The missing link to fast, accurate, and affordable professional practice valuations.
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Your practice closed for Covid-19… is your practice worth less?
Board certified business appraisers begin the process of valuation by reviewing the income producing ability of the practice. One advantage of small businesses are the “perks” of expensing optional and allowed items to minimize profits. Each owner personalizes these options upon their personal preference and their accountant’s advice.
The appraisal standard that guarantees uniformity is a process called normalization or recasting of the income statement. This is necessary because there are extra-ordinary and/or one-time expenses that must be considered. The evaluation process normalizes these items to get an accurate representation of the practice’s true cash flow. Examples are: 1) Legal fees from lawsuits; 2) Accounting fees from audits; 3) If office real estate is personally owned, paying an above market rent to yourself; 4) Paying yourself a below market salary and taking draws against profits for the balance to minimize FICA taxes.
These examples pale in comparison to the devastation of closing your practice for Convid-19 but there’s precedent for normalization. Every city unintentionally closes businesses from roadway summer construction. Professional practices, retail stores, restaurants are affected from the difficulty of getting to the business. Some are effectively closed for weeks.
There are acceptable normalization techniques to use for Convid-19 shut-downs. 1) If the practice is down 4-8 weeks, an add-back proportionate to lost business revenues will be made to the NOI. 2) If the practice is shut-down for more than two months, the preceding year’s income statement should be normalized and all the value weight be given to it. Assuming year to year performance consistency, there should be no value penalty due to Convid-19 closures.
Therefore, there is no reason to wait to list and sell your practice. Just make sure the appraiser of your practice is aware of and uses these techniques.
Ted See, President, The TASCON Group
You’ve Worked your Whole Life Building the Value of Your Practice…
It’s time to retire, don’t bet the value of your life’s work on multipliers or rules of thumb. Some believe business valuation an art and multipliers and rules of thumb are adequate methods to value your practice. The multiplier, a value nobody can quantify, is multiplied against some arbitrary value such as gross sales, gross profit, adjusted net profits, etc. A small variance in the multiplier can cost you $100,000 or more.
Here’s how to avoid it. Most dental practices are worth more than the market value of their assets. Banks usually won’t lend the difference between the selling price and down payment and/or the buyer needs additional down payment. Therefore, to maximize the value, the dentist holds some of the paper from the purchase price. A practice is worth: 1) That price at which it must pay the debt, at market conditions, structured from the sale. 2) It must pay the owner a fair market salary. 3) It must pay the owner a return on investment. At any "snapshot" in time, mathematically there is only one value that can simultaneously meet all three criteria.
Remember, a buyer wants to know that he/she will be paid appropriately and also receive an appropriate return on investment. Since the dentist will be holding part of the debt, it is critical that debt be considered as part of the valuation process. These three criteria are the key issues determined in future due-diligence reviews by the buyer and seller. Having this information up-front saves professional fees, time and deals.
The only methodology that considers these three criteria is called the ‘Optimism” method. It optimizes the value for a win-win to both the buyer and seller. Insist upon it!
Ted See, President, The TASCON Group