The Value of Your Patient Charts
A sometimes overlooked value of your practice are your patient charts. Just as you have equity in your equipment and inventory, so have you equity in your charts. Let’s look at an example.
Appraisal for an Optometrist’s Widow
I performed an appraisal recently for a widow whose OD spouse died. Despite being an established practice, it turned out there was very low cash flow. In fact, by the time I factored in the replacement cost for a new OD, there was actually negative cash flow.
This is not an uncommon situation.
Calculating Practice Value
Let’s say, for example, that a practice grosses $500,000 and has a net profit of 20%. That means after paying all the expenses there is $100,000 remaining ($500,000 X 20% = $100,000). This is also known as “owner’s discretionary income”. While the owner may have become accustomed to this income, it is actually below fair market value compensation. The median OD compensation in the U.S. (including salary, payroll taxes, and benefits) is about $140,000. In other words, if the OD was being paid the going rate, this practice would have negative cash flow.
Overcoming Negative Cash Flow
Since there are few buyers that are willing to pay for an office showing negative cash flow, I often value these practice based on the “hard assets”. In other words, how much money the equipment and inventory would make if sold on the open market. But the widow’s accountant posed an interesting question: “Aren’t the charts worth something?” And the answer of course is – yes. But the real question is how much?
How Other Professions Value Clients
In other professions – law and accounting, for example – it is fairly common for one company to buy a colleague’s records. The accountant told me his company routinely “absorbed” competitors’ files for various reasons. In one instance, his company bought the “low-end” records (clients whose tax returns cost below $500) from a firm that no longer wanted to handle those clients. His office would pay the seller a percentage of the collected receipts of those transferred accounts, with a range of 20% – 40%, depending on the circumstances.
This appears to be a win-win situation – the more clients that transfer to the new firm, the more income is generated for both buyer and seller. And if zero percentage transfer, then the buyer owes nothing.
Would this work in optometry? Let’s talk about that next week!