24 January 2020

The Icarus effect on practice sales

When selling your dental practice, deciding on the right asking price can be tricky. Practice Sale Search Managing Director Simon Palmer has some advice for how you approach the task.

In Greek mythology, the story of Icarus illustrates the folly of aiming too high. Facing imprisonment in Crete, Icarus was given wings made from feathers and wax to help him escape. During the escape, Icarus ignored the warnings that came with the wings, and flew too high in the sky. The higher he flew, the closer he got to the sun, which melted the wax holding the wings together. As a result, Icarus fell to his death.

When a vendor is selling their house or business, and is deciding how to price it, there is a school of thought that says they should set the asking price well above what it’s worth or what they would accept. The rationale behind this strategy is that it gives the vendor room to negotiate and potentially a chance to score big.

While both these reasons make sense, it is important for vendors to see the danger in overpricing their practice when it is on the market. Asking too much, assuming that people will just offer less money and they can meet in the middle, is not a safe assumption. Just like Icarus, the vendors could be setting themselves up for a big fall.

Four reasons to avoid pricing too high

1. Buyers may not view your practice

People generally set up search parameters by price when looking for a business to buy. If you feel that your practice is worth $500,000 and would accept that amount, but decide to ask for $600,000 to give you room to negotiate, there is a good chance that many legitimate buyers will not look at your practice because it is outside their budget, or because they feel it isn’t worth what you are asking.

Why is it far more common for a real estate agent to slightly underquote on properties they represent, rather than overquote? This is because real estate agents want as many interested parties as possible to view the premises they are selling and turn up to the auction. There are two reasons for this:

  • It is often hard for a buyer to see the true value of a practice unless they come and view it. Regularly, a practice has qualities that are not visible on a P&L and inventory. There are sometimes elements like the area, neighbours and foot traffic that will be beneficial to a practice and could increase demand for it. Sometimes, the quality of the finishings or overall aesthetic gives a practice a high-end feel that needs to be personally experienced to be appreciated.
  • They are hoping that competitive tension and social validation will help them get the price they are looking for.

2. Buyers may not realise that you are open to negotiation

Even if you are able to get buyers to look at the practice at the higher price, they may not bid for fear that you are not open to a lower offer. Not everyone is up for a negotiation. Many sellers simply quote what they want for their practice and will not consider lower offers. Many buyers, in turn, will not offer a vendor less than they are asking for fear of insulting the vendor and causing a negative interaction.

3. You are helping other practices sell instead

When you price too high, you can be inadvertently helping sell the other practices nearby that have listed for less. Buyers are often territorial and will look at all practices within a certain radius. After seeing your high-priced practice, buyers may be eager to get the better-value practice nearby – even if they liked your practice better.

4. The practice won’t get finance at the high price

Even if you attract a buyer who is interested in your practice at the higher price, if they are getting a loan from a bank (as most buyers will be), the lender will only lend to the extent it feels the practice is worth (similar to a residential loan). The higher you aim above the bank’s appraisal, the more you are relying on the buyer to dig into their savings, on top of the loan.

Start high and revise later?

One strategy is to start high, with the belief that if you don’t get the interest you want, you can always come back later to revise and reduce the price. The potential problems with this strategy are:

  1. You miss the strong start advantage. When the listing is still new, you capture the buyers’ attention and excitement. Best practice in a transaction would be to use this attention and excitement to your best advantage to attract good offers. When you price too high, you waste this opportunity and it can be hard to get the buyers’ attention back afterwards.
  2. The market has a memory. If your house is on the market for a long time, buyers may start wondering why. They start to think that others must have seen a problem with the practice that they are not seeing.
  3. Coming back to interested parties with a lower price will put you in a weaker position when it comes to negotiations.

The bottom line

There is nothing wrong with having ambitious goals in a business endeavour. Most successful businesspeople get that way by setting themselves an ambitious target and working hard to get there. There is a difference, though, between setting yourself an ambitious target that you can meet through effort and ingenuity, and setting an unrealistic target fuelled by hubris. Setting yourself an unattainable target for selling your house or practice does give you room to negotiate and a chance of winning big ... BUT it also gives you far to fall if you miss your target. Reigniting a campaign once your first attempt has failed can be twice as hard and take twice as long, and there is a chance you may be sacrificing your sale entirely by aiming too high.

It is far easier to get the price you want if you have a realistic price from the start rather than trying to get one later when your Icarus price hasn’t worked.

Hear Simon Palmer at our event Exiting your practice and maximising your outcome. Simon, Mark Fitzgerald (Meridian Lawyers) and Albert Gigl (MW Partners) will explain how to prepare your practice for sale to optimise your results.