Assessing Practice Value
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A variety of factors, both financial and of other nature, help determine practice value. However, the real value is clearly based on what a buyer is willing to pay and the amount results from multiple variables.
Regrettably, quite a large number of practitioners and even financial experts use different gross income percentages to determine practice value. This is a common practice, despite the fact that price stems from profit after all taxes and expenses.
Look, for instance, at a mixed practice with a gross income of $700,000, of which 500,000 come from over-the-counter sales of large animals, bringing in abnormally low returns. After a thorough analysis, the actual cash flow amounts to only some $75,000. On the other hand, a small animal practice with proper management brings in a gross income of only $400,000 but has a $150,000 cash flow. These situations are both real scenarios. Comparing the two begs the question of which practice has better value? Obviously, it would be the one with lower gross income, but a higher net income.
The profit of a practice is certainly the predominant factor in determining the value. If the practice lacks the money to pay for its expenses and debts, while also providing the new owner with a reasonable income, the value of that practice is little to none – unless one counts the equipment, drugs and property. However, other various factors can affect the cost directly, and not all of them are financial in nature.
For instance, a relevant factor is business development. Between two practices of equal gross and net incomes, the higher value will go to the one with a 10% annual growth, instead of the one with a 10% yearly decline.
The ability to transfer the proceeds to the new owner is yet another crucial factor in mobile practices, as the client loyalty links more to the individual and less to the practice. On the other hand, an ownership change in a fixed location multi-DVM operation would have a lesser impact. As such, the goodwill of the latter has more value than of the former.
Other relevant factors in influencing practice value are location, aspect of the facility, strength of the competition, inventory value, employee quality and the transition period of the owner.
While numbers are of the essence in establishing the value of a practice, it would be a serious oversight to ignore the other fundamental factors that are tightly knotted into the total practice value.
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