If you’ve ever wondered how much money your private practice is worth, you’re not alone. The reason for the question varies of course. Some private practice owners may be considering selling, while others want to determine the value as part of their overall asset valuing exercise. Whatever the reason for determining the value of your practice, this can be a complex exercise.
Hopefully this blog will help give you some ideas of the most popular methods for valuing a business. So, let’s dive on in and see how we go.
Before you actually set about trying to determine the value of your private practice, it is helpful to first establish why you want this information and how you think you might be able to use it. If your objective is to simply get a value for your business as part of your asset pool then frankly, your job here is quite a bit easier. If, on the other hand, you are looking to get a value to give to a potential buyer then you will have additional factors to consider – specifically, you have to factor in what a buyer is likely to be prepared to pay.
There are five main methods for valuing a business. And private practices, while typically a bit harder to sell, are no different.
Method 1: Asset Valuation Method
This is essentially the process of using your balance sheet to determine the value of your business and while it isn’t exactly comprehensive it’s a good starting point.
The process is simple enough. You add up the total value of everything the business owns, including equipment, furniture, vehicles and so on. From that total, you deduct the total value of debts and liabilities. The result is a net figure, but be mindful, this is really an assets-only valuation and in most cases, a business is worth more than its net assets.
Method 2: Future Cash Flow Forecast Adjusted for Today’s Money
In case the title of Method 2 wasn’t enough of a giveaway, this one is a bit complicated. Basically, this method involves working out what the projected or planned cash flow forecast is in the future. This is then discounted back to an amount in “today’s money” to arrive at what is called a Net Present Value, or NPV.
This is a complicated way to value your business and while there are good resources available on the web to help, such as NPV calculators, this is a difficult method to undertake alone.
Method 3: Revenue Based Valuation
This is probably the most commonly adopted approach to value a business, in part because it is easy to calculate, but also because it is a fairly universal measure in most cases.
Simply put, this method takes the total annual revenue and multiplies by a predetermined amount that is generally applied to the industry. That multiplier is obtained by researching through brokers that have sold similar types of businesses recently.
For example, you might find that a reasonable multiplier is 3x revenue, which for businesses such as a psychology practice would be a reasonable figure. If the total revenue was $400,000 per year on average, you might say the business is worth $1.2m.
Method 4: Earnings Multiplier (Price to Earnings Ratio)
Earnings being different from revenue, this method is not the most popular method to determine the value of your business, probably because it will generally deliver a higher estimate of the value of the business. While that is good for the business owner, it’s not so good for a purchaser, which means not that many private businesses get sold with a value obtained by this method.
Having said that, it is only slightly harder to calculate than method 3. This method is also referred to as the Price to Earnings Ratio method. In its simplest form, take the forecast earnings of the business for the next few years, average them to a one-year figure then multiply them by earnings ratio multiplier which is usually between 10 and 15 depending on the industry. So, if the net earnings of the business are $80,000 per year on forecast and you pick a multiplier of 10, then the business would be worth $800,000.
Method 5: Beyond the Numbers
There are many things that influence the value of a business: where it’s located, how long it has been established, its public reputation and that’s only a few. There is also a consideration for the strategic value of your business for the person or group buying it. It might be worth more to them to take out a serious competitor and so your formula won’t take that into consideration. Keep in mind the other factors that might contribute to the value of your business.
But a serious word of caution here. The most common mistake private business owners make here is assigning emotional value to the business. Your private practice has no emotional value to the buyer. They don’t care how long you spent building it up, how many late nights you put in, how many school sports days you missed to make this happen.
Allied health practices can be very difficult to sell in a conventional way. In part because the buyer has to be qualified in the same field but also because allied health practices tend to be about the principle practitioner. Setting yourself a strategy to make your business less guru-focused and more brand-focused means you will find it easier to sell when the time comes. It also opens up the possibility of selling internally to your team.
Need help determining the value of your private practice? You can contact The Practice Lab team here to set up a free intro call to discuss your options.