What is My Practice Worth?

In a previous post, we emphasized the importance of getting your practice valuation made every year. A yearly valuation allows you to monitor the worth of the business and maximizes its valuation later when you decide to sell, buy, acquire, or partner with other businesses. A business valuation as Warren Buffet puts it, is the heart of investment and risk management, without it, you will be missing the most important metric that shows the exit value of the practice, its lending and credit capacity, and the insurance coverage you need as a practice or practice owner.

Many valuation companies have tried to democratize the process for the purpose of minimizing the costs of valuation. Despite the importance of a yearly valuation, few businesses conduct a valuation, less than 40% of business owners have life insurance, 50% of businesses are under-insured, 70% of businesses are underfunded, and the majority of business owners think it is a valuation is a costly procedure.

What do you actually value when you perform a business valuation? You value projections of past, present, and future performance as well as the respective metrics that relate to the practice, equity, asset, and liquidation value figures. For someone exiting the value would be based on the past and present value of the assets. For someone buying the business, the value would include the future growth and potential for revenues and earnings that the practice will provide. For example, if a new specialty practice that just contracted with Optometrists and Ophthalmologists for referral would have a high practice value but not a high equity value.

There are many standards that apply to business valuation. The easiest and the most basic financial concept is the Time Value of Money that states that a dollar today is worth more than a dollar in the future. The difference is based on the interest rate. If you decide to acquire a business with known monthly cash earning, its value will be the sum of all the future payments discounted to the present value at an interest rate dependent on the risk of the earning.

The methods employed to calculate the value of the practice may look at either the income, the market, or the cost. An income approach is based on business earnings. A market approach is based on what other similar practices are selling in the market. A cost approach is based on how much the owner has already spent in the practice.