1 / 36

Considerations in Practice Valuation

Considerations in Practice Valuation. A Quick & Dirty Method of Practice Value Estimation John G. McDaniel, OD, MLHR President Waugoo Consulting Group. Introduction. About myself – John McDaniel, OD, MLHR About Waugoo Consulting Group, LLC Contact information:

arlais
Download Presentation

Considerations in Practice Valuation

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Considerations in Practice Valuation A Quick & Dirty Method of Practice Value Estimation John G. McDaniel, OD, MLHR President Waugoo Consulting Group

  2. Introduction • About myself – John McDaniel, OD, MLHR • About Waugoo Consulting Group, LLC • Contact information: • JMcDaniel@WaugooConsulting.com • 614-352-4423

  3. First Question – Why Do It? • The first question that drives any appraisal/valuation is the purpose: • Practice appraisal (implies fair market analysis) • Practice valuation (implies personal consideration) • Quick estimation for comparisons of prospect practices • Execution of the due diligence process • Business plan and/or strategy development • Borrowing – asset determination/statement of net worth • The purpose dictates the extensiveness of the process and reasonable expenditure for the process

  4. DIY Valuations? • Can some of these be done yourself? • In my experience, only one: the quick and dirty (Q&D) method of estimation • A few caveats: • Be prepared to be frustrated; this method is simple but collecting the data can be complex • Incomplete financial records complicate the process • Q&D estimation is a simplified version of the industry market multiplier method used in full blown appraisals

  5. Replacing a Professional Valuation? • No, but why? • Less rigorous and makes too many assumptions • Too much variance in the data/conclusions • It represents about 1/20 of the actual appraisal process • Try to save a few thousand, risk tens or hundreds of thousands (no exaggeration) • Comfort level with the sources of information • Data is not just “found” it is corrected – this is where appraisers earn their fees • Lack of knowledge on industry norms, including the financial industry norms (for borrowing purposes) • What to do with missing/suspect data? Hard questions that require experience to answer • Etcetera - you get the idea, right? • In summary: don’t sell or buy a practice for a price based solely on this method because it is too simplistic and fails to capture a significant amount of the complexity of the process

  6. Purpose: to relatively quickly estimate the approximate range for the selling price of a given practice Usefulness: most useful when comparing prospected practices – you need a minimal amount of data Useful as a periodic business assessment tool Also can be used as a gauge on a professional appraisal – does this appraisal/valuation seem reasonable? Q&D Estimation

  7. Assumptions & Limitations • Business activities are limited to normal practice of optometry • Real estate is not included • All assets used in the practice will be sold • There will be a reasonable covenant not to compete • All patient records will be sold • There will be a reasonable transfer period & process • Etcetera – things have to be pretty typical because this process does not have mechanisms for dealing with idiosyncratic aspects that are part of all sales

  8. Data Needed to Start • Gross Revenue (GR) for 3-5 years a. Get this from income tax docs • Net income (NI) for the same 3-5 years • You have to use a modified corrected NI (MCNI) • MCNI = reported NI plus add backs of OD income, OD pension/benefits • The accuracy of the method does not justify a more completely corrected NI • Usually can get this data from the tax docs

  9. Calculate Weighted Mean GR (GRWT ) • This becomes the figure used in all future estimation calculations, called GRWT • Make a data table to facilitate the process • The table should have these columns/data:

  10. Calculate Weighted Mean GR (GRWT )

  11. Calculate Weighted Mean GR (GRWT ) • Enter the GR for each year

  12. Calculate Weighted Mean GR (GRWT )

  13. Calculate Weighted Mean GR (GRWT ) • Enter the GR for each year • Create the weights (WT) for each year • Keep it simple – the rigor does not justify increased complexity (remember significant digits?) • Higher WT on more recent years, in general

  14. Calculate Weighted Mean GR (GRWT )

  15. Calculate Weighted Mean GR (GRWT ) • Enter the GR for each year • Create the weights (WT) for each year • Keep it simple – the rigor does not justify increased complexity (remember significant digits?) • Higher WT on more recent years, in general • Multiply each years GR x WT

  16. Calculate Weighted Mean GR (GRWT )

  17. Calculate Weighted Mean GR (GRWT ) • Enter the GR for each year • Create the weights (WT) for each year • Keep it simple – the rigor does not justify increased complexity (remember significant digits?) • Higher WT on more recent years, in general • Multiply each years GR x WT • Sum the weighted GR values and the total WTs used

  18. Calculate Weighted Mean GR (GRWT )

  19. Calculate Weighted Mean GR (GRWT ) • Enter the GR for each year • Create the weights (WT) for each year • Keep it simple – the rigor does not justify increased complexity (remember significant digits?) • Higher WT on more recent years, in general • Multiply each years GR x WT • Sum the weighted GR values and the total WTs used • Divide summed weighted GR by the sum of WTs • This figure is your weighted mean GR ($111,000)

  20. Calculate Weighted Mean GR (GRWT )

  21. Calculate Weighted Mean Growth Rates (GrowthRateWT ) Basic idea: comparison of alternative investments • This applies equally to the practice that sells for $30K and another that sells for $2.5M – those purchase dollars could have been invested in similar alternative investment vehicles (real estate, equities, bonds, T-bills, etc.) • Why do you invest an something? For growth and/or income generation; this focuses on the growth aspect of the “investment”, i.e. practice

  22. Calculate Weighted Mean Growth Rate (GrowthRateWT )

  23. Calculate Weighted Mean Growth Rates (GrowthRateWT ) • Enter the GR for each year • Calculate the growth rates • Formula: (Year 2 – Year1)/Year 1 • If 5 years of data, can get 4 rates (n-1=# of rates) • Create weights (WT) – similar to before • Multiply the WT x growth rates • Sum the weighted growth rates and WTs • Divide summed weighted growth rate by the sum of WTs • This figure is your weighted mean growth rate (2.97%) • Is this growth?

  24. Calculate Weighted Mean Growth Rate (GRWT )

  25. Determine Estimated Range • Economically, the scale for growth has to be normalized – 3% is equal to no growth (CPI) • Use the following table to determine the multiplier to use for range determination

  26. Multiplier Selection: Growth Rate

  27. Determine Estimated Range • Using the multiplier range, calculate the estimated range for selling price: • Multiply the low end of range x GRWT • Multiply the high end of range x GRWT • This is one of the estimations of selling price range • For this example: $49,500 - $60,500 based exclusively on growth rates • Not done! More analysis is required, even for simple estimating

  28. Calculate Weighted Mean Net Income as a % of GR (NetInc%GRWT ) Basic idea: evaluation of income stream • This applies equally to the practice that sells for $30K and another that sells for $2.5M – those investment vehicles each could have the same rate of income return • Why do you invest an something? For growth and/or income generation; this focuses on the income aspect of the “investment”, i.e. practice

  29. Calculate Weighted Mean Net Income as a % of GR (NetInc%GRWT )

  30. Calculate Weighted Mean Net Income as a % of GR (NetInc%GRWT ) • Enter the GR for each year • Enter corrected NetInc for each year • Corrections for this process: add back OD income and benefits • Calculate NetInc as a % of GR (NetInc/GR=NetInc%GR) • Create weights (WT) – similar to before • Multiply the WT x NetInc%GR • Sum the weighted net income% and WTs • Divide summed weighted net income% rate by the sum of WTs • This figure is your weighted mean net income as a % of gross revenue value (40.57%) • How does this compare with the growth rate analysis?

  31. Calculate Weighted Mean Net Income as a % of GR (NetInc%GRWT )

  32. Multiplier Selection: Net Income%

  33. Determine Estimated Range • Using the multiplier range, calculate the estimated range for selling price: • Multiply the low end of range x GRWT • Multiply the high end of range x GRWT • This is one of the estimations of selling price range • For this example: $60,500 - $71,500 based exclusively on net income rates • OK, almost done now!

  34. What To Do When…? • You get two different ranges (as with our example)? • The results are not close to what I thought I would get? • The basis for the overall range of .35 - .65 • Seller has “amazing assets” and they are not even considered • Yup –remember method assumptions • This value doesn’t take the real potential into consideration • Yup, and that is how it should be; price based on past performance • Don’t like it? Take the practice up to its potential before selling! • The building will be involved in the sale – is this still the price? • No – bring in separate appraiser and treat it as a separate transaction • But this doesn’t take into account “______” (AR, AP, staff, location…) • Yup – this is why this is an estimation – still need real/full blown valuation/appraisal

  35. Things to Remember… • All of the “flux” in this simple process are addressed in a full appraisal/valuation • A full appraisal does 10-15 more of these type of calculations as part of 1/3 of the overall process • What is being sold/purchased? The past performance of the assets owned and goodwill • “Potential” does not increase the selling price; but it does increase interest • Is this a useful process if not selling/buying the practice? • Yes – can be done to evaluate the success of the practice

  36. Thank You! • Thanks to EyeCodeRight, the EyeCodeRight Community and John Warren for this fantastic forum and opportunity • My practice uses EyeCodeRight software (no financial interest) and I love it! • How to contact me: • JMcDaniel@WaugooConsulting.com • Phone: 614-352-4423 • Thanks to all of you for taking the time to listen! • Questions???

More Related