Practice Valuation and Life Cycle

We emphasized in many previous posts about the Optometry practice valuation and how it is computed. We also provided two types of entrepreneurship the first one is to start cold and build a practice from scratch and the second way is to acquire an Optometry practice and be the CEO from day one. We called the second type, entrepreneurship through acquisition. We added information about preparing for the search of the practice to acquire and how to consult different listings available online and through brokers. There is one very important step that comes when you prepare the offer after you have looked at all the financial statements that provide enough information about the past state of the practice. At this step, the seller provides you with the asked price. you should expect that the seller would provide an overpriced offer and that is because his agent advised him to.

The reason a valuation agent or a merger and acquisition advisor overprice a practice is that price is the number one benefit the seller would have going through the practice that is for sale. It is for this reason that the advisor spends the last years preparing the seller for the price and makes him believe it is fair. You looked at the past performance and you will pay for the future performance of the practice. At this point, one very important indicator that would help you in negotiating with the seller and probably being able to convince him of the true value of the practice is to determine the lifecycle of the business. Every business goes through a life cycle that consists of introduction, growth, maturity, and decline phases. You should be able to figure this out from financial statements and try to use it to your advantage in presenting it to the seller. One way to get into the subject is to ask the seller why he is selling the practice. He may be selling because he knows the phase of the business.

Whatever the stated reason is, you ought to figure out the business phase because:

At the intro phase the business needs a lot of investment, development, care, has no customer base, is unstable, and its future is unclear.

At the growth phase, customers are aware of the products and services of the business and demand grows significantly.

At a later phase, growth is followed by maturity characterized by low profitability, low quality of services, unfocused management leading to potential stall and bankruptcies. At this stage, the market competition is significantly high and businesses compete with each other by lowering prices and eroding profits.

At the decline phase, as its name indicates, oh no! you certainly don’t want to acquire a business at decline phase. Determining the business phase highlights what future value the practice has and helps you in deciding on acquiring the business.