Features Finance Management
My Massage Therapy Practice

At some point, every massage therapist thinks that now is the time to sell out or do something different.

No matter the reason, there is always the question: does my massage therapy practice have a value? The truth is that many massage therapy practices can command a high dollar while others are worth very little.

The first step in establishing market value is a clarification of what is to be for sale. A buyer will weigh the logic of buying your operation, buying another or establishing a new practice. A fair value for your massage therapy practice is what another will pay for it and what you will accept.

GOODWILL DEFINED
Other than furniture, fixtures and equipment (FF&E), for most massage therapy practices the value is in “goodwill.” Although there are several definitions, the best comes from a 1910 English law case, where a Lord Eldon stated “Goodwill is nothing more than the probability that the same patrons will continue to patronize the same shop.” In addition to FF&E, this is what you have to sell and this is what a valuation puts the dollar sign in front of.

We will place goodwill into three distinct categories:
Personal or Professional – This is goodwill that’s been built up by the work of the therapist. When (s)he leaves, any goodwill created by his/her abilities, techniques and personality leaves too; however, because a successful practice is largely a trust relationship between the professional and the clientele, that trust may be partly transferable. A fair assumption in clients’ minds is that the new buyer will have the same training and professionalism as the seller. This ensures a measure of continuity. So, the value here relates to the trust of the clientele in the established system of training and accreditation of massage therapists.

Goodwill of Establishment (a.k.a. Business Goodwill) – The longer the practice has been established, the more regular and devoted the clientele and the greater its value. It’s about the probability that the same clientele will return, no matter who is in charge. The measure is the retention and potential for continued patronage from existing clients. Consider the competition: some is good but excessive competition is ruinous. If the market for therapeutic massage is large and expanding, competitors will soon appear.

Location – A massage therapy practice can be location-dependent or location-independent. Location-dependent is where the clients are nearby. The practice cannot be simply packed up and moved across town without losing many of them. Location-independent would be where the practice can be easily relocated, and the clients will seek it out. If independent, there is no goodwill of location. Everything depends on the source of the clients. If they are drawn almost exclusively from the massage therapy operation being part of a spa or recreation centre for example, this is definitely location-dependent.

Alternatively, if the clientele is scattered throughout a larger metropolitan area and it would be unimportant were the practice located a few blocks or so here or there, any goodwill value for the practice would only exist for reasons other than location.

VALUATION METHODS
There are two common valuation methods and each method has its shortcomings. All that anyone can do is give it a best estimate. One of the two methods is a “Market Comparison,” where revenues and selling prices abstracted from the sale of other massage therapy practices are compared. While data is lacking on the value ranges for massage therapy practices, they are usually valued between 40 and 60 per cent of annual billings. As there are many factors involved, the spread is large and this procedure provides only the broadest of value estimates. Secondly, the “Excess Earnings Approach” is the summation of the value of the tangible assets, usually limited to the FF&E plus a dollar figure for goodwill. An explanation follows below.

TANGIBLE ASSETS
A quick method for providing a reasonably reliable estimate of the in-place value of the tangible assets (principally FF&E) is first to determine their replacement cost and then to calculate their depreciated value.

Estimate the in-place value as halfway in between. For example, assume that the cost to replace the FF&E new would be $20,000. Normal useful life is 15 years. They are now eight years old. The depreciation would be 8/15ths or 53.3 per cent of $20,000 or $10,660 with a depreciated value of $9,340. The halfway would be an estimated value of $14,670. The result is not what you could sell these assets for on the open market, but a value in-place and in-use that is part of a going concern.

VALUE OF THE GOODWILL
Start with the last five years of average income and expenses if the income is variable, or at least three years if quite steady. If there is a noticeable trend, one way or the other, use the last two years. Remove anything that has nothing to do with day-to-day operation, such as windfalls, major losses or purchase/sale of assets. If you own the real estate, add to the income the amount that you pay for mortgage amortization but subtract what you would have to pay for rent were the property owned by another. Always assume the FF&E to be free of debt, even if this is not true. Determine a fair wage for yourself. Do not consider it as an expense but adjust it to what you could earn if working for another, or what you would have to pay someone to manage your practice. Deduct all other expenses except interest on debt and depreciation on capital assets. The remainder is an adjusted cash flow figure, on which the goodwill value is based.

The goodwill value is calculated by multiplying the adjusted cash flow by a factor, but the eternal problem is what that factor should be. In my opinion, if it’s a relatively new practice or one with little anticipated client retention, a factor of one would probably be about right. If it’s a well-established or a group practice, three or perhaps even four times could be appropriate. For total value, add to the goodwill the value of all tangible assets, and the real estate if a part of the package.

Bear in mind that only a ballpark figure is produced, one from which to begin negotiating. Because it is not possible to reconcile every value contributor or detractor, the best of appraisal methods has its limits.

Check the result with what’s happening in your marketplace.

Any value estimate is always subject to adjustment by other determinants. These would include non-competition clauses, seller financing, or an “earnout,” where you stay with the practice and accept payments. This last situation is affected by excessive competition, obsolescence, or where the practice is largely built on specialized services that are difficult for the new entrant to continue.

In the end, it still comes down to one’s personal judgment. What are buyers willing to pay? What will sellers accept? The going concern value is always based on what is there, the transferable portions of the practice, and the level of willingness of each party to negotiate and compromise.

Lloyd Manning is a semi-retired business, commercial real estate appraiser and financial analyst. His newest book, Winning With Commercial Real Estate – The Ins and Outs of Making Money In Commercial Properties, is available online from Indigo-Chapters. He can be reached at lloydmann@shaw.ca.