“Hey John, Can you give me a ballpark figure on how much my practice is worth?” This is one of the most common questions I get asked as an appraiser. Like most things, there is no quick and easy answer.
Appraisers Use Rule of Thumb
While some appraisers like to use rules of thumb such as one year’s gross, net plus inventory or three times net, these rough guidelines are all based on simple averages. It stands to reason, if you take the average of a large number of anything, you come up with a just that – an average. The problem is that all practices are different, and as such, they should be evaluated differently.
There is no such thing as an “average” practice.
Optometry Practice Value Not Like Real Estate
Many people are familiar with real estate appraisals and assume that business appraisals are the same. They are not. Real estate appraisals depend entirely on comparable sales, or “comps.” This market approach is the best way to truly know fair market value. While we look at the practice sales of optometry offices, there is very scarce data available for small business sales in general, including optometry and medical practices.
Instead, we rely heavily on profitability of the business, and the likelihood that those profits will continue in the future. This income approach is based on the fundamental valuation principle that the value of a business is equal to the present value of the future benefits of ownership. After all, isn’t that what the buyer is interested in?
Appraisal Like A Tax Return
Doing an appraisal is like preparing a tax return. A qualified financial professional should work through a variety of computations to determine the right value for a practice. Important considerations are demographics, revenue and expense trends, financial ratios, efficiency ratios, practice net and cash flow.
Range of Practice Values
According to our in-depth database, values ranged from a low of 16% to a high of 82% of the gross collected receipts of a practice, with the majority falling within a 40% to 70% range. Obviously, there were significant differences between the practices. Practices with the same net might not have the same value due to differences in the demographics of the drawing area and other risk factors.
For this reason, rules of thumb should not be applied when the result will be used in an actual sales transaction. The best advice we can really offer is that high-net, high-volume practices tend to have larger price-to-gross percentages than low-volume or low-net practices.
So I guess my answer to the original question: “It depends!”
Contact me if you would like to value your practice.