Establishing the value or worth of a practice is a complex matter. There are more than 30 ways in which to calculate the value of a business and in fact there is a specialty certificate for accountants which deals specifically with this. A practice, no matter how it has been appraised, is only worth what someone will actually pay for it when all is said and done.
I am not going to get into the 30 different ways, but I will give you an overview of what to look for when purchasing a practice. If you reverse the point of view, this will also provide you with what to do to make your practice more saleable and valuable.
The value of a practice can be split into two basics categories:
(1) Probably the easiest to verify is the value of the physical assets of the practice. This includes the chairs, equipment, leasehold improvements, etc.
(2) The other category is goodwill which is represented by the patient base, how well it is being serviced, and profitability. This aspect is more difficult to accurately determine.
Before buying any practice, it is optimum to review the professional practice valuation provided by the seller. This should provide details such as an exact list of the physical assets of the practice including the value of each, the number of active patients versus the billings, a demographic breakdown of the patient base, expenses, etc.
Assets of Practice
1. Review the age and condition of the existing equipment. It must be capable of lasting at least another 3 years or it has no value to you. Once you have gone to the bank for financing, you do not want to go back for more for another 3 years.
2. Find out what company has been maintaining the equipment. It might be wise to talk to them concerning its state of repair. You might also want to have a service company check the equipment out and determine what repairs if any are needed. This is especially true if the equipment is not under a maintenance agreement.
3. Is the office computerized? This is the 21st century now and the office should be computerized. What is the software being run on the computer? Can it be transferred to you or do you have to purchase a new license? How user friendly is it? (This is important when hiring staff in the future who need to be able to operate the computer.)
4. Leasehold improvements require an on-site inspection to see what the premises actually look like. Will patients be attracted or repelled by its appearance. Are you going to have to do a minor facelift or a major renovation
5. The term of the lease for the premises and specific clauses such as a demolition clause need to be looked for, as well as whether a sublease or new lease will be required. Does the lease allow you to put up signs — how many and where? Most leases require written authorization from the landlord for signs and this point should be negotiated and included in the lease.
Goodwill
1. The practice philosophy of the seller should be determined to ensure that it is compatible with your own. Have the patients been educated into a belief that the best is what they should have or the cheapest is best?
2. A chart audit will then substantiate whether what you are being told is true or not. The more thorough your chart audit, the more certain you are about what you are buying. It’s like taking a car for a test drive. In a chart audit you should be looking for the following:
- Prices of services being sold – current fee guide?
- Are discounts being given and, if so, under what circumstances?
- % of patients that are subsidized by various government agencies.
- What is the quality of work which has been provided. How many standard dentures versus how many premium ones? (This also provides insight into how to approach the patients concerning treatment should you buy this practice.)
- Recalls – is there an organized and systematic recall system?
- Are previously seen patients returning?
3. Statistical items you will want to establish are:
- Total number of patients: The larger the number of patients with up to date addresses, telephone numbers, etc., the greater the value of the goodwill.
- Number of new patients per month.
- Accounts Receivable amount and age.
- Payment policy of the practice.
- Gross billings annually as well as monthly, if you can get this information. (You want to determine whether the practice is expanding or contracting, and if contracting, how long has it been contracting.) Can you personally produce that volume? If not, can you find an associate or cost-sharing partner to help?
- Net income of the practice. After making your loan payments for the purchase, what is left over for you? Carrying costs involved in financing the practice especially relative to its existing income and expenses, can turn a profitable practice into an unprofitable one.
General information
Other aspects to consider are:
- Number of staff and their tenure with the practice.
- General layout of premises and potential for expansion.
- General location of the practice relative to visibility i.e. ground floor (or has an elevator), store front, availability of parking, public transit, etc.
- Number of denturists in the surrounding area.
- Get a copy of the demographics for the area to see if the population is made up of the type of people that you want as patients. Statistics Canada provides such information.
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