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More than 10,000 Americans turn 65 each day, a trend that is expected to continue for at least 15 more years. Most of us in the hearing industry see this as a positive sign—the aging population means that each year more people will be candidates to buy hearing aids, suggesting that our industry has a lot of runway for growth ahead of it. But this also means something else for the private practice community. Turning 65 is synonymous with retirement, and the majority of practice owners belong to this aging demographic.

As a business owner, retirement takes on a very different meaning for you than it does for everyone else. You can’t simply decide to walk away because you have a responsibility to your employees,

patients, and community to ensure your business continues in your absence. Therefore, exit and succession planning are a critical part of your life plan, something you should consider at a very early stage in business ownership, before retirement is even a tangible concept.

If you’re like most practice owners, you play a critical role in the daily operations of your business, seeing patients while also managing marketing, HR, and finance. If you decided to stop showing up for work, your business would soon cease to exist. Therefore, the fundamental aspect of planning for exit and succession becomes building a business that can thrive without you. Before you can do that, however, you must shift your mindset,

Exit and Succession Planning for the Hearing Aid Specialist

Creating a strong exit strategy requires a shift in mindset; it requires thinking of your company as an investment rather than as a career.

by Craig Castelli CEO & Managing Director of Caber Hill Advisors

Take the quiz on page 48!

practice management

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viewing your practice through the eyes of your successor. If you can begin to understand the buyer’s perspective, you will understand what makes a practice worth buying. In other words, begin viewing your practice as an investment.

Treating Your Practice Like an InvestmentWhat is the difference between an investment and a career? The two words are rarely compared, but in the context of business ownership perhaps we should pay closer attention to their meaning. A career is your occupation or profession, followed as your life’s work and, hopefully, something you are passionate about. An investment is an asset purchased with the idea that it will provide income in the future or appreciate and be sold at a higher price. Whereas a career only provides you with an annual income, an investment can provide you with both an annual income and a return (hopefully for a gain) of your invested capital.

Perhaps the best way to compare the two is this: you retire from a career, but you exit an investment. This distinction sums up the difference in approaches - retirement is a highly personal and emotional decision whereas exiting an investment is a highly rational, non-emotional, business decision. Unfortunately for many small business owners, when it comes to exit strategy it’s tough to separate the emotional from the rational. Therefore, exit is typically linked to retirement rather than the real factors that should drive exit timing.

I draw the distinction between investments and careers because I know far too many business owners who treat their companies like careers. They purchased their business as a way to further their career and enhance their lifestyle, and, whether the goal was to make more money or create more free time, their company supports their goals. The focus is short-term, with the primary concern being to make as much money this year as they did last year, in order to fund their lifestyle. Rarely, if

ever, do these owners contemplate the bigger picture, including their exit strategy.

Creating a strong exit strategy requires a shift in mindset; it requires thinking of your company as an investment rather than as a career. To this end, your company is no different than a stock or a piece of real estate. Given the choice, you are only going to sell a stock when you believe that it has peaked, but you can only sell it if someone else wants to buy it. You should treat your practice the same way, building it to a point at which others want to buy it, and selling when you’ve reached that peak. Unlike stocks or real estate, however, where you may have little control over performance, you have direct control over many aspects that determine whether or not your practice can be sold.

Owners who treat their companies like investments, rather than careers, embrace this mindset. They take action to ensure that their company is in a position to be sold at any point in time. We all like to think that we control our own destinies, and in the case of business ownership that means determining when to sell and doing so on our terms. The unfortunate reality is that many owners don’t get to do both; some are forced to sell earlier than expected, usually due to unforeseen circumstances (divorce, illness, or other hardship), while many others simply operate unsellable businesses, and are unable to find a buyer willing to acquire it.

So, what can you do?

It’s All About YouI frequently speak on the topic of exit strategy, and in doing so pose the question,

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“When you sell your business, what are you actually selling?” The answer contains three components: tangible assets, like equipment, inventory, and a furnished office space; intangible assets, including files, contracts, your company name, and goodwill; and your profit & loss (or, in other words, the fact that a new owner can rely on a future stream of income generated by the business).

Valuations generally consider all three components, with the P&L driving the fair market value, but this only partially answers the question. As a prospective buyer of your practice, the very next question I would ask is, “Does any of this have value without you?”

The more involved you are in daily operations the tougher you are to replace, and your practice’s value is tied to the new owner’s ability to replace your output. This is a truth in any business, but is exponentially more critical in healthcare practices (and other businesses with licensure requirements).

Consider the solo practitioner, who owns the business and sees all of the patients. Without this person, the practice can’t generate any revenue. Therefore, a new owner has to determine who to hire to fill that role before they can buy the practice, and they have to find this person from a very small group of potential candidates—due to the licensure requirements inherent in the hearing industry, the new owner can’t just hire anyone off the street.

If the new owner is another hearing aid specialist or audiologist, the problem

can be easier to solve. This person can assume your role relatively quickly and will bring the same drive and passion to the business; just like you, they need the practice to thrive in order to pay their bills. If, however, you sell to another practice owner or a larger corporation, they may not have an employee riding the bench that they can plug into your practice right away. They can hire someone, but replacing an owner with an employee poses numerous challenges, namely that employees rarely possess the same level of skill, motivation, and accountability as owners. Several buyers have been burned by replacing owners too quickly, as the new employee’s shortcomings result in declining sales.

Therefore, it has become increasingly common for an owner to continue working in the practice after the sale, seeing patients and managing daily operations for

the new owner. This extended transition period can last several years and provides insurance to the new owner that there will be very little disruption to the customer facing aspects of the practice.

You can mitigate the risk associated with replacing your production in three ways:

1. Reduce the practice’s reliance on you.As your practice grows, you ultimately reach capacity for your own personal output. There are only so many patients you can see on any given day, limiting the number of hearing aids you can sell. Once you reach that limit, the only way to grow is by hiring an additional provider. Doing so not only facilitates growth, but it also reduces the practice’s reliance on you simply due to the fact that someone else sells hearing aids and generates revenue. Over time, your second employee also reaches capacity, and you hire a third. The cycle repeats itself, each time supporting your practice’s growth while reducing its reliance on you.The alternative, if growth appears hard to come by, is to simply hire your replacement. You move into a general manager role, running operations but ceasing to see a full schedule of patients, and your employee becomes the primary provider. Then, when you sell the practice, the new owner inherits a business with the succession problem solved.

2. Agree to a long transition period and/or employment contract.Hiring additional providers won’t work for every owner. Perhaps you are too close to selling, too risk-averse, or your practice’s financial performance

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simply can’t support an additional provider. In this case, your agreement to facilitate a smooth transition, be it for a few months or several years, mitigates the risk for the new owner by giving them time to learn the business they’ve acquired and ultimately find and train your replacement.

3. Lower the price.Nobody likes to hear this, but the reality is that risk is a major factor in valuation and if you cannot execute on the first two options then your only realistic alternative will be to price the risk into the deal. In other words, a buyer may only be willing to purchase your practice if they can afford to lose business and still recoup their investment.

In my business, we sell several millions of dollars’ worth of hearing aid practices each year, and we see a strong correlation between the practice’s reliance on its owner, their willingness to support a transition, and the valuation. If the owner is not involved in patient care, this rarely becomes an issue; however, most businesses in which the owner generates 20% of revenue or more carry enough owner risk that realizing a premium valuation requires agreeing to unique terms.

Get a Valuation and Understand the Financial Big PictureThe second most important aspect of your exit planning is learning about the fair market value of your practice, and understanding what exactly that means for you. This starts with a valuation. Engage an independent firm to appraise

your practice, and ask them to outline various transaction scenarios in addition to simply determining fair market value. Then, talk with your financial or estate planning advisor about the tax and estate implications of the sale and have them calculate whether you can afford to sell at such a price.

Ultimately, it’s not how much you sell your practice for but what you keep after taxes and expenses that matters. Your corporate structure, the transaction structure, and the payment structure will determine how much you get to keep. For example, most small business transactions are structured as asset sales, in which the buyer purchases the assets of your corporation but does not buy the corporation itself. This is in contrast to a stock sale, in which they purchase the stock in your corporation.

If an asset sale is structured properly, a seller will pay capital gains tax on the

majority of the purchase price. This is the optimal scenario, as capital gains tax rates tend to be significantly lower than ordinary income tax rates. There are, however, two primary exceptions to this rule. The first applies to C Corps, which are penalized in asset sales. A corporation structured as a Sole Proprietorship, LLC, Partnership, or S Corp acts as a pass through entity; the corporation does not pay taxes and the income flows through to the owner’s tax return, where the proceeds are taxed as ordinary income or capital gains. C Corps, however, are subject to double taxation; the corporation pays corporate income tax on the proceeds from the sale, and then the owner pays capital gains or ordinary income tax on the net proceeds (after corporate income taxes are paid). If you own a C Corp, it would be wise for you to consult an advisor immediately to discuss your options, and consider switching your corporate structure altogether.

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The second exception is more of a scenario than a hard and fast rule, and relates to the purchase price allocation: a tax and accounting schedule that divides the purchase price into separate amounts that are allocated to the various assets being sold. The owner pays capital gains tax on the amounts allocated to files, goodwill, and intangible assets; and ordinary income tax on the amounts allocated to tangible assets (furniture, fixtures, and equipment) and non-compete agreements. Most of our transactions have resulted in the vast majority of the purchase price being allocated to intangible assets, meaning that the owner was taxed at the capital gains rate on all but a very small percentage of the payments he or she received; however, if the allocation is neglected or poorly negotiated, the seller can face an unexpectedly large tax obligation, reducing his or her net proceeds from the sale.

After reading that, some of you may be thinking, “Well this is easy, I’ll just make this a stock sale and not have to worry about it.” As ESPN personality Lee Corso is famous for saying, “Not so fast my friend.” Stock sales are very rare at the small business level. There are several reasons why buyers prefer asset sales, and while I won’t elaborate on the reasons in this article other than to say they relate to liability and tax treatment, I can safely assure you that not only do most buyers prefer the asset purchase but they also insist on it. In other words, they will only buy the practice if it’s structured as an asset sale, and would rather pass on the deal altogether than buy the stock.

So, design your exit plan with the assumption that you will sell the assets of your corporation. Work with your advisors to model various scenarios and determine the point at which you

can afford to sell based on your age, date of sale, corporate structure, and payment structure of the deal.

Identify Potential SuccessorsOnce you have an understanding of your practice’s value, the next step is to familiarize yourself with the buyer landscape. Generally speaking, there are four types of buyers: individual hearing aid specialists or audiologists, current practice owners, large corporations, and non-industry buyers. Each have their own unique valuation methodologies and transaction requirements. Familiarize yourself with each buyer category and begin the process of identifying potential successors. If you can line someone up in advance, your transition will be much smoother.

Understanding the ever-changing dynamics of corporate buyers is a key component of successor identification. They have had a heavy influence on the industry over the past few years, and like anything come with their own set of unique pros and cons.

Compare transactions from the hearing aid industry to other similar healthcare industries, and you will find that hearing aid practices sell for larger multiples than their peers. Are hearing aid practices innately more valuable than other healthcare practices? All industry biases aside, the answer is no. So why will a hearing aid practice sell for significantly more than an equivalent practice operating in a different area of healthcare?

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Dig deeper into recent industry transactions and you will find the same discrepancy exists between the prices paid by corporate buyers and those paid by individuals. Therein lays your answer. The corporate buyers have deeper pockets, and those owned by or affiliated with hearing aid manufacturers can profit at both the wholesale and retail levels, allowing them to use a very different valuation model than an individual is able to use. Furthermore, their objectives are to expand market share and leverage economies of scale to realize a return on their aggregate investment rather than any one individual deal. Simply put, they are willing and able to pay more than the practice would otherwise be worth, and as long as they remain active in the marketplace, values will remain high.

Some of you reading this article may object to selling your practice to a corporate buyer. You value your independence and take pride in your ability to compete against the big companies. Your goal is to sell your practice to a younger version of you,

someone who can continue the legacy of an autonomous practice. The decision to support the cause of independent business owners may also be a decision to lower your sale price because, as the previous paragraph suggests, no individual can afford to pay what the large corporations will pay for a practice.

Some readers will inevitably think that the preceding paragraph does not apply to them, and assume that the uniqueness of their practice will allow them to sell to an individual for the premium price paid by the corporate buyers. This may be possible, if they are willing to agree to some very unique terms of the sale that require them to finance part of the price themselves or co-sign for the loan. Even if they can pull this off, however, they still rely on the corporate buyers and their valuation models to justify such a premium.

The corporate buyer landscape continually evolves, with new players entering the market and more established entities shifting their focus. Several of those who

were the first to go on an acquisition spree are closing in on their goals for market share and units (e.g. number of stores). Such rapid growth has led them to pump the brakes on acquisitions for a while, either shifting their focus to specific markets or specific practice types that better fit their “new” model. New buyers who have recently entered the fray are picking up some of the slack, but until they achieve scale they tend to focus on specific markets and/or practices that are large enough to justify entry into a new market. Understanding the likelihood of selling to one of these buyers, as well as your own views on such a transaction, will help you position your practice to sell it at the right time, to a buyer with whom you feel comfortable, and for an attractive price.

Clean Up Your Financials and Pay the IRSThe vast majority of your time spent owning a company should be focused on growing both your business and your personal income, and the two are usually directly related. Therefore, finding ways to reduce your “on paper” business income by treating personal expenses as business expenses lowers your tax bill and helps accomplish this objective. To this end, most small business owners write off everything they possibly can; however, the final years before selling the business call for a change in strategy, because declaring as much income as possible can increase the price you receive in a sale. Let me explain. Profitability and cash flow are the key drivers of a company’s value. Even buyers who utilize revenue multiples incorporate cash flow into their valuations. Simply put, more cash flow means a higher price.

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When we prepare a company for sale we will make certain adjustments to a seller’s financial statements in order to identify personal and one-time expenses that are not directly related to the operations of the business in order to present a clearer view of the buyer’s cash flow after the sale. This helps the buyer understand how the seller was running expenses through the business and that the business generates more income than is shown on the tax return. Whether the income appears on the bottom line or is buried in expense line items, we will find it and add it to the net income to calculate adjusted cash flow.

This adjusted cash flow will become the basis for our valuation, but it might not be the basis for valuations done by a buyer or lending institution. Certain add backs are obvious: interest, tax, depreciation, amortization, owner’s wages, and the lease of a company car. Some are a little gray but can be acceptable, like travel and cell phones; typically, if these are their own line item they can be relatively justifiable. Other expenses that are buried within line items, however, can be much more difficult to justify. And when they are tough to justify and/or appear hidden, buyers are less likely to accept them. If you are willing to mislead the IRS, why should a buyer believe that you are being honest with them?

When a buyer requires financing in order to complete the deal, the bank’s valuation is all that matters. Banks, especially the SBA lenders most commonly used in small company transactions, will not accept many of these add backs; they usually

accept the obvious add backs (as specified in the previous paragraph), but may negate the rest altogether. So, by eliminating the personal expenses you increase net income and make your business more attractive to buyers and lenders alike.

Many buyers value companies based on a multiple of cash flow, so achieving agreement on the adjusted cash flow number is critical to convincing a buyer to accept your asking price. The one thing no buyer can ever dispute is net income, so by expanding your net income you eliminate many of these concerns.

Consider $10,000 in personal expenses that are buried in a variety of line items. By running this $10,000 through the business you probably save $3,000-4,000 in taxes; however, if the buyer does not treat these expenses as add backs it could cost you $30,000 to $70,000 in purchase price. Think about it: pay an extra $3,000-4,000 now and get it back 10-20x in the sale. The extra taxes you pay in the final year or two before a sale could literally be the best investment you ever make!

Get HelpIf exit planning were easy and intuitive, I wouldn’t have been asked to write this article. Several professionals of varied backgrounds can help you prepare your exit plan and sell your business. Accountants, attorneys, business brokers, estate or financial planners, and even some hearing industry entities all play a role and represent a worthy investment if you are serious about maximizing your exit opportunities.

Your accountant, estate planner, and/or financial planner help you with advanced preparation. They can advise you on trusts and wills that can shield your heirs from taxes while also helping them avoid probate should you die or become incapacitated prior to selling. They can also help you forecast your required retirement income and model your ability to afford retirement based on various sale scenarios. Your accountant should also be involved in the sale process itself, albeit in a smaller way, providing financial statements, answering questions about your financial history, and advising on tax implications.

Your attorney may be involved in estate planning. Otherwise, their role really only comes into play during the late stages of the negotiation. Selling your business is a legal transaction, and there are several items to which you will have to agree that should be very closely reviewed by an attorney. Like any contract, the purchase agreement defines each party’s duties and responsibilities as well as the recourse they can pursue should the other party fail to uphold their obligations. It’s tempting for many to skimp on legal fees or try to

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avoid hiring an attorney altogether, but doing so is like playing Russian roulette; the savings don’t justify the risk.

Hearing aid manufacturers, buying groups, and management companies can be very valuable resources when it comes to selling your practice. They are plugged in to each market, are likely to know a potential buyer, and therefore can introduce you to prospects that may ultimately be your successor. Many also offer valuation and other transaction support services, in some cases for free if you are a loyal customer. A word of caution: putting all your eggs in this basket due to the appeal of free can be a very costly mistake.

On the surface, some companies may appear to be friendly and supportive, but they may not have your best interests at heart. Their goals are to secure their customer base and sell more hearing aids; therefore, their chief concern when helping you sell your business is to facilitate a sale to someone else who will continue to buy from them. They fish for buyers in the small pond that is their current customer base rather than the ocean that is all potential buyers. They may also inject their own bias into the valuation, providing you with a value based on what they would like to lend to a prospective buyer or based on a number that will make your practice easier to sell to one of their customers rather than offering you a true reflection of fair market value. Furthermore, some of these companies produce valuation reports that lack content and a broad understanding of financial modeling, and in some cases are

nothing more than a two paragraph email broadly describing market trends.ay

These past two paragraphs may make some people feel uncomfortable or even downright angry. If you are able to speak openly and honestly with any of them, however, they will acknowledge that their primary concern is protecting their customer base. Please don’t misunderstand – they can still be valuable resources – but relying exclusively on them limits your opportunity and reduces your odds of a successful outcome.

Contrast these companies with business brokers and advisory firms, who are agnostic toward hearing aid manufacturers and buying groups. They can play a valuable role in your exit planning, in some cases simply helping with the sale itself while at other times helping you make preparations several years in advance. These firms and/or individuals lack the conflict of interest inherent in working for an industry entity, and therefore can provide objective guidance while targeting a larger pool of prospective buyers.

Find someone with industry expertise and a reputation for working on a national level, and you’ll have an advisor by your side who understands the unique nuances of the hearing industry as well as a very large network from which to draw several candidates to purchase your practice. These types of advisors aren’t free, and while it’s always tempting to try the free routes before hiring one, they can represent a successful investment by managing the sale process so you can focus on running

your business, and in most scenarios outperforming industry entities in terms of both valuation and time to sell.

ConclusionIf I could simplify this article down to one sentence, it would be this: Begin your exit planning several years in advance of your desired sale date, and focus on building a business that can function in your absence. If you are able to do this, everything else will fall in place. Your practice will be valued at a hefty premium to practices that present significant owner risk. You will be able to avoid complicated deal terms and long employment agreements. And, you will have more prospective buyers lining up and possibly even competing against each other to win the right to take over your practice.

Craig CastelliCraig Castelli is the Founder of Caber Hill Advisors and serves as the company’s CEO and Managing Director. He has over 10 years of audiology industry experience and has

worked with hundreds of private practices. He launched Caber Hill because he wanted to transform the business brokerage industry by bringing a higher level of service and professionalism that would produce above average results for his clients. Caber Hill was formerly the Chicago office of Bridge Ventures, which Mr. Castelli founded in 2010 and rebranded as Caber Hill at the end of 2013.

For more information, contact Castelli at:

Caber Hill Advisors(312) 371-6920 craig@caberhill.com www.caberhill.com

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Please check one: ☐ $29.00 (IHS member) ☐ $59.00 (non-member)

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EXIT AND SUCCESSION PLANNING FOR THE HEARING AID SPECIALIST✁

IHS Continuing Education Test1. Paying more in taxes in the two

years before you sell your practice could actually provide a return rate 10-20 times greater that the amount of the extra taxes paid (when you sell your practice).

a. true b. false

2. Considerations for choosing an attorney to be involved in estate planning include

a. careful estate planning can wisely be conducted without a lawyer’s involvement

b. the savings of conducting a practice transaction without a lawyer justify the risk

c. a lawyer is usually only necessary during the late stages of negotiation

d. none of the above

3. Eliminating personal expenses buried within line items from your adjusted cash flow will

a. increase your net income b. make your business more

appealing to buyers c. make your practice more

attractive to SBA lenders d. all of the above

4. Hearing aid practices typically a. sell for less than other

healthcare practices b. sell for about the same as other

healthcare businesses c. sell for larger multiples than their peers d. sell for a higher price when

being sold to an individual rather than a corporation

5. The four types of hearing aid practice purchasers (hearing aid specialists/audiologists, current practice owners, large corporations, and non-industry buyers) all utilize the same basic valuation methodologies.

a. true b. false

6. Practice owners who operate their offices as a C Corp

a. won’t be penalized in an asset sale b. are not subject to double taxation c. should consider switching their

corporate structure altogether d. none of the above

7. Owners can mitigate the risk associated with replacing their production by

a. reducing the practice’s reliance on the owner

b. agreeing to a shorter transition period or employment contract

c. raising the price of the practice d. all of the above

8. Regarding selling your practice, it’s value is made up of:

a. it’s profit and loss b. intangible assets c. tangible assets d. all of the above

9. In selling your practice, it is best to treat your company like a career.

a. true b. false

10. Getting the best price for your practice means that you must

a. consider succession planning 2 years before you want to retire

b. build a business that thrives primarily due to your physical presence in the practice

c. view your practice as an investment d. none of the above

For continuing education credit, complete this test and send the answer section on the next page to:

International Hearing Society • 16880 Middlebelt Rd., Ste. 4 • Livonia, MI 48154•  After your test has been graded, you will receive a certificate of completion.•  All questions regarding the examination must be in writing and directed to IHS.•  Credit: IHS designates this professional development activity

for one (1) continuing education credit.•  Fees: $29.00 IHS member, $59.00 non-member. (Payment in U.S. funds only.)

Answer Section(Circle the correct response from the test questions above.)

1. a b

2. a b c d

3. a b c d

4. a b c d

5. a b

6. a b c d

7. a b c d

8. a b c d

9. a b

10. a b c d

(PHOTOCOPY THIS FORM AS NEEDED.)