and it will always take longer than they say it will. Owners do this to move things along faster, but it does the opposite, because with nothing to compare an offer against, your only leverage is gone.

Number two, going out unprepared. Financials that are not in order, no normalized EBITDA, no clean data room. In order means reviewed, compiled, or potentially audited, and at the very least fully reviewed by an advisor or a CPA.

Number three, a leadership team that is not aligned. An acquirer picks that up immediately. Aligned means they share your goals, they clearly know what they are responsible for in reaching those goals, and they want to grow through a transaction, not just to a transaction. Those are two very different things.

Number four, mispricing the practice in either direction, which almost always traces back to listening to someone who does not know this industry. Someone at a party rattles off a number and tells you the business is worth $5 million. You spend months with acquirers to find out it's really only worth three.

Number five, running a due diligence process and your clinics at the same time, usually to save paying a fee. You sign a letter of intent, you spend months hunting down due diligence material, and your eye comes off the business. The business shows downward trends and the acquirer re-trades the price. A business that is trending positively has the very opposite effect, because then the acquirer wants to get the transaction done before you come back asking for more money.

Number six, waiting for a better window until the market window closes. You can only sell your business when there are acquirers in the market. Your timing may never line up perfectly with theirs, and their windows tend to shift faster and shut tighter.

Number seven, being out of compliance. This usually happens from pushing volume and forcing the numbers. If you are not careful, this can raise a red flag, and it will stop a transaction in its tracks until it's fixed.

Transcript lightly edited for readability.