How Much Is My Practice Worth?

Dear Jerry, 

I am in the process of selling my practice and am trying to determine a price that is fair to both myself and the new owner. I know that every practice is different and understand that value is in the eye of the beholder. 

Most of the formulas I have seen recently call for various types of weighted three year averages of the gross income multiplied by 50% to determine the purchase price including equipment, inventory good will, etc.  

I know this is a starting point, but 50% of average gross seems to be much lower than previous guidelines. 

Since a lot of "baby boomer ODs" are in this situation, I would like to hear your opinion. 

Thanks, 

Walter Docker, OD (name changed) 

Hi Walter,  

“How much is my practice worth?” is always a great question and one that I get a lot. 

In my opinion, the key financial metric to consider when valuing a ‘traditional dispensing OD practice’  is not Gross Revenue, but Net Profits, which would include the owner’s draw.  

Why? Because, after a deal is done, the practice has to generate enough cash flow for the buyer to: 1) pay herself a reasonable salary and 2) make payments on the loan she took out to buy the practice.  

Therefore, I would argue that when it comes time to pay the bills each month, a $600,000 practice netting 40% (Net = $240,000) is worth a lot more to the buyer (and the seller) than a $600,000 practice netting 20% (Net = $120,000).  

How much more the 40% net practice is worth than the 20% net practice is subject to a number of other variables. That’s why I highly recommend a professional practice appraisal for most transactions.  

(Disclaimer: My consulting firm no longer does appraisals. I only suggest them because I sincerely think in most cases it’s good for the buyer and seller of a small business to get an independent third party opinion of value.) 

I haven’t priced one lately, but practice appraisals can cost $2,000 - $3000. That’s generally less than 1% of the value of the practice. Which is a small price to pay, in my opinion, to keep two ODs from making a financial misstep.   

What About Rules Of Thumb For Practice Value?  

The example above is exactly why I feel simple formulas such as 50% x Average Gross Revenue Over 3 Years are unreliable. They focus on Gross Revenue to the total exclusion of what I feel is the real key to value; Net Income. 

Having said that, if you want a rough estimate of practice value, Jerry’s rule of thumb for practice value is around 2/3 of Collected Gross Revenues.   

For example, I think the starting point of value for a practice grossing  $600,000 would be 2/3 or $400,000.  

Repeating myself for emphasis, the value could be more if the practice net is above 30%. And, it will likely be less if the practice net is 29% or below. 

Readers of drhayesblog.com are invited to give feedback by email or Click the red 'Click To Discuss' link below to share your thoughts. How would you handle this situation in your practice? 

Regards,  

Jerry Hayes, OD 

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Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2010 Jerry Hayes, OD. Not to be reproduced without written permission of the author.