Practice Value V’s Real Estate
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Unless your practice is mobile you will have a facility, either owned or rented, in which you perform your activities. The costs associated with a facility are real expenses with an impact on your practice’s profitability. In the financial statement, under the profit and loss category, there will be present a cost of operating your practice in a facility – whether you pay rent to a landlord or as “rent” to the practice owner.
If the property where the practice operates is owned by the practice holder, he/she actually has two separate investments, which are unavoidably tied to each other. The practice in itself with all the associated equipment constitutes the first investment, while the building in which the activities are performed is another investment. The space where the practice operates is rented from the owner of the property. In order to establish a fair value for the rent, you should ask yourself what amount you would charge if you would rent a building to another veterinarian. Furthermore, if you were to rent a location, how much would you be willing to pay? Ideally the two amounts you come up with should be equal. However, in order to get a realistic and objective estimate, you can always use the service of local real estate agents, appraisers and property managers.
Keep in mind that your profits will have considerable weight in determining practice value. Your profits will be higher as your expenses are lower, which also means that the value of your practice will be high. If the value of the property where you operate your practice is lower than what was concluded during the practice appraisal, the value of your practice will increase. On the other hand, if the property value is found to be much higher than the initial assessment, your practice will be worth less. The two are closely connected, and you cannot ignore the effects of real estate over your practice’s value.
In order to determine how much you are really making from your practice, you need to establish the costs associated with the property. If you own the property you should ask your accountant if paying rent to yourself is a good idea. Either way, some amount should be subtracted from your profits in order to reflect the property expense in your financial results. That way, you will know exactly how much cash you are getting from the practice alone.
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