Veterinary Practice Brokers - Why You Need an Advisor p3

February 2, 2021

The Thing about Commissions...

For any broker, most of the work is done on credit with the expectation of earning a fee at the close of the transaction. That should sound very good to a selling doctor, but brokers in almost every industry have a bad reputation.

Getting compensated at deal close has an element of risk reward for the broker. The risk is that the broker works to support a deal that doesn’t close.  When Goldman Sachs attempts to sell a large-cap Company, the reward for success more than offsets the risk of failure.  This is less true as the size of the Company, and potential reward gets smaller.  

Selling a small Company has a lot of the same risk (time spent with no compensation), but a lower potential reward. This dynamic incentivizes brokers of smaller transactions to look for short-cuts on the preparation work. These short-cuts reduce the risk for the broker, by lessening the work required to get to a fee. Clients, however, do not benefit from short-cuts.

Many short-cuts are evident in how brokers act in the real-estate market. Real-estate brokers like to set a list price for properties they sell. The list price is a chance for the broker to set a valuation target so the property can be sold easily. A list price helps the broker, but not the client.

Also, Real-estate brokers typically will “split” commissions between the sell-side broker and the buy-side broker. In some cases, the buyer’s broker will be of the same firm as the seller’s broker. Here, the broker many have conflicts that prevent him from fully advocating for the buyer, or seller leaving the clients to push any negotiations themselves.

Finally, almost every real-estate broker becomes unreachable once an offer is accepted, leaving buyers and sellers to figure out how to close the deal with their attorneys. These are all things that cause sellers to seek ways to avoid using brokers.  

Practice brokers in veterinary services (and in other small business sales) may take short-cuts as well. Some practice brokers will use a list price approach, removing the price discovery process. Others push clients into deals with favored buyers. Many fail to fully prepare their clients for the transition, and take only a passive approach in the process from offer acceptance to close.  

In a veterinary practice transition, the brokers bear the most risk on any work they do prior to the client accepting an offer. Taking short-cuts on this work by not fully identifying and communicating the drivers of value in the practice, and not properly vetting and preparing the facts of the practice, reduces the broker’s risk, but does a disservice to clients.

Aside from being careful and systematic about how you select your broker, the best thing you can do to avoid “short-cuts” is to make sure the broker’s incentives are aligned with your own. Since you want the “right” deal, not just the easiest deal, you should make sure the broker can earn much more compensation for bringing you an excellent deal, than he can for bringing you an easy deal.

Most practice brokers work for a fee that is a flat % of sale value. On the margin, a flat fee structure will lead the broker to quickly get you a deal, instead of working to find the right deal.

A tiered fee will better align the broker's incentives with your own. A tiered fee is a lower percent of sale value and “ratchets” up as the sale valuation increases. Such structures better incent the broker to go the extra mile to get you that best deal.  

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