Practice Valuations - What You Need To Know
A fundamental aspect of a successful business exit is assuring that your healthcare practice has enough value to allow you to exit with financial security. This, along with the value of your assets, gives you the best chance to pursue the exit you want on the timeline you want. Obtaining a proper, professional practice valuation is the first and most important step in determining how much your practice is worth.
The Practice Valuation is your presentation of what your practice is worth. This is where you explain everything a potential buyer may want to know about your practice. A Valuation is principally based on information concerning the practice, its history, referral base, operations, equipment, staff, profitability, market considerations and a set of reasonable assumptions.
The overall purpose of a practice Valuation is to offer an opinion concerning the Fair Market Value of the entire practice as a going concern.
The Valuation is where you tell the buyer:
• What the Fair Market Value is and why
• Differentiating qualities of your practice
• Competitive advantages
• Growth opportunities
• Profitability, existing and potential
• All other value drivers defined and quantified
The Valuation should also include:
1. The purpose of the Valuation
2. Important assumptions
3. Practice characteristics
4. Production, revenue & expenses comparisons
5. Introduction to the valuation process
6. Valuation methods used
7. Advantages of the practice
8. Important things to consider
How to arrive at a value for the practice …
The final valued price of a healthcare practice is defined as the price that a successful practice of this description should bring in this marketplace when offered for sale by a willing seller and accepted by a potential willing buyer allowing reasonable time in which to find a buyer with both buyer and seller acting prudently and neither being under duress.
The Valuation is a process and set of procedures used to determine what a business is worth. Tracker Enterprises, Inc.™ believes there is no singular preferred valuation method that should be used to establish what a healthcare practice is worth since business value means different things to different people. For example, an owner may believe that the business connection to the community it serves is worth a lot (often called “blue sky” value); a buyer may think that the business value is entirely defined by its historic income and future income potential.
Since the various methods chosen may produce somewhat different results, concluding the value requires that these differences be reconciled to derive a fair business value. An average of the different Valuation methods should then be used in reaching the actual value. The Valuation then proposes an expected price this practice might sell for in the current market.
How to arrive at a value for the practice …
The final valued price of a healthcare practice is defined as the price that a successful practice of this description should bring in this marketplace when offered for sale by a willing seller and accepted by a potential willing buyer allowing reasonable time in which to find a buyer with both buyer and seller acting prudently and neither being under duress.
The Valuation is a process and set of procedures used to determine what a business is worth. Tracker Enterprises, Inc.™ believes there is no singular preferred valuation method that should be used to establish what a healthcare practice is worth since business value means different things to different people. For example, an owner may believe that the business connection to the community it serves is worth a lot (often called “blue sky” value); a buyer may think that the business value is entirely defined by its historic income and future income potential.
Since the various methods chosen may produce somewhat different results, concluding the value requires that these differences be reconciled to derive a fair business value. An average of the different Valuation methods should then be used in reaching the actual value. The Valuation then proposes an expected price this practice might sell for in the current market.
Valuation methods typically used …
Tracker Enterprises, Inc.™ uses three different methods that are best suited for a healthcare practice. The values determined by the methods used are then averaged to arrive at the recommended practice Current Fair Market Value. The current methods used include:
1. Discounted Cash Flow Method: This method appraises the practice value based on the expected future benefits that a buyer expects after purchase. The question answered is: If you buy the business today for a certain amount of money, receive annual cash flows over the period you own the business, then sell the business, what return on your initial purchase investment do you get?
2. Capitalized (CAP) Excess Earnings Method: This approach assumes a practice is valued as a sum equaling the total of the tangible (e.g., clinical and office equipment, supplies, etc.) and intangible assets (e.g., “goodwill”). Goodwill represents the amount of money a buyer would pay over the fair value of the Tangible Assets to acquire a practice that is well established and has a significant, reliable and loyal patient base thus assuring an assumed stabile monthly income. The value of a successful business generally exceeds the value of its assets since it takes time, effort and resources to make a business successful.
3. Multiple of Discretionary Earnings Method: This calculates the earnings track record and future prospects, likelihood of business and industry growth, business location, employee skill and stability, how attractive the business is, and financing availability.
Once these three approaches are completed and a value is established for each approach, an average is calculated for the three approaches to determine a fair value. For example,
The Current Fair Market Value of the practice of John B. Smith, DDS, LLC is assumed to be:
Valuation Approach I $ 1,322,985.81
Valuation Approach II 1,386,993.51
Valuation Approach III 1,321,908.60
$ 4,031,887.92
$ 4,031,887.92 / 3 Approaches = $ 1,343,962.64
Current Market Value of this practice as of 9-30-2021 is estimated at: $ 1,343,963
additional Information - How to Increase Practice Value
What happens if your practice isn’t worth enough to allow you to exit with financial security? How can you increase your practice’s value? Growing practice value and cash flow can help you add to what your practice is currently worth. The answer lies in managing to the Value Drivers and Value Killers. What are they?
• Value Drivers: Historical cash-flow, sales growth, growth opportunities, market share, profitability, unique services, key employees, transferable, good systems, leadership, good financials so buyer can obtain financing.
• Value Killers: Inconsistent profit, bad financials, poor management, no growth opportunity, and owner skills and patients who are not transferable.
WARNING: Untimely or early disclosure of the Seller’s intent to employees, patients, vendors, and the marketplace could all potentially have negative impacts on the value of the business and the ability to sell it.
What Are the Benefits of Using Value Drivers?
• Perspective. Identifying and enhancing Value Drivers can help you view your business through the eyes of a prospective buyer. This helps you overcome sentimental attachments to your practice and decisions that only benefit you personally.
• Action. Because you’ve already set your goals and determined how much your business is worth, you know how much and how quickly growth needs to occur. This gives you an idea for an action plan.
• Triage. By identifying the Value Drivers, you can concentrate your and your staff’s efforts on areas that need the greatest improvement.
DISCLAIMER
The opinions expressed by Tracker Enterprises, Inc.™ are those of the author. All of the information contained herein is intended to be general in nature without regard to specific types of businesses, geographical areas, or other circumstances, and should only be considered after consulting an appropriate expert, such as an attorney or accountant.