It’s time to retire, don’t bet the value of your life’s work on multipliers or rules of thumb. Some believe business valuation an art and multipliers and rules of thumb are adequate methods to value your practice. The multiplier, a value nobody can quantify, is multiplied against some arbitrary value such as gross sales, gross profit, adjusted net profits, etc. A small variance in the multiplier can cost you $100,000 or more.
Here’s how to avoid it. Most dental practices are worth more than the market value of their assets. Banks usually won’t lend the difference between the selling price and down payment and/or the buyer needs additional down payment. Therefore, to maximize the value, the dentist holds some of the paper from the purchase price.
A practice is worth:
1) That price at which it must pay the debt, at market conditions, structured from the sale.
2) It must pay the owner a fair market salary. 3) It must pay the owner a return on investment. At any “snapshot” in time, mathematically there is only one value that can simultaneously meet all three criteria.
Remember, a buyer wants to know that he/she will be paid appropriately and also receive an appropriate return on investment. Since the dentist will be holding part of the debt, it is critical that debt be considered as part of the valuation process. These three criteria are the key issues determined in future due-diligence reviews by the buyer and seller. Having this information up-front saves professional fees, time and deals.
The only methodology that considers these three criteria is called the ‘Optimism” method. It optimizes the value for a win-win to both the buyer and seller. Insist upon it!
Ted See, President, www.TasconPracticeValuations.com 608-827-6349