Having an understanding and a focus on practice value is not just important from the perspective of an eventual sale, but also as a means of maximising your return along the way in a sustainable, accretive manner. It can also assist in a number of key decision areas including:
- Succession planning
- Resource allocation
- Determining strategic priorities
While we are likely to spend more time analysing practice income and expenses in the day to day operations, it is important to remember that practice value is built over time and comprises both quantitative and qualitative factors and that good decision making balances short and long term objectives.
Practice value is essentially the sum of net tangible assets (e.g. plant and equipment, working capital) and goodwill. Goodwill is classed as an ‘intangible asset’ and is the premium one is prepared to pay for a practice over and above the fair market value of all tangible assets.
Goodwill is a relative concept and can comprise many different factors that support the premium a willing, but not anxious, purchaser will be prepared to pay for a practice. There are different types of goodwill, such as:
- Personal goodwill: The ability of a practice to attract and retain patients based on the reputation of the Doctors working in a practice
- Location goodwill: Holding a prominent and convenient location that attracts patients to a practice
- Brand goodwill: The reputation for quality in the market place as a positive differentiator.
In financial terms, the presence of goodwill is demonstrated by the longer term annual financial performance of a practice that, when averaged, can be a starting point in arriving at an agreed practice value.
In practice, the most widely used approach is by applying a multiple to a practice’s ‘maintainable earnings’ to arrive at a value. Maintainable earnings are commonly based on track record in order to predict future profits, but it is the risk attached to earning those profits that influences the multiple to apply. The multiple can be influenced by both internal and external factors and is an important element in determining value.
While most valuations will focus on the financial performance as means of calculating value, it is equally important to have regard for the qualitative factors in a practice as any potential purchaser will conduct their own due diligence and won’t simply rely on the story the numbers tell.
From our experience, the following qualitative factors can positively influence practice value to support and enhance an optimal valuation:
- Fully leveraged cost structure (e.g. high utilisation of consulting rooms)
- Stable workforce (e.g. Non-owner Doctors)
- Strong Practice Manager and support staff
- Established referral relationships
- ‘Built in’ Doctor succession (e.g. participation on registrar programs)
- Professional branding and practice marketing
- Modern, professionally presented premises with accessible parking for patients
- Low reliance on government payments
These factors are established over the life time of a practice, not just as you think about the potential sale, which makes having an understanding and focus on your practice value important at all stages of running a practice.
If you need assistance with reviewing your practice value or any other financial matter, please feel free to contact Tom Laundy, Health Services Director at William Buck on (08) 8409 4333 or by email firstname.lastname@example.org.
Click here to read part 1 – Revenue
Click here to read Part 2 – Expenses Analysis
Disclaimer: The contents of this article are in the nature of general comments only, and are not to be used, relied or acted upon without seeking further professional advice. William Buck accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. Liability limited by a scheme approved under Professional Standards Legislation.