11 factors that influence practice valuation
By Frazer Smith
There are two main components that determine the value of a business: assets and goodwill. Assets are the things you own and are set up on a depreciating market value basis. Goodwill is less tangible and therefore more variable. Unlike in other business valuations where the assets make up a higher percentage, goodwill makes up the majority of the value of a chiropractic practice.
By Frazer Smith
Assets are generally depreciated annually on a declining basis of 25 to 30 per cent per year until they cap out at market value, which is the price you could sell the asset for.
Goodwill, on the other hand, is more difficult to appraise as it factors in many different intangibles. There are many variables that we consider when establishing the market price of a practice. When you place value on goodwill, you effectively put a price on the reproducibility of that practice.
The following 11 factors will influence the overall goodwill valuation when selling your practice.
The practice location in a given community influences the ability for a new owner to reproduce the profit. Is it centrally located in a place that has easy access and visibility for new and existing clientele or is it in the back of a building in an industrial park?
The existence and type of lease may have a huge impact on the saleability of a practice. Generally, when selling a practice it is vital to ensure that there is a clearly documented long-term lease with opportunity for a new owner to renew. A minimum of three years is ideal to allow the purchaser the opportunity to establish the business. We have seen situations where the seller literally has a handshake arrangement with a property owner, which may be fine for the existing doctor, but will often make the practice unsellable.
Is the office space updated and set up for good traffic flow for both clients and the office team? Is it aesthetically pleasing and modern, or is it old and tired? Is there potential for expansion? Does it have adequate parking? Does it need new paint and furnishings?
How long has the practice been in the community and at the current location? If the practice has a long history in a particular community, it may be considered the “go-to practice” for that area. Longevity generally increases the valuation versus a practice that was only recently established.
Technique influences how many potential buyers will be interested in a practice. The pool of buyers for a massage practice starts out small because you are generally limited to massage therapists. If the practice utilizes an uncommon technique, you simply reduce that pool of potential buyers to those that would be comfortable purchasing the practice and utilizing that particular technique.
Is the team trained in systems and procedures? How often a team refers new clients indicates how engaged they are. The ability to maintain current team members also greatly influences the purchaser’s ability to maintain existing clients and recreate profit. Potential buyers typically want to keep the team to help them build rapport and minimize attrition.
Is the practice more acute-care-focused or more wellness-focused? Acute care practices require more new clients to sustain volume. As a result, they generally have a higher new client acquisition cost which factors into the ability of a new purchaser to reproduce a similar profit margin. A wellness-focused practice often has a higher patient visit average (PVA), which may mean less effort to maintain the existing practice numbers.
A more diverse or generalized client demographic will increase the pool of potential purchasers, versus having more of a niche in the community. For example, focusing purely on pediatric, sports or a specific ethnic clientele will limit the number of purchasers that are willing to buy a practice they may not necessarily feel strongly suited to. Offices that have clearly defined financial policies that are reviewed with clients and that have structured education systems that communicate the health and function benefits of chiropractic care generally are more sought after.
Offices with well-structured operating systems that are team-focused rather than doctor-focused are more reproducible. Evaluate this is by reviewing your operations manual. An office with a written marketing plan that adapts it accordingly and tracks return on investment on efforts expended is more attractive to potential buyers, as they can simply follow the plan to recreate current practice volume.
Goodwill can be increased when an office has reliable passive income streams such as allied health-care professionals, rehabilitation area and nutrition that are systematized in a way that requires little effort to reproduce cash flow.
Offices that have embraced the electronic era increase their saleability. Today, buyers are looking for offices that have effective and updated websites with reputation marketing systems built in. It doesn’t take much imagination to see how a reputation marketing system that has significant numbers of positive reviews can impact the goodwill of a practice. In contrast, poor reviews can weaken your goodwill.
Other factors that have the ability to influence the valuation of a practice include the geographical location of a practice, percentage of overhead, whether a practice is declining or growing, and whether there is real estate available as part of the purchase.
Applying some energy into these areas will more than likely produce immediate results for your bottom-line and also provide a healthier selling price for your practice when that time comes.
Dr. Frazer Smith has been a chiropractor for more than 17 years, practicing in Smiths Falls, Ont. He is also an associate coach at Full Circle Coaching and Consulting. Contact him at firstname.lastname@example.org